If you are leasing office space, your lease should include an option to extend the term of the office lease. In tight markets favoring landlords, a well-negotiated office lease extension option can serve as a ceiling on rent for the new lease term. The office lease extension option should also preserve the tenant’s rights and prevent the landlord from leasing the space to a larger or higher paying tenant.
When negotiating your office lease extension option, consider the following items:
- How many extension options do you have? Can you exercise them at the same time?
- How long is each extension period? Are the lengths fixed or can you choose from different alternatives when you exercise the option?
- Is the “notice period” appropriate and realistic?
- Is your landlord required to remind you about the option to extend the office lease if you haven’t provided notice by a certain date?
- Does the office lease extension option include a requirement for the landlord to provide an allowance for maintenance or repair when you exercise your option to renew? If so, and you decide you don’t need to use the allowance for maintenance or repairs, can you use it instead as a credit against future rent due?
- How will rent be determined under the renewed lease, if you exercise the renewal option (i.e. does it say rent will be calculated as the lessor of a percentage of the then-prevailing ″market rate″ or a certain dollar amount per rentable square foot?)
- Does the extension option cap rent?
- Does the extension option include provisions for you to choose to expand your space? If so, will you receive a “free rent” period while you design and build-out the additional space?
- Make sure the option to extend will allow you to extend any expanded space in the future.
- How is market rate rent determined? It should be tied to transactions for similar spaces by new tenants, and those transactions used should be for tenants with comparable creditworthiness, in similar spaces in similar buildings, with similar lease terms.
- When you provide notice of intent to exercise the renewal provision, the lease should require the landlord to provide you with a “good faith” estimate of its determination of market rate within a specified time period. The provision should further provide protection for you in the event that you and your landlord are unable to come to agreement on the market rate in a specified time period, including taking the matter to mediation or arbitration with neutral arbitrators, or allowing you to rescind your decision to exercise the renewal option.
- Your option to extend the lease should be structured so that you will retain the option as long as you continue to lease a certain percentage of the original space, regardless of whether you have subletted or assigned a portion of your office space.
- The lease should provide that you have the option to extend as long as there are no material tenant defaults continuing beyond the notice periods and any grace periods.
- Do the provisions in your lease accurately reflect any state law distinctions regarding options to extend or options to renew the lease?
- Are your rights under the lease subordinate to any other tenants’ rights when it comes to extending your lease?
- Do you have the right to delegate the option to extend to a sublessee or assignee, or are those rights personal to you?
Businesses should retain a tenant representation commercial real estate broker to negotiate the office lease extension option and guide them through the office relocation or lease renegotiation process.
At Golden Group Real Estate, we specialize in tenant representation real estate services for office space users in the Chicago area, helping local business owners find office space and negotiate lease and purchase agreements. We never represent landlords, so we are prepared to negotiate aggressively on behalf of our tenant clients.
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