Lease Renewal Clauses & Beware of the Automatic Lease Renewal

As a business owner, managing your office space is critical to the success of your company (see Tenant Tip: Managing Your Critical Lease Dates & Terms) Ensuring that you’re providing an advantageous work environment for yourself, and your employees can be daunting task. One area which requires special attention and awareness is office lease agreements – particularly one clause that occasionally surfaces, albeit too late for some business owners and managers that lose tract of their critical lease dates. Many leases have automatic renewal clauses buried in their fine print, leaving unsuspecting businesses at risk of being locked into office or warehouse space they no longer require or worse yet cannot afford.

Typically, tenants negotiate leases for office space that contains a lease renewal clause and within these clauses the tenant is charged with the responsibility to trigger the lease renewal by providing the landlord with notice of the tenant’s intent to exercise the renewal. The notice period usually precedes the lease expiration by 3-12 months, meaning tenants must provide landlords of their intent to extend the lease on or before the Notice Date, as defined in the lease agreement. The Notice Date is of critical importance because lease renewal options are typically one-way streets in favor of the tenant. The tenant can choose to extend (renew) the lease according to the terms defined in the renewal option clause or elect to not renew the lease and vacate to pursue other building alternatives. The choice is theirs. Failure to provide the landlord with notice by the Notice Date identified in the lease means the choice is not only the tenant’s, but also the landlord’s. If the building is relatively full and there is another tenant that wants your space to grow or the landlord believes it can rent your space for a higher rent than what you’re paying, the landlord will not allow you to renew your lease and you’re out on the street, so to speak. Or the landlord can use your failure to provide notice of your intent to renew as leverage to negotiate better lease terms than what had been agreed to in the lease renewal option. The bottom line is that the tenant must be cognizant of the Notice Date and be making plans to renew the lease or vacate in favor of other pursuits well in advance of the Notice Date. If the Notice Date occurs 6-months prior to lease expiration, than the tenant should be examining its next step at least 6-months prior to that, or 12-months prior to lease expiration. Tenants usually need at least 6-months to plan its next step and do a thorough market analysis prior to having to decide its next move on the office space. Shortening the time frame will only put the tenant at a disadvantage in the relocation or renewal process. Time can be a tenant’s friend when there is plenty of it, or its worst nightmare if there is not enough.

Another important aspect to the lease renewal clause or Renewal Option is the Automatic Renewal. Over the past few years, I’ve noticed an increasing number of landlords using an Automatic Lease Renewal clause in their leases. In this scenario, the lease will automatically renew for a lease term and at a rental rate specified in the lease agreement if the tenant does not notifiy the landlord on or before a specific Notice Date, which can usually be 3-6 months prior to the lease expiration. I want to be as clear as possible: NEVER SIGN AN OFFICE LEASE THAT CONTAINS AN AUTOMATIC LEASE RENEWAL CLAUSE. Hopefully, I’ve articulated that clearly! Really, an automatic lease renewal clause is in place for 1 reason: to trick the unsuspecting business owner or manager into entering into a lease renewal that he or she would never otherwise agree to. As mentioned in my prior Tenant Tip: Managing Your Critical Lease Dates & Terms, business leaders have their hands full focusing on the core pursuits of the business to effectively manage all of the moving parts of the lease agreement. Therefore, it’s not uncommon for they will procrastinate on pulling out their lease agreement and paging through a long document to learn what they have to do and when they have to do it. Or, they simply forget there is a key date in the lease or don’t recognize it as important until it’s too late. Once they have missed the date, they’re locked in for some specified term at a rental rate above market. Therefore, negotiate the automatic lease renewal from the document and replace it with a Lease Renewal Options. Even if you miss your Notice Date with a Renewal Option, you can still negotiate with the landlord with the right to leave if you aren’t happy with the terms the landlord is demanding. If you miss a Notice Date with an automatic renewal…you’re stuck!

Familiarizing yourself with all of the pertinent terms of a lease agreement and getting them on paper or in your calendar where you have access to this information to refer to from time to time, will save the business time and money, and save the owner or business manager from having headaches whenever they have to repeatedly pull out and reread the same long lease document during the lease term. And if you get nothing else from this Tenant Tip, please remember to never sign a lease document that contains an automatic lease renewal.