Renewal of Lease

What tenants should watch for

Structure of the option

Number and length of renewals. Negotiate multiple renewal periods (typically two (2) to three (3) of five (5) years each), allowing long-term occupancy with shorter commitment increments. The first period locks in continuity; subsequent periods provide flexibility.

Assignability of renewal right. Renewal right should be assignable to any Permitted Transferee (per Assignment & Subletting clause). Resist restrictions that limit renewal to the originally named Tenant or that void renewal on assignment.

Carry-forward of tenant-favored provisions. All other Lease terms shall continue during the Renewal Term, including exclusives, ROFOs/ROFRs, TI provisions for any unfunded TIA, OpEx caps, parking rights, etc. Resist Landlord-amendment of terms at renewal. If Landlord reserves the right to document the renewal as a new lease on its then-current form, condition that right on the new lease effecting no change materially adverse to Tenant and preserving all specifically negotiated provisions.

Renewal: TI Allowance. If significant tenant improvements are required for the Renewal Term (e.g., refresh, expansion), negotiate a renewal TI Allowance. Otherwise renewal is "as-is."

Reset of certain provisions. Consider whether to reset OpEx base year (or to continue with a rolling base) at renewal; reset Security Deposit if Tenant’s creditworthiness has improved; reset Guaranty (typically Guarantor should be released or burn-down restart).

Alternative structure: short initial term with sales-based automatic renewal. For an unproven location, consider a short initial term that automatically renews for a multi-year renewal term if Tenant’s average annual Gross Sales exceed a stated per-square-foot threshold, with either party entitled to prevent renewal by notice if sales fall short. The structure limits Tenant’s downside commitment while preserving continuity if the location performs.

Setting the renewal rent

Renewal rent: methodology. Two options: (i) fixed escalation (e.g., three percent (3%) annual increase, or CPI-indexed), predictable for tenant; (ii) Fair Market Rent (FMR), market-based but requires a determination procedure. For tenant: prefer fixed escalation for short renewals; FMR with a defined cap (e.g., five percent (5%) annual increase from prior Rent) for longer renewals.

FMR: determination procedure. Define FMR methodology with precision: (a) what is "fair market rent" (rent for comparable space in comparable buildings in the same submarket, taking into account tenant credit, lease term, TI allowance, and other concessions); (b) reference to comparable properties or rent data sources; (c) appraisal procedure if parties disagree (each party selects an MAI appraiser; if the two cannot agree within a range, they jointly select a third whose determination is final or within the high-low range of the first two); (d) cap on FMR increase (e.g., five percent (5%) per year cumulative from prior Rent).

FMR: beware rent floors and concession exclusions. Landlord extension forms often provide that renewal rent “shall not be less than” a stated amount (or the prior Rent) and exclude from the Renewal Term all allowances, concessions, inducements, rent-free periods, and Landlord’s Work. A rent floor converts fair market rent into a market-up-only adjustment; resist it, and require that FMR account for the concessions a renewing tenant would command in the market. Where the three-appraiser procedure is disproportionate to the deal, a single qualified and experienced arbitrator is a workable, lower-cost alternative.

FMR: final-offer (“baseball”) arbitration and hybrid alternatives. As alternatives to the three-appraiser procedure, consider final-offer (“baseball”) arbitration: each party submits a number and the arbitrator must select one, which disciplines both sides toward reasonable positions and avoids split-the-difference outcomes, or a staged hybrid in which Landlord’s proposal, Tenant’s counterproposal, and sequential party-selected appraisals each trigger renewed negotiation windows before a neutral third appraiser makes a binding selection between the two appraisers’ figures. Calendar every short response deadline in such mechanisms: under the published model, a missed counterproposal deadline makes Landlord’s proposed rent binding.

Renewal rent left “to be agreed”: enforceability. In most states an option whose renewal rent is left to future agreement is an unenforceable agreement to agree; a minority of jurisdictions (including Alaska, Arizona, California, Colorado, Michigan, Nevada, North Dakota, Ohio, Tennessee, and Washington) will enforce a renewal option in the tenant’s favor at a court-determined “reasonable rent.” A definite fair-market-rent mechanism remains the safer course in any jurisdiction.

Exercising the option: notice and conditions

Notice window. Negotiate a notice window of six (6) to twelve (12) months before expiration. Resist eighteen (18) months: too far in advance for tenant business planning. Specify form of notice (written, certified mail) and address.

Notice mechanics: waiver runs both ways; rely on neither. Courts strictly enforce written-notice requirements: a tenant cannot exercise a renewal option by conduct or through Landlord’s acceptance of continued rent where the lease requires written exercise, although a landlord’s own reminder correspondence and course of dealing may waive strict compliance. Landlord checklists instruct landlords to refuse any obligation to send renewal reminders; negotiate an express reminder-notice obligation where possible, and calendar the exercise window in all events.

Conditions to exercise. Resist broad "no default" conditions. Limit to: (i) Tenant not in material monetary default beyond cure period at the time of exercise (not commencement); (ii) Lease not terminated. Resist continuous-operation conditions and assignment restrictions on renewal.

Conditions to exercise: gross-sales minimum (retail). Landlord retail forms may condition the renewal option on Tenant’s Gross Sales meeting a stated per-square-foot minimum over the twelve (12)-month period ending shortly before exercise, with a certified sales statement delivered with the exercise notice. Resist a sales condition altogether; it converts Tenant’s option into a landlord kick-out right. If a sales condition is unavoidable, set the threshold conservatively and define the measurement period and certification mechanics with precision.

Conditions to exercise: landlord condition checklist and counters. Landlord renewal checklists condition the option on: no default at both exercise and commencement of the Renewal Term; delivery of updated audited financial statements, with a right to nullify the exercise if Landlord determines in its sole discretion that Tenant’s creditworthiness has declined; minimum percentage-rent thresholds both before and after exercise (retail); franchisee good-standing certificates; and delivery of a notarized guarantor reaffirmation of the Guaranty with the exercise notice. Counter each: limit the default condition to material monetary defaults (a compromise landlord counsel concede is legitimate); replace sole-discretion credit determinations with an objective net-worth floor; resist sales-based conditions as a disguised kick-out right; and coordinate any reaffirmation requirement with this entry’s position that the Guarantor is released or the cap renegotiated at renewal.