When entering into a commercial lease, a landlord should consider not only the initial term of the lease, but future potential for the premises and their business. If you are planning to lease a commercial premises, thinking ahead may help you avoid complications during the term of the lease. You need to look ahead and consider the type of business the tenant is carrying on and their plans for the premises and make sure that your expectations are not conflicting. It is not always easy to plan ahead as your circumstances and expectations may change, however as a landlord, there are some considerations to keep in mind at the outset of lease negotiations which may protect your interests and avoid uncertainty and conflict in the longer term.
Options to renew
Commercial leases quite often have three to five year initial terms and then include an option to renew for a number of future terms. Including an option to renew in a lease effectively places the control of the term of the lease into the hands of the tenant, as they have the power to choose whether or not to exercise the option at the expiry of each term. A longer initial term will guarantee the tenancy for longer, but gives you less flexibility and certainty.
If a lease contains many options for renewal over a number of years, the future becomes increasingly uncertain – will the tenant renew the lease or not? Although breaking a lease is possible, it may come at great cost. A tenant gains bargaining power if you want to shorten the lease term to suit your plans or remove renewal terms, and you may have to compensate. If you want to put the property up for sale, the number of option terms in the lease may deter potential buyers who do not want ongoing lease obligations.
This is not to say that options to renew are always unfavourable to landlords. A tenant may look upon a lease offer more favourably if the lease contains an option term, as this suggests stability and allows them the possibility of a longer term tenancy. Also, landlords are not always aware that options to renew can be drafted to give the landlord the power to accept or reject the additional terms, or to place conditions on the tenant’s power to renew.
It may be beneficial to consult legal and financial professionals when entering into a new lease in order to explore your short-term and long-term options and to ensure that your interests and future plans are reflected in the lease.
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