Lease Options Good For Tenants Bad for Landlords...

By Chase Mayhugh, SIOR, CCIM

During my 20+-year career, I've often found it intriguing how landlords and some brokers take pride in highlighting the inclusion of multiple option periods in leases, as if tenants will willingly commit to staying for the long term. Negotiating renewal options may suggest a tenant's intention to remain in the property, but in reality, this rarely happens without renegotiation. Over the years, I've negotiated numerous lease renewals, and more often than not, they don't favor the landlord. For instance, let's say a tenant is within the standard 180-day notice window and has a well-detailed option to renew. Most of the time, the tenant will seek to renegotiate the rent, request tenant improvements (TI), or seek other concessions like free rent. They seldom execute the renewal as initially outlined. I have had some experiences where tenants exercised their renewal options, but this usually happens when the rent they locked into is significantly below the market rate or when they've invested a substantial amount of their capital in the space build-out. Tenants with options know they have a safety net. They can agree to renew according to the lease terms, which serves as their fallback position. In the best-case scenario, they may try to leverage this position to negotiate better terms with the landlord. With lease options in place, it's generally a win-win for tenants. When the market is down, they can renegotiate; when the market is up, they can still negotiate or fall back on the existing lease terms. For landlords, it might be more advantageous not to offer renewal options at all. While this approach is less common, it shifts the negotiating leverage entirely to the owner. Whether or not an option exists, if a tenant plans to explore other alternatives, they will do so. Not having a renewal option puts more pressure on the tenant, as they lack a fallback position. If landlords cannot secure a lease with no renewal options, the next best alternative is to limit the options to just one, renewing at the Fair Market Rent Value (FMRV). This obliges the tenant to work with the landlord in determining the Fair Market Rent. This determination can be achieved using various methods, such as the Appraisal Method, the Three Broker Opinion of Value (BOV) Method, or the Baseball Method. I will describe these methods in detail in a future publication. Should you have any questions please feel free to reach out to Chase Mayhugh, SIOR, CCIM with Mayhugh Commercial Advisors based out of Fort Myers, FL.