Having an Option To Renew clause written into your office lease is always advisable. This gives you, the tenant, the right to renew your lease at the end of your existing term. But there are both benefits and pitfalls that you have to be aware of when exercising this right.
This clause can be particularly valuable in low-vacancy markets. Too often, we have seen landlords refuse to negotiate with a tenant at the end of their term because the landlord has a new, preferred tenant for their space. This means the existing tenant is out looking for new office space whether they want to or not—and not always in the most favourable market conditions.
Every tenant needs to know a couple of things about the Option To Renew.
First, they are always time-sensitive. A tenant can only exercise the right within a specific time frame outlined in the lease, i.e., “…the Tenant must give to the Landlord written notice of its intention to renew the Term of the Lease not less than six (6) months prior to the expiry date of the Term…”. It is extremely important that you know this critical date in your lease; if you miss it, you will forfeit your right to renew.
Second, but no less important, every tenant needs to know that once you exercise your Option To Renew, you are obligated to renew their lease.
Prior to your option date, spend some time ensuring that you are well-versed in the office market so you know if exercising your option to renew makes sense.
Your broker can give you the market information that you will need and can open a preliminary discussion with your landlord. Be sure that you are confident that the renewal terms will be acceptable and fall in line with your business plan prior to exercising your Option To Renew.
With a typical option to renew clause, it is also important to know that, if exercised, you are usually only negotiating a new lease rate. You do not generally have the right to re-negotiate other terms of your lease. If there are terms in your current lease that you would like to change (i.e. you may want to downsize), you will want to open the discussion about a new lease with your Landlord prior to your option date.
