Renewal Options/Holdover Provisions

Next segment in our Leasing Series…Renewal Options/Holdover Provisions.

Generally all lease agreements have renewal options built-in to the initial lease. Both tenant and landlord effectively agree on the basics of a renewal term, with respect to a new term for the space. Beyond the actual duration of the renewal term – other items which may be included would include; the lease rate itself (or some sort of ceiling on a percentage basis) and the notice period for exercising the renewal.

The term and notice period are generally easy to agree on. Where things get more complicated is on the rate itself or a ceiling. Tenants will argue that they do not wish to see a substantial increase in the base rent, as they move into the next term. Landlords will rightfully point out, that they should not be forced to fix base rental amounts, as there is no commitment to remain in the space beyond the initial term. This matter then becomes a very much negotiated term of the deal, and both sides need to determine how forceful a position they need to take.

If the parties cannot agree, depending on the jurisdiction, an Arbitration Process is a practical solution for all concerned. It effectively allows a 3rd party to determine the rate if the parties cannot come to an agreement at the time of renewal. Arbitration can be used for other reasons, but most often it applies when the parties cannot come to an agreement on dollars, with differing views of market rates. There are definite costs to pursue this line of resolution for both sides, so it is best to review them prior to filing for it.

Again, seek out experienced commercial realtors with solid leasing backgrounds in your market to assist you in negotiating the right renewal terms for your purposes.