WHAT IS A RENEWAL OPTION?
A Renewal Option is a clause that allows the tenant the right to either extend their lease at specific terms upon the expiration of the current lease term; or, the right to negotiate to extend their lease term. Renewal options typically require the tenant to provide written notice to the landlord of its intent to exercise the Renewal Option. If the Tenant does not notify the landlord within the required timeframe, the tenant’s option may expire.
Alternatively, there are some rare Renewal Options that automatically renew if the tenant does not cancel the Renewal Option in writing during the required notification period.
Renewal Options typically come in two main variations:
- The renewal terms are primarily defined in advance as part of the original lease. When the tenant exercises its Renewal Option, the lease terms are already determined for the new lease moving forward. In this instance, the tenant is simply agreeing to continue the lease at the terms that were pre-negotiated at the time the original or most recent lease was executed.
- The renewal option outlines that the lease terms will be at ‘then market lease rates and terms’ and provides the methodology for how the new terms will be determined. Typically in this scenario, a new negotiation takes place between the tenant and / or tenant’s agent and the landlord and / or landlord’s agent. This type of renewal option allows for a more accurate new lease as the terms are based upon the current market vs. a negotiation that may have taken place 5, 7 or 10 years earlier.