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Tenants don’t often spend a lot of time on the renewal option provisions of commercial leases during negotiations. Though these provisions are seem to be for the tenants’ benefit, many tenants are satisfied that the lease provides for the agreed upon option with out giving much thought as to what their choices will be at the end of the lease term.  I suppose this short term thinking comes from the fact that people generally don’t like change and to move your business is very unappealing and disruptive.  However, if a tenant is careful and able to get some favorable language in the renewal provisions, as the expiration of the initial term approaches, the tenant will have time to properly evaluate whether to extend the lease or to sign a lease for space at another property.

The first thing to watch for relating to the renewal option is the time to exercise the right. Landlords generally look for a short window to exercise, about a year prior to the end of the term.  The window itself should not be that important to tenant as long that tenant properly calendars the dates and begins to research options far enough in advance of the notice period to make an educated decision and complete negotiations with a new landlord or the current landlord.  However, tenants should strive to negotiate for the window to exercise the renewal option to be at least 6 months long.  The time to exercise the option is usually around a year prior to the end of the term and the window falls around the 1-year mark.

Rent during the renewal term is the next key point. Landlords don’t like to lock themselves in here. While rent during the initial term usually increases a fixed amount year to year or on fixed dates or intervals, landlords like to reset rent at the beginning of the renewal term.  Sometimes lease drafts have language saying that rent will be determined at the start of the renewal term.  Tenants should never agree to this clause.  That is a blank check for the landlord.  A more common clause is to reset rent a fair market value (FMV).  This could be a blank check as well if FMV is not carefully defined or capped.  There is no right answer as to the definition of FMV.  Sometimes appraisers or brokers’ professional opinions (BPO’s) are used.  Still, you need to define what geographical area, class of property, rent incentives and other factors can be included in the determination of FMV.  Many landlords put a floor on rent, i.e., rent at the beginning of the renewal term can not be lower than rent for the last year of the initial term.  Whenever a FMV provision is included, I try to place a cap on the reset.  Sometimes, I try to convince the landlord to move away from FMV and instead, change the first year renewal rent to the increase in CPI from the last year of the initial term.  You also need to look at rent for the remainder of the renewal term and make sure that the reset does not happen every year.  I have encountered this on more than 1 occasion.

CAM increases during renewals need to be addressed. The base year for CAM increases should be re-set to the 1st year of the renewal term.

Tenants should pay attention to the renewal option language in the lease prior to signing. Planning for the future should begin immediately.  A poorly drafted renewal option provision could limit a tenant’s choices years down the road.  Thinking ahead could give a tenant leverage.

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A shopping center landlord client has had some difficulties with one of his tenants recently. The tenant, a bagel shop and restaurant, and the largest tenant in the small suburban strip center, is not maintaining the area surrounding the restaurant very well.  The corridor that the tenant utilizes to accept deliveries to the restaurant and to haul trash to the dumpster is stained with cooking oil and grime.  Tenant, though obligated to pressure clean, paint and maintain the area, has failed to do so.

In addition, the tenant has an out door seating area. The shopping center is designated as tobacco free/no-smoking.  This is contained in the lease there are signs posted around the center.  However, tenant permits his employees and customers to smoke and they use shopping center planters as ash trays.  Consequently, the planters are filled with cigarette butts.

There are other issues between the landlord and the tenant, but the most difficult problem is garbage. Tenant has been causing both the waste and recycling dumpsters to overflow.  All the other tenants are small retail or office and generate little trash.  And, from the type of trash in the dumpsters, it is very easy to identify the cause of the over flow.  Therefore, several months prior, tenant requested that landlord 1) upsize the waste dumpster from a 2 yard dumpster to a 4 yard dumpster, 2) increase pickups from weekly to 4 timers per week, and 3) obtain a 2nd 2 yard recycling dumpster.  Landlord made the changes and increase tenant’s CAM charges accordingly which Tenant paid for 2 months.  For whatever reason, Landlord to slide back to the prior CAM amount for the remainder of the year.

In an effort to get the shopping center cleaned up, landlord recently required that tenant fulfill its lease obligations and maintain the premises and surrounding areas and enforce the no-smoking policy. In addition, landlord sent a new CAM statement reinstating the increase in CAM charges.  Several days later, tenant’s attorney responded.  Funny thing is, there was no objection to the requested maintenance.  There was a question about the no-smoking policy which was quickly put to rest.  Tenant and its attorney strongly object to pay any increase in CAM charges for garbage pick up.

I can’t figure out if tenant has selective amnesia regarding the requests for additional services or if tenant believes it does not generate an inordinate amount of garbage as compared to the other tenants in the shopping center. We have provided the attorney with copies of the invoices to show the charge is a straight pass-through without up charge and corresponds with the services that were requested and agreed to.  I have provided the e-mail correspondence between landlord and tenant regarding change of service.  The attorney has acknowledged that the lease is NNN.  The extra service and capacity, even if not specifically requested by tenant is necessary because of tenant’s use.  All of the other tenants are gross leases.  So why do tenant and tenant’s attorney think that they don’t have to pay for their own trash pick up?

My mother and grandmothers always told me to clean up my mess. My father always had me take out the trash as soon as I was old enough.  This is good advice for this tenant.

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