Tenants wanting the ability to renew their lease at the end of the lease term need to negotiate prior to lease execution a unilateral right to exercise such renewal and an equitable method to determine the future rent. A methodology to determine a reasonable rent will ensure that the landlord will negotiate in good faith.
In today’s issue, we provide seven essentials to cover when negotiating a renewal right under your lease.
AlanMintz & Gold LLP
In a Word; Renewal
COVID continues to alter well-designed plans. Our son Adam and his fiancé Natalie recently postponed their wedding celebration until October, 2021.
On the bright side, they got married anyway on the same day as originally planned and we had an outdoor socially distanced brunch with just our immediate family and Natalie’s immediate family.
Actually, it could not have been nicer and allowed us to spend more quality time with the bride and groom and the bride’s family than we ever could at the “real” wedding.
There is an intimate yet somewhat strange relationship between any two sets of in-laws, bound together by holy matrimony… of their children.
Makes one think “there ought to be a word for that.”
Leave it to Yiddish to actually have the word. Machatonim.
The parents of the people your children marry are your Machatonim.
The internet is apparently filled with words people make up for things when there ought to be a word but there isn’t (these people should clearly learn some Yiddish).
For example, a “social notworker” is someone who spends their workday on the internet.
A “wannapreneur” is someone who claims to be an entrepreneur but does not actually own any businesses.
My goodness, this is so appropriate for commercial leasing!!
A “flease” would be a landlord’s first draft of a lease that is so terrible you need to either hand the landlord the shirt off your back or retain Mintz & Gold (hey, we will gladly take the shirt off your back!).
An “insecurity deposit” would be the money you give to a shyster landlord that will require intervention from Vito Corleone if you ever want to see it again.
“Nofaulterations” would be alterations that no matter how poorly constructed by your landlord it will never be his or her fault.
A year from now, Adam and Natalie will get married again, throw a party and “renew their vows” (there ought to be a word for that – “rewed?”, “wedux?” “wedding part two; revenge of the sith?” (no wait; great title but not a word…).
Sometimes a tenant and its landlord renew their vows and extend their lease term.
Since not all landlords are true romantics, it is wise for a tenant to negotiate a renewal right in its original lease, including an equitable method for determining the future rent.
The landlord may have every incentive to make a deal with its then current and good paying tenant, but providing the tenant with a right to unilaterally exercise a renewal right and having an avenue to determine a reasonable rent is the added incentive that ensures the landlord will negotiate in good faith.
Use the following seven suggestions when preparing your renewal option or forever hold your peace:
- Renewal Exer-cries (renewal exercise restrictions that leave you in tears). Your landlord may require in order to exercise your renewal option that your lease not be in default, but this should be limited to then continuing (not cured) “monetary or material non-monetary” defaults and only after the expiration of notice and cure periods. In addition, any direct or indirect assignee by reason of merger, purchase of assets etc. or any affiliated entity should have the right to renew, not just the “named tenant.”
- Right of Re-snoozle (renewal notice requirements both incomprehensible and with tight response times so you inevitably snooze and lose). You will need to provide prior notice (e.g., 12 or 24 months) but be sure you have time to test the market and still renew. Clearly indicate the required notice (e.g., overnight courier, certified mail, etc.) and what must accompany your notice (e.g., your proposed renewal term rental). If you have negotiated for flexibility in selecting the term or the portion(s) of the space being renewed, then failure to identify the selected option should allow a cure right or trigger a deemed selection (rather than nullify your right).
- Minimum Obstinacy (occupancy requirements too difficult to reasonably achieve). If you must agree to a minimum occupancy requirement, you should have the flexibility to sublease some portion of your space (e.g., 10%, 20%). In addition, “occupancy” should mean space not affirmatively subleased (i.e., warehousing unused space for future use allowed) and should include affiliates, permitted successors (not just the “named tenant”) and licensees. In a larger lease, you may also have enough leverage to negotiate a renewal option that would give you the option to renew for only a portion of the premises.
- Loco-cation (where your ability to sign a second lease is subject to insane relocation restrictions). Some landlords will limit renewal rights if the tenant has entered into a “relocation lease” elsewhere (i.e., a lease intended for the same purposes and otherwise capable of accommodating a relocation of the tenant’s business). Your landlord does not want to tie up your space until your notice period ends if it is clear that you are moving, but you need to make sure that you retain flexibility if more than one lease may be needed.
- Fare Market Rental (a rent determination method that guarantees you pay the fare). Provide for determination of the renewal term rent based on “fair market rental”, i.e., what a willing lessee would agree to pay and a willing lessor would agree to accept for the renewal premises during the renewal term. Your landlord may try to require a “floor” of your then current rental, but this is not fair market. Your lease can specify certain aspects of the renewal (e.g., that your landlord will not be providing any initial work or tenant concessions, or that the base years for escalations will be updated), but many leases provide that only certain factors which benefit the landlord be taken into account. Some of these may even be “phantom measures” that your landlord is not even providing so you should not be obligated to accept any tenant concessions on a renewal that you do not want. Fair market rental should simply reflect “all relevant factors.”
- Negotia-gyration (a period of negotiation that leaves you spinning in circles). Create a formal time period (e.g., 30 or 45 days) for the parties to discuss options, perhaps even a pre-exercise estimate where the parties submit their proposed figures well in advance of the exercise of the renewal right. If the parties’ estimates are within some pre-determined amount of each other (e.g., 3% or 5%), require that the parties split the difference rather than go to the expense of arbitration.
- Dispute Dissolution (when your landlord can run over your rights of renewal in the event of a dispute). Require an arbitration dispute resolution procedure to determine the fair market rent if the parties cannot agree on their own (a fair process will incentivize the parties to agree and avoid arbitration).
- Agree on an independent arbitrator (or arbitrators) or provide for selection by a neutral third party, such as the American Arbitration Association (AAA). A landlord advocacy group is not an independent third-party. The arbitrators should be leasing brokers or attorneys with at least 10 years’ experience in the applicable area, and without any conflict of interest, such as having recently been involved in a litigation with either party.
- Encourage voluntary agreement through the use of “baseball arbitration” (used by Major League Baseball for salary arbitration) where each party selects a rental figure and the arbitrator must select one of the proposals, but no other amount. This compels the parties to propose reasonable figures since an outlier is likely to be rejected.
- Specify whether there will be formal hearings, witnesses or discovery, and provide timetables for the parties to appoint arbitrators and submit proposed rentals, with rights deemed waived if responses are not timely. Timing is important if for no other reason than that your landlord may require that you use its rental determination until final determination by the arbitrator (at which point there should be a “true up”). At a minimum, your lease can tie into an objective set of rules, such as procedures of the AAA.
- If you have sufficient leverage you may be able to obtain the option to reject the fair market rental after it is determined by the arbitrator, but this is hard to achieve and it is not unreasonable for your landlord to expect you to go forward once the option is exercised.
- Any decision rendered in arbitration should be final and binding with the parties consenting to the entry of any order of judgment in court.
- The parties generally share the costs and fees of a third arbitrator and pay their own costs associated with “their” arbitrator and attorneys.
“Hazardous Immaterial”. That one aptly describes much of this newsletter. But follow the suggestions above and your renewal rights will lead to years of leasing happiness and bliss. And congratulations to Adam and Natalie!!!