The option to renew a lease in a commercial real estate contract provides the tenant the right to continue leasing the property for extended periods of time. This promise of continued occupancy has continued for many centuries; however, a landlord has no obligation to grant an option to extend the lease for any period of time.
There are times when the option is good for the landlord. Below are examples of when an owner should consider providing language to extend a commercial lease in a contract to the tenant:
1. The economy is bad and there is a high vacancy rate resulting in a slow leasing market
There are other times when an option to renew a commercial real estate lease is not appropriate for the owner. Listed below are some reasons why the landlord should not grant options to a tenant:
1. The landlord can’t recapture the premises in any short period of time, and the tenant controls the space
Granting the option to renew a lease gives the tenant greater flexibility for long term planning. However, not granting an option gives the landlord greater flexibility and protects the investment.
My advice to the commercial real estate owner is to offer the tenant a short or long-term lease and not grant an option to renew. For example, a tenant who requests a 3-year-lease with a 2-year-option should be advised by the landlord to take a 3 or 5-year-lease with no option to renew. The tenant should always have the right to sublease the premises if necessary.