Understanding Lease-Renewal Options

Landlords and leasing agents typically want tenants to sign long-term leases. This type of lease, which may extend over many years, guarantees the landlord a reliable stream of rental income and allows them to avoid the hassle and expense of re-leasing the space. But if your business is growing and you don't want to lock into a five- or 10-year lease, consider a short-term lease with renewal options.

A renewal clause in a real estate lease allows a tenant to decide whether or not to extend the lease once the initial lease term expires. You may, for example, negotiate a two-year lease with four two-year renewal options, rather than a fixed 10-year lease.

When you discuss renewal options with a landlord, try to negotiate a series of predetermined rent increases for each renewal term. Renewal options that allow a landlord to raise rents based on fair-market rates can result in large rent increases — especially if your business operates in a booming area where commercial space is in demand.

Some landlords are reluctant to grant renewal options because it limits their flexibility to market the space to prospective tenants. Others, however, see renewal clauses as a good way to keep tenants without having to renegotiate their leases after the original term expires.