A Missed Option Opportunity
Joe was a manager at Retail, Inc. who unfortunately missed an option to extend the lease. At the time, I was Vice President of Leasing for a private investment company, and it was truly an unfortunate situation. The existing lease had pre-negotiated rent that was below market rent. All Joe had to do was provide written notice within the specified window of time, and the Landlord would be obligated to accept the below market rent. With a busy retail season, it was just a simple oversight. But that oversight cost Retail, Inc. over $225,000.
An option to extend is an excellent negotiation tool for any business as it enables future planning for growth. It provides the Tenant (not the Landlord) the right to extend the lease (or multiple rights) after the initial term has expired. However, every lease is different, and it is equally important to understand what goes into the option section.
Here are 4 great tools to have at your negotiation table:
Just like the initial term of the lease, the option has a length of time. The term could be any number of years, such as 3, 5 or 10 years. Many businesses like the option to mirror the initial term. For instance, if negotiating a 5-year lease, a law firm may like a 5-year option to extend. However, there is no rule.
Yes, I dare say it. Options can have multiple options. A restaurant may want not just one option to extend, but two. As an example, a lease can have (2) – 5-year options to extend. This means that after the first option, there is another option (i.e. 2 x 5): effectively giving the business 10 years of planning! The second option cannot occur without the first, which leads me to the next tool.
3. Written Notice
Joe did not provide the required written notice. Most lease options stipulate that the tenant gives the Landlord written notice, but the notice does have an expiration date. If that expiration date passes and such notice has not been provided, then the option disappears. Gone forever. The good news is the expiration date usually falls sometime during the last year of the lease. My recommendation for good business practice is to pull that dusty lease at the very least 12 months of expiring to confirm the terms, or better yet, have the lease reviewed every year. For my clients, I keep track of their lease expirations and let them know in advance of the deadlines.
4. Base Rent
The beauty of pre-negotiating an option is the opportunity to negotiate the base rent. Often businesses hire me to review the option base rent to compare with current market conditions before making a decision. This is a great way to decide before committing whether that base rent is still a good deal. And if not, there is nothing that says the option must be taken. If the option base rent says "Fair Market Value" or "Market Value" then this does require a bit more advisory service: the base rent will become market. The Landlord can't just make-up the new number. But, the language used is very important in the lease negotiation process as often there will be a discussion of how market rent is determined and how both the Landlord and Tenant should come to an agreement.
Whenever negotiating the business terms of a lease for a business, my goal is to discuss the unique business plan and operations for each business so we can determine the best options (no pun intended). Or at the very least, understand what the Landlord is asking.
As my favorite moto goes:
“Don’t Wait Until After the Lease is Signed.”