Leasing 101: How to Negotiate the Option to Extend
The option to extend is one of the most valuable clauses a tenant can get. For the tenant, it reduces risk, granting the Tenant flexibility to decide later whether to extend its lease. For the landlord, the option is nothing but an encumbrance on the space.
Here are negotiating tips regarding the option:
For the landlord
- If you cannot avoid an option to extend provision, include strict requirements that must be complied with to exercise the option. For example, include provisions revoking the option if the tenant defaults at any point in time in the original term. Require the tenant to exercise the option well before the end of the initial term, so that you have adequate time to lease the space if the option is not exercised.
- Especially on long term leases with future inflation values unknown, consider requiring option term rent to be the greater of a certain dollar amount or market value, with a procedure on determining market value. You can also tie it to an inflation rate.
- Be careful with the language. If the lease grants concessions in the initial term, such as tenant improvements, be certain the option states additional tenant improvements will not be granted in the option term. Make sure the option specifies what will be different in the extension terms, such as the elimination of future option terms.
For the tenant
- Push for as many options to extend as you can get.
- When dealing with the landlord reluctant to grant an option to extend, be proactive and offer a landlord favored option to extend, such as one that granting the landlord favorable rent terms. You can always decide to not exercise an option later. Having an option to extend at a high rent rate is better than no option. You can always attempt to renegotiate the rent rate closer to the option exercise deadline.
There are a number of other factors at play when negotiating an option to extend. If you would like your lease negotiation optimized, contact our firm for more information and support.