One way commercial leases differ from residential leases is that the lease terms are for longer periods of time, such as three, five or seven years. But the end of a commercial lease term doesn’t always mean the commercial tenant has to move out. Many commercial leases contain special provisions that allow the commercial tenant to renew the lease.
While this sounds simple, the renewal process is sometimes the source of disputes that result in breach of contract lawsuits and the hiring of contract lawyers. Fortunately, most disputes don’t get to the point of contract litigation because each side has a strong interest in renewing the lease and avoiding litigation costs, moving expenses or lost rental income.
Commercial Lease Extension Basics
Commercial leases have special provisions that allow commercial tenants to renew the lease at the end of the lease term. In other words, a commercial lease extension is an option that the tenant can exercise and remain at the commercial property. Alternatively, the commercial tenant can choose to waive this renewal right and move out at the end of the lease’s term.
The Commercial Lease Extension Process
The first step involves the commercial tenant deciding whether or not to renew the lease. The commercial tenant must make this decision by a specific deadline, which often ranges from six to 12 months before the end of the lease.
After giving notice to the landlord of this intent to renew, the terms of the commercial lease will remain the same, except for the cost of rent, the removal of the lease extension clause (although the landlord may agree to include another lease extension clause) and termination of special bonuses for the commercial tenant (also called lease incentives or inducements).
The commercial landlord and tenant then begin the negotiating process to decide what the new rent should be and if another extension clause or other special bonuses should be placed back into the lease.
Simply put, the landlord wants more money, typically in the form of additional rent. Most leases will have some wording that will give an idea what the new rent should be, such as “reasonable fair market value.” However, determining what this is can be complicated and subject to much dispute among the parties.
So while the commercial landlord wants the highest rent possible, it understands that if it asks for too much, it could lose the commercial tenant. If this happens, the landlord is facing a large amount of expenses and lost income in finding a new tenant and negotiating a new lease.
In contrast to the commercial landlord, the commercial tenant wants to avoid any rent increase. If the overall commercial rental market has been on the decline, the commercial tenant may be able to make this wish a reality. However, the commercial tenant will need to do its homework and research similar commercial properties available for less rent.
If the overall commercial rental rates have been rising, the commercial tenant must accept that some increase in rent is inevitable unless it’s willing to move to another location.
For More Information
To learn more about commercial lease extensions, you can contact the Thomas Law office and speak with a Maryland lawyer to discuss your options and legal rights.