Monday, October 31, 2016

Real Estate & Related Terms Explained: Renewal Option

Say you are a commercial tenant in a plaza and business is pretty good. You are established now and planning for the future. Before you know it, a few years have gone by and you realize that your lease must be coming up for renewal later this year. But do you really understand what a renewal option is and what rights and obligations you have? Today we are going to discuss the important topic of renewal options.  

What Exactly Is A Renewal Option?
A renewal option is a clause within your lease that outlines the terms for renewing or extending a lease agreement. Obviously this renewal option comes into play as you approach the end of your lease term.  These renewal options are at the right of the tenant and not an obligation.

How Do Renewal Options Work?
Renewal options generally spell out how (usually in writing to the Landlord), and when (usually a time period before the expiration of the lease, ie 6 months), this option can be exercised. There is also usually a number of renewal options (ie. 3 options of renewal), and a lease term (ie. 5 years), tied to a renewal option. This also assumes the Tenant is in good standing not in default of any of the covenants of the lease. The wording of your renewal option will be a clause included in your lease agreement.  Make sure to have your lawyer read over the clause to protect your interests.

What Else Should I Know About Renewal Options?
Sometimes renewals also spell out the rental rate. The rest of the time the rate in the renewal is at “a rate to be negotiated”. This rate to be negotiated is supposed to be at a market rate at the time of the renewal. In Ontario (our market where we practice real estate), in the case where a Landlord and Tenant can’t come to terms on a rate, there is an arbitration process to resolve the matter.

In the event a Tenant doesn’t exercise their right to renew, they end up holding over month to month and lose all additional renewal options. If you’d like to read up on this situation, be sure to read our blog on this topic here.

Renewal options are a negotiating term when negotiating a commercial lease. Make sure you get a good commercial realtor to negotiate your renewal options on your behalf and be sure to understand this renewal option for the future.

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