What to Know About the Lease Extension Clause

When signing a commercial lease, the extension clause may appear to be unimportant compared to other details like the base rent and CAM, but it's risky if quality attention is not paid to the extension clause. Since tenants tend to receive the most benefits from this portion of the lease, landlords may try to use limiting and restrictive terms or even omit the clause entirely. Knowing the following information about lease extension clauses can help you protect your company.

How to Notify Your Landlord

The lease extension spells out exactly how and when you need to notify your landlord that you intend to renew your lease. In most cases, you will need to submit written notice to the landlord. Leases may require you to do so 6 to 12 months before the end of the lease or by a certain deadline that is specified in the clause. If you fail to notify your landlord properly or on time, you will be ineligible to extend your lease.

Landlords Will Push for the Original Term Length

Most landlords will make the term of lease extensions equivalent to the original term of the lease, particularly if you previously had a short-term lease. To give yourself more flexibility, you can ask for the option to renew at different length terms. For example, you may have clause inserted that gives you the ability to renew for three or five years

Your Rent Rate May Not Be the Same Under the Extension

When possible, negotiate to extend your lease at your current rent. If the landlord refuses, you can ask to have the initial rent for the lease extension calculated based on whatever rent escalation method is used for your current lease. Should you be unable to achieve this concession, make sure that at the very least the method of calculating the fair market value of the office space is spelled out clearly in the extension clause.

Landlords will often try to raise the rent when you sign an extension. In some cases, the clause may say that you can extend your lease with a new rent based on the current fair market value of your space at the time of renewal. It's also possible for landlords to insert clause that allows the rent to be increased with an extension based on changes in the consumer price index.

A Tenant Rep Broker Can Help You Get the Best Terms Possible

Tenant rep brokers are very important and incredibly beneficial throughout the commercial real estate search process and can give you an edge when you're negotiating your lease. With their knowledge of the market and potential relationship with your prospective landlord, tenant rep brokers can evaluate the extension clause, point out areas of concern and help you fight to have them changed. As landlords pay the fees for the tenant representative, having one at the negotiating table with you will not be a burden. The benefits of using a tenant rep broker almost always outweigh commissions earned.