Should you Exercise your Option to Renew?
A typical Option to Renew clause looks like this:
Provided the Tenant has not been in breach of the Lease, the Tenant shall have the right to renew the Lease with respect to the Demised Premises for an additional Term of five (5) years on the same terms and conditions, save only for the Basic Rent, Free Rent, Landlord Work, and any Tenant Inducement and that there will be no further right of renewal. The Rent during the renewal period shall be the fair market rent agreed between the parties, and failing such an agreement, as determined by arbitration pursuant to the Commercial Arbitration Act of British Columbia. However, the Basic Rent shall not be less than the Basic Rent payable in the last year of the Term. To exercise this right, the Tenant shall give written notice to the Landlord no earlier than twelve (12) months and not later than six (6) months prior to the date of expiry of the Term, otherwise this Option to Renew shall be deem waived.
It gives the tenant the right to lease the premise for an additional period of time. If the tenant exercises the option to renew, then the lease is extended for the predetermined period even if the tenant and landlord have not agreed on the new rental rate.
If your current premise meets your business or organization’s future needs, should you exercise your option to renew?
Before invoking the option to renew, you have the opportunity to relocate. Even if you would prefer to remain at your current location, this opportunity to vacate the premises will give you leverage to negotiate with your current landlord. You can attempt to negotiate a new lease with your current landlord and reserve the right to renew your existing lease (as long as the renewal period has not passed).
Most likely your current landlord has a strong incentive to keep you as a tenant because it ensures occupancy and eliminates vacancy between tenants.
The end of your renewal period is approaching and you have not been able to negotiate a new lease with your landlord, should you exercise your option to renew?
This decision becomes one of control versus value or cost. If you do not exercise the option to renew the lease you risk losing the premises and if you do exercise the right to renew the lease you lose negotiating clout. Each decision will be based on your perception of the downside risks.
What happens after you exercise the option to renew?
If you exercise the option to renew your lease, you and the landlord negotiate a new rental rate. If the parties cannot agree on the new rental rate, it is usually determined by arbitration.
Did you know that even if you are negotiating another lease, lease extension, or lease renewal with your existing landlord, a real estate consultant can assist you and this service usually imposes no additional cost on your business or organization?