The process of creating an option to renew begins in lease negotiations. Landlords don’t always want to grant these provisions to a tenant because it limits their options down the line. However, most tenants demand this option, so it is fairly common in leases. The renewal clause determines when the tenant can ask for renewal, the length of the renewal period, and either the rental rate or the way that rate will be determined for the renewal period. Here are a few parts of the renewal option to be aware of as you negotiate your lease, as suggested in the article “Negotiating the Renewal Option”:
- Notice date – renewal clauses usually require tenants to notify their landlord that they want to renew their lease within a specified period of time, usually a year to several months before the end of the lease. As a tenant, try to negotiate to make this period as long as possible, which will give you time to evaluate all of your options and make the best decision.
- Rental rate – sometimes the renewal clause will actually state the renewal rental rate, but more often just the formula for this rate is stipulated and will be according to fair market value.
- Term – the renewal clause also typically states the length of the renewal term. When you’re negotiating your lease, try to ask for several different potential options for lengths of the renewal term so you have some room to choose when the time comes.
- Fair market value – if your rental rate is going to be based on fair market value, It is important to clearly define fair market value. Your goal is to make this interpretation as detailed as possible to avoid leaving it up to the landlord’s discretion at the time of renewal. There are a lot of aspects of this to discuss; one of the important things to ask for is a cap on the renewal rental rate. Also consider including a provision that determines that a third-party arbitrator will be consulted in the event of a disagreement.
Be sure to thoroughly consider your renewal option as you negotiate your initial lease. Make this clause as clear and detailed as possible to avoid complications and disagreements when it comes time to renew. It might be worthwhile to solicit expert advice to make sure this aspect of the lease is fair and favorable.