Should a business lease have renewal options?

On Behalf of | Oct 25, 2018 | Business Contracts and Leases

When creating a business lease, is it wise for those on both sides to talk about renewal options in advance? It certainly can be, as it may help prevent a situation in the future where the tenant wants to break the lease. After all, commercial leases are something of a gamble for tenants, who have to believe they will make enough at that location for it to be profitable, even when paying the least. This is not always the case. A start-up may fail entirely for a variety of reasons. Even an established company may fail at a specific location because it just does not have the foot traffic or the right local customer base. Landlords, however, may not like the idea of giving out one-year leases. They would like something with a bit more commitment, especially if the building needs to be modified to fit that business. They could ask the tenants to sign three-year or five-year leases. Some tenants may be wary of a five-year deal because they know they’ll be in trouble in two years if things don’t pan out and they’re still obligated to pay. A potential solution is to sign a lease with built-in renewal options. For example, it could be a two-year deal that can be renewed for another three years if both parties agree. This way, after the trial period, you can both evaluate where you stand and make the right decision. This offers protection for the tenant and helps the landlord avoid disputes and broken contracts. All through this process, it is important for both sides to understand their legal options.