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Commercial Real Estate / Property Lease Renewal Options

Lease renewal options present an array of advantages and disadvantages based on whether one is the lessee or lessor. To fully understand the issues that may be involved, it is necessary to examine the issue from both perspectives.

Lessee perspective - It is advantageous to negotiate a lease renewal option when leasing space for a business. This option provides the lessee with the choice to renew at the expiration of the term or to abandon the agreement altogether and renegotiate a new lease or move to another location. There is some comfort in having the knowledge that the business space will be available at the conclusion of the term of the lease. It is critical for the lessee to fully understand the lease renewal option. It should spell out specifically how rent will be determined if the option is exercised. This should be in dollars and cents, not on some formula that is open to interpretation such as "comparable space", "fair market value" or "market rate". A fixed dollar amount is the most advantageous to the lessee since it is not subject to any interpretation. The option should also specify a time period for the lease renewal. At the expiration of the term the lessee has the advantage of exercising the option at the predetermined time period and price. If this is what the lessee considers fair, then the renewal can simply be signed and the deal is closed. It eliminates any uncertainty on the part of the lessee.

Lessor perspective - While it is advantageous to negotiate a lease renewal option with a lessee because it provides for a long-term relationship and insures a steady stream of rental receipts, it may not be in the lessor's best interests to be too specific about renewal terms and conditions. A specific price and term of any potential renewal may not sufficiently address future costs or increases in rental rates in a particularly attractive area. A specific price and term places all the options for renewal in the lessee's hands and provide very little room for future negotiations. Terms such as "comparable space", "market value" or "market rate" offer the opportunity to adjust to any increases in costs or place a higher premium on desirable space in the future. The key to a successful lease renewal option on the part of the lessor is to build in flexibility, while retaining renter loyalty.

A taste of the several considerations that are important from the perspective of each party in the lease renewal agreement has been presented to enable a thorough evaluation of the advantages and disadvantages for each negotiator. An informed individual is in the best position to protect their interests and make the best business decisions possible for their individual circumstance. Obviously, it is difficult to project what the future will dictate for each party, so it is critical that each address their individual concerns to insure that a lease renewal option that will satisfy each party is negotiated.

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