I received a panicked call from a client the other day… “We missed our renewal notice window! We were supposed to tell the landlord that we wanted to stay! The general counsel is freaking out!!!”
As I talked him off the ledge, I explained that while a renewal provision certainly provides protection and expands your options as a tenant, this was not a crisis, and we had in fact missed the renewal date on purpose.
The basic concept of the renewal option is that the tenant has the right to extend their lease for a predefined period at the end of the term at a predetermined rate with appropriate notice. Some leases spell out a specific rate for the extension term while others quote that the rate should be “fair market value” and still others suggest that it should be some percentage higher than the rate for the existing lease.
While all of these provide protection for the tenant, that protection only exists in the event that the landlord wants the tenant to move out of the space. In the event that the landlord wants the tenant to stay, chances are that activating the renewal option will allow the landlord to maximize the rent going forward. The landlord isn’t going to compete in the open market and certainly isn’t going to offer the most aggressive terms available.
Rather than automatically activating the renewal option, take some time prior to the notification date to evaluate the market, solicit competing landlords for proposals, and then approach your landlord about renewal terms. At the very least you’ll be able to define “fair market value” and validate that the rate in your extension is in fact, fair. At best, you’ll find a more attractive deal and force the landlord to compete in the market. Either way, you’ll be making an informed decision.
For the record, my client was set to renew at their previous rental rate, which was $4.00 above the building’s current asking rate. If they had simply activated the renewal like the general counsel had wanted, it would have cost them almost $100,000 in additional rent.