Commercial Real Estate 101 – Chapter 5: Tenant Options

A lease abstract is a document that summarizes specific, key information from a lease agreement. Leases can be lengthy documents with confusing legalese. Lease abstracts allow users to easily reference and review fundamental lease terms to ensure that both the tenant and landlord are in compliance with applicable obligations, timeframes, etc.

This series will go through a typical lease abstract and explain the various terms and what is important for a tenant to understand.

Tenant Options

Renewal

  • Lease provision detailing tenant’s right to renew the lease at the expiration of the initial lease term. Renewal rights solely benefit the tenant. Can be multiple renewal options.
  • What’s important – Timeframes for giving notice of a tenant’s election to exercise their renewal option. The shorter the timeframe the better for tenant. The method for determining the rental rate for the renewal term can be the then market rate, greater of the then market rate or current escalated rent, or lesser of the then market rate or current escalated rent. Other important terms include annual escalation for renewal term, base year reset, etc.

Expansion

  • Lease provision detailing tenant’s right to expand within the initial lease term or any renewal terms. Expansion rights can include the floor, building, or within the landlord’s portfolio.
  • What’s important – Most landlords will do their best to accommodate a growing tenant; making most expansion options somewhat of a formality. However, expansion options can include provisions allowing the tenant to terminate the lease if the landlord cannot accommodate their growth.

Right of First Offer

  • Lease provision which requires the landlord to offer space to tenant before offering the same to the general public. Tenant has the ability to lease the proffered space first, but landlord retains the right to reject the terms.
  • What’s important – Terms specifying which spaces are covered by the ROFO. The right can be relegated to spaces that are adjacent to the premises or can extend to different floors or even other buildings in the landlord’s portfolio. Details governing the terms that will be deemed acceptable to landlord, timeframe for tenant to exercise its right, and number of times ROFO applies.

Right of First Refusal

  • Lease provision which gives tenant the right to review all other offers on a particular space/property before landlord can lease the space to a third party. Tenant must simply match the highest and best offer.
  • What’s important – This right benefits the tenant more than a simple ROFO by encumbering a space/property. Details governing which spaces/properties are covered by the ROFR, timeframes for tenant to exercise its right, and number of times ROFR applies.

Termination

  • Lease provision which gives tenant the right to terminate the lease.
  • What’s important – Conditions and timeframes under which tenant can exercise its right. Termination rights can stand-alone and be based on landlord’s inability to accommodate tenant’s growth, a timeframe, i.e. after 3 years, etc. or be a condition of landlord default.

Purchase

  • Lease provision giving tenant the right to purchase the premises/property.
  • What’s important – Terms and conditions of the purchase including time, price, etc. Terms primarily benefit the tenant by setting limits on the landlord/owner. Purchase options can dictate the sales price at a future date which means that owners cannot charge more even if the market price is higher at that future date; however, tenants may be able to negotiate a lower purchase price if market prices are lower.

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