Option to renew a lease

A landlord is questioning the benefits of a tenant’s option to renew their lease.

Ed inherited a half empty commercial building from his father. The one tenant in the building had an option to renew their lease. Ed asked me if he should offer new tenants an option to renew their lease as well.

It is important to understand that an option to renew a lease benefits only the tenant. An option allows the tenant to evaluate the market conditions near the end of their existing lease term to determine if rental rates have changed. If current market rental rates have moved higher and the option rate stated in the lease is lower than market rates, it will be beneficial for the tenant to exercise their option to renew. If market rental rates have moved lower and the rental rate quoted in the option to renew is higher than the current market rates, the tenant can approach the landlord and try to negotiate a lower rent. The option to renew does not obligate the tenant to remain in the space in any way until the option is exercised. If the tenant is not satisfied with the new rental rate the landlord is offering, the tenant can relocate to another building. An option to renew with stated renewal rates puts the tenant in the driver’s seat and is generally not a benefit to the landlord.