Real Estate Insider: May 2018 News Report

Hello there, Real Estate Insiders! Get ready for some of the most important topics we've discovered yet. Why you need a lawyer if you're selling your house, the best way to approach mortgage renewal, and why it's harder for Millennials to buy are just a few of the reads we have in store for you. 

There’s a lot of things you can do to save some money, but skipping out on a Real Estate lawyer when buying a home should NEVER be one of them! Read why it can end up costing you way more than the legal fees if you decide to buy a home without a lawyer. >>

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While owning a condominium in Toronto and renting it out may seem like a great investment, it appears nearly half aren’t getting enough rent to cover their costs. Is it still worth it? >>

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If you sold your home after 2016 and didn’t report it to CRA, you might be looking at hefty fine! Read here to stay updated on all the forms and necessary steps to avoid an unwanted call from the CRA. >>

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If you own a rental property with more than two people, tax season can be tricky! Be sure to know how to split these taxes fairly, and you can start by reading this article! >>

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If you are thinking of investing in your first rental property, this article is for you. Be better prepared to make this decision. Should it be a house or condo? Duplex? Where are you living now? This article has all the right questions you might not have thought to ask! >>

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“My mortgage comes up for renewal this year.” If you are in the same boat as these authors then you should definitely read their mortgage renewal strategy to help with your own! >>

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Think that if you can afford the down payment and the mortgage payments you can afford a house? Think again! There are a lot of costs involved in buying a home and we want to make sure you are financially prepared for all of them. Read this list so there are no surprises on closing day! >>

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Real Estate Lawyers discuss the "5 Things to Know about Government Standard Lease Form”. >>

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The 2018 OSFI stress test has cut Millennial purchasing power by over $40,000! What does that mean for first time home buyers? >>

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With a lot of things now being done online, should dealing with a mortgage broker be one of them? Read the pros and cons of going online for a mortgage. >>

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.

All You Need to Know About Your Options for Renewal

Congratulations… on having just closed and purchased a 6 unit commercial plaza and the management of it going forward. Your first order of business is to negotiate a RENEWAL with an existing tenant, with a term expiring 6 months out. It all begins with a look back at the Lease Agreement and a review of the RO it contains.

What’s INCLUDED in the RO? The key elements most often include the following:

• A notice period of intention to renew (ie. 6 months) and typically in writing
• Term – either specified as a fixed yearly term or possibly a range (ie. 3-5 years)
• Rental Rate – in some cases as a pre-determined amount
• To Be Negotiated – more often, at rates to be negotiated at the time of renewal
• Rate Capping – even if rates are higher, capped at a certain threshold (ie. +5%)
• Arbitration – a mechanism to establish a rate through a 3rd party if each side disagrees

BENEFITS – In actuality it is more important to the Tenant, as it protects their rights to the space and possibly their ability to negotiate in conditions which favour the Landlord. The more detailed the RO and specific based on future rates, the better for the Tenant in protecting their interests.

FUTURE RATES – this is the ‘Canary in the Coal Mine’ and where many a battle is waged. Landlords expect to achieve market rent at the time of renewal, and generally resist capping or fixing rates ahead of the renewal. Tenant’s on the other side - want cost certainty going forward on renewals and want to know they will not be faced with substantial rate increases in future terms. The option of ARBITRATION is a must to be included in any deal, to make sure a ‘fair market rent’ can be achieved at time of renewal. Keep in mind that Arbitration Hearings cost money, and it can be expensive to involve this 3rd party solution.

COSTS TO STAY OR GO? – For the Tenant - costs to relocate can be substantial, not to mention the disruption to business and your customer flow. For the Landlord – costs can include loss of income through a vacancy period, expenses to re-fit the unit for another tenant, and ultimately a hit to the return on the property.

Renewal options may not seem important (to either side) when you initially sign the initial lease. But clearly, it’s a future planning matter and you need to consider it carefully before finalizing your deal – and again, both Landlord and Tenant.

Just a click / call away from discussing our latest investments here in Windsor – Essex!

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Mark Lalovich
mark@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 259-5434

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.