How does the option to renew in my lease work?

Managing Partner and Senior Sales Associate , ICR Commercial Real Estate
  • Oct. 3, 2019

What if it was represented to you that you have an option to renew your lease and there is a specific clause which spells out details of that option?

Can that clause effectively achieve what you intend it to?

Let me provide an example where it does not. This wording may appear reasonable to the average tenant.

“Provided the Tenant is not in default in the payment of the rent or in the performance or observance of any other covenant, obligation or agreement herein contained at the time of giving notice of renewal and at the end of the Lease Term the Tenant shall have the right, by written notice given to the Landlord not less than 180 days prior to the expiration of the Term, to renew this Lease for a period of five years.

“Said renewal period(s) shall be subject to the same terms and conditions as contained in the Lease except for rent, which shall be negotiated, and any inducements and there shall be no further right of renewal.

“In no event shall the rent payable during the renewal period(s) be less than the rent payable during the immediately preceding period.

“The parties shall execute and deliver a further lease or modification and extension of the Lease as the Landlord deems appropriate in the circumstances of such renewal(s).”

A tenant may believe they’re covered, but they’re not, and here’s why.

Dispute mechanism required

What happens if your landlord sincerely believes the space is worth 25 per cent more than what you’re currently paying? Yet there are recent comparable lease deals you’ve heard about which have been far less than that.

You’re essentially at the mercy of the landlord. “Why?” you ask.

Because your option to renew clause did not include a dispute mechanism which would have been worded something like this:

“The rent for the renewal period(s) shall be equal to the fair market rent anticipated to be in effect by the commencement of the renewal period(s) for space of comparable size, quality and location, as agreed between the Landlord and the Tenant.

“In the event the parties are unable to agree, the fair market rent shall be established by arbitration in accordance with the provisions of The Arbitration Act, 1992 (Saskatchewan) or subsequent legislation).

“Notwithstanding anything else contained herein, if the amount of rent is not agreed upon, then the arbitration process shall be commenced no later than three (3) months prior to the first day of the renewal term(s) with mandatory completion no later than one (1) month prior to the first day of the renewal period(s).”

That properly worded arbitration remedy is the key to solidifying your option.

Why the “game”?

Without an arbitration clause, your landlord could ask for twice as much rent without recourse by the tenant.

There are instances where the Landlord may want the tenant to vacate. Maybe there’s a more desirable tenant who wants to take over the space. There could be an adjacent tenant who is likely to vacate unless they can expand into the subject rental unit.

It’s easy to come up with three or four other reasons for the landlord to play that game.

The arbitration clause allows a third party, removed from the transaction, to fairly assess the market value.

It puts the landlord and tenant on a level playing field.

The moral of the story . . .

Many tenants believe they can save money by not paying for representation in a lease negotiation.

What if the tenant in the above example was forced to relocate their successful business, whose success was based on the high traffic volume of its existing location, to an inferior location?

This is just one of many examples where engaging a professional can literally save 10s of thousands of dollars.

There are many important steps to renewing your lease. You don’t want to miss any step along the way which could compromise securing renewal.

Born in small town Saskatchewan, I began my real estate career in Saskatoon at a really early age in 1978. Although I can’t claim to be No 1 in North…

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Born in small town Saskatchewan, I began my real estate career in Saskatoon at a really early age in 1978. Although I can’t claim to be No 1 in North…

Read more

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