The lease describes the terms and conditions under which the tenant can use the landlords property. One of the terms is how long the tenant may use its premises. Typically, the lease sets out an initial term, followed by a series of options to renew or extend the term. This article explores some aspects of lease term management.
The term of a lease must be date certain in order for the lease contract to be valid. Beyond this requirement, the lease term can be any length the parties agree to. Our office administers leases with terms ranging from as short as a month to a land lease with a term of 1,000 years. Typically, the lease term is five years. Terms longer than 20 years may require special administration depending on the type of tenancy and property.
Ultimately, the tenant wants to remain a guest in the landlord’s property under as many optional terms and conditions as possible, whereas the landlord wants to maximize the benefits of the tenancy, giving up as little control as possible. It is this conflict of interest that makes optional lease terms a very tricky mechanism to deal with. For example, some landlords simply do not grant options to renew; some tenants will not lease space without several predetermined options to renew.
From a tenant’s perspective, options to lengthen the term are very valuable. Here is a list of concepts every tenant should clearly understand.
The remaining term length plus optional term length must be greater than the length of time the tenant needs to finance its operation. For example, if a tenant is considering selling its practice in three years, and at that time there is a total of eight years remaining in the current term plus optional term length, the buyers ability to finance will be impaired, reducing the value of the practice. That simple.Know that some options to exercise term lengthening mechanism requires the tenant to notify the landlord that they are exercising the option, in writing, by a specific mechanism, on or before a certain date failing which the option is null and void. Alternatively, some options are considered to be exercised if the tenant does not notify the landlord! Failure to exercise the option to extend, or not extend, has very significant consequences. Many landlords will take this opportunity to renegotiate all tenancy terms and conditions, including imposing a new lease, or in worst case the tenancy may be ended.If an option is exercised, a certain mechanism is set in motion to administer the optional term period. Typically, only the base rental amount is to be reset. In some cases, even the base rental amount is predetermined. A prudent tenant would want to re-negotiate terms such as additional term options, more signage and so on, so exercising an option can and will severely limit the scope of the new term negotiation. Negotiating BEFORE option exercise can and will ensure the opportunity to negotiate as many tenancy elements as possible.Administered properly, a new term negotiation is an opportunity to revisit or visit many tenancy issues including whether to delay or delete the demolition clause and add additional options to renew.Technically, a lease term renewal differs from a lease term extension. A renewal “renews” all tenancy terms and conditions, which terms and conditions may include free rent, allowance etc., whereas an extension simply “extends” the current term into the future. In the industry, the two terms are commonly interchanged, but to know the difference will enable prudent administration of your affairs and maximize your position.Options to lengthen the lease term have limited value if the lease contains a form of early termination in favour of the landlord. More and more common, the demolition clause gives the landlord the option to terminate the lease if it wants to redecorate, refurbish or redevelop the property on little or no notice. In this case the options to renew are only valuable if the landlord’s option to terminate has not been invoked.Just because your lease has no written option to lengthen the term does not mean you have no option. You always have the option to approach the landlord to negotiate a longer term, or a series of options to lengthen the term.
Look forward to properly administering your option(s) to lengthen your lease term. Look forward to understanding what you can and cannot accomplish with your premises management, and how you can improve the long term value of your practice.
First, clearly understand exactly what your options to lengthen your lease term length mean in terms of how many there are, how long you have optional control of the premises, how options are administered, and how options might affect your tenancy. Have a qualified professional review your lease with specific attention to term length options.
Secondly, administer your options carefully by hiring a specialist. We all have our areas of expertise; do not risk losing your tenancy by attempting to administer your own affairs. A properly administered option is an opportunity to improve your position; an improperly administered option can end the tenancy.