Hello landlords and tenants, I’m going to discuss the meaning of an “option” in commercial real estate leasing. My name is Jenna Zebrowski and I’m the attorney behind LawByJZ.com. An option is an offer made by the landlord at the beginning of the lease to extend the lease for a certain price. The tenant can accept the offer to extend the lease under these pre-negotiated terms, but there’s usually a few years of lag time before the tenant has to make that decision.
If there’s anything that’s uncertain such as the rental rate or the term, then it’s not a true option. It’s an offer to negotiate an option. It’s important to know what the rent will be BEFORE the tenant decides to exercise the option, or once landlord knows you’re interested, they might have the ability to pick any number they want, and you’re stuck with it!
Commercial Real Estate Case Study
Option: Choices Are A Nice Thing To Have
Bill was planning his exit strategy for his independent car care company. He had been operating for over a decade and was thinking about selling the business so he could focus more on his classic car hobby. But he had one more child that was about ready to graduate from high school. He wanted to have the choice to get out of the business when he was ready, but he wasn’t sure when that was going to be. His lease was up for renewal, and he thought a longer lease term would be more attractive to a potential purchaser.
Bill wasn’t ready to make a decision, but he wanted to protect his business value for the eventual sale, so he turned to the attorney who helped him negotiate the lease to start with and explained his dilemma: Bill wanted maximum value and maximum flexibility for the person that would purchase the business, eventually.
The best way to protect the lease was to have a lease term and several options. Options are pre-negotiated, so both parties know how long the term will be and how much the rent will be during that term. The tenant has the choice to exercise the option, or try to negotiate better terms with the landlord, or not renew the lease all together.
Bill’s new lease was shorter, only five years, but he got three additional options for three years each! That means the new owner would know what the offer was and how much money the rent costs would be under the lease, and the new owner could decide whether to accept those rental rates, or not. The landlord couldn’t end the term of the lease at expiration, that was the tenant’s choice!
Bill was glad he worked with his attorney again, because less than a year after the lease was extended, Bill received an offer to buy his business that he could not refuse. The new owner really liked that he had a few years to confirm that the location was profitable, then could make the decision about staying put at the rental rate or making the decision to relocate. Like Bill, he was keeping his “options” open!