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Options To Renew

Posted by capital on February 2, 2018
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CCIMWhen we are representing tenants in a retail leasing transaction we always attempt to secure an option to renew the lease. Options give the retailer the right to stay by notifying the landlord in writing a certain number of days or months before the lease expires. Landlords may want a higher rent for the renewal period or “market rate”.  Often the tenants want a fixed rate renewal. A common compromise between landlord and tenant is to use the “three(3) broker method” as summarized below.

  1. If the Prevailing Market rate is not resolved by the exchange of Estimates, Landlord and Tenant, within 7 days after the exchange of Estimates, shall each select a real estate broker to determine which of the two Estimates most closely reflects the Prevailing Market rate.   Upon selection, Landlord’s and Tenant’s real estate brokers shall work together in good faith to agree upon which of the two Estimates most closely reflects the Prevailing Market rate for the Premises for the Renewal Term.  The Estimate chosen by such real estate brokers shall be binding on both Landlord and Tenant as the Prevailing Market rate for the Premises during the Renewal Term.  If the two real estate brokers cannot agree upon which of the two Estimates most closely reflects the Prevailing Market rate within the 15 days after their appointment, then, within 10 days after the expiration of such 15-day period, the two real estate brokers shall select a third real estate broker meeting the aforementioned criteria.  Once the third real estate broker has been selected as provided for above, then, as soon thereafter as practicable but in any case within 14 days, the third real estate broker shall make his determination of which of the two Estimates most closely reflects the Prevailing Market rate and such Estimate shall be binding on both Landlord and Tenant as the Prevailing Market rate for the Premises during the Renewal Term.  The parties shall share equally in the costs of the third real estate broker.

It’s important to negotiate at least the renewal option method (i.e. market rate, fixed, 3 broker) during the “Letter of Intent” phase of the leasing process.