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Lease Renewal in Commercial Real Estate

Lease Renewal: What You Need to Know

Commercial leases can last as little as a few months, or as long as 20 years or more. In contrast, multifamily apartment leases are typically 12 months, with some leases ranging as long as 24 months. However, before a lease is up, a landlord has the option of allowing a tenant to renew their lease. Whether they want a tenant to renew is up to several factors, including the tenant’s behavior, as well as individual factors involving the property.

For instance, if a landlord wanted to offer more of a retail property to an expanding anchor tenant, they may not want to renew leases for tenants in nearby stores. Or, if a landlord wanted to do a significant rehabilitation of an apartment building, they may choose to not renew any leases for the year in which the repairs are planned to occur.

Check Renewal Rights Before Making Decisions Involving Commercial Lease Renewal

In some commercial leases, tenants may have a right to renew their lease after the expiration is up. Sometimes, this is referred to as “right to renew”, while in others it’s called “option to extend”. If you and your tenant have agreed upon a lease with a right to renew clause, it will typically have a notice period, the time prior to the lease expiration during which a tenant can exercise their right to renew the lease. This is often 6 months before expiration, but it is often 3 months for smaller tenants, and 9-12 months for larger tenants.

In addition, some lease renewal clauses allow a tenant to lock in a specific rate, while others allow the landlord to set the rent at a fair market price. Many commercial lease renewal clauses also posit that the landlord will not have to do any work on the premises prior to the lease renewal, i.e., that the property must be accepted “as is”.

In many cases, commercial landlords will set specific terms that a tenant must abide by in order to be offered a renewal option. For instance, a landlord may stipulate that a tenant may not default on their lease or pay it late if they wish to renew. However, a landlord generally has to inform the tenant of their violation within a certain time frame in order to deny their lease renewal. Another potential term could involve allowing the landlord to rehabilitate the property at a certain point in the future, which could disrupt the operation of the tenant’s business.

In General, Renewal Clauses Benefit Property Investors/Landlords

If you own commercial property that you rent to tenants, having them agree to a lease renewal generally means that they cannot argue any other aspects or clauses of the commercial lease. In general, this is to your benefit, as they may later wish to request expensive concessions like property improvements, which you may not be in a financial position to grant. If, however, they have already agreed to renew, they cannot use a potential lease renewal as a bargaining chip.

In some situations, lease renewal agreements stipulate rent floors or rent ceilings, specific amounts that rent cannot exceed (a rent ceiling), or specific amounts that the rent cannot fall below (a rent floor). As one might expect, rent ceilings benefit tenants, while rent floors benefit landlords.

Lease Renewal for Multifamily Properties

For large multifamily properties, lease renewal is typically handled by a property management company rather than by an investor themselves, but investor/developers should still be extremely familiar with the process. In general, residential tenants have significantly more rights than commercial ones, however, landlords still do not have to automatically renew a lease. However, unless a tenant’s behavior has been particularly egregious (i.e. disrupting other tenants, destroying property, or repeatedly missing payments), it’s often in a landlord’s best interest to renew. An average of 54% of apartment leases turn over each year, costing landlords an average of $1,750/month of vacancy. As this can get incredibly expensive, especially when dealing with multiple units in multiple properties.

See also: Lease assignment

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