A one-year lease could be an option for your startup. You’ll have the flexibility to scale the business up or down depending on its success.
If it doesn’t work out, you won’t be stuck with a long lease or left trying to find someone to sublet the space. Although the option for a sublet in your lease is a way to protect yourself, it can take time to find a sublessee.
Let’s say your business does well and you want to remain at your current location. Unless it’s written in your lease, your landlord isn’t obligated to offer you an extension or a renewal.
Learn more about lease extension agreements and the provisions you should discuss when negotiating a lease.
Short-term Leases
While short-term leases may be ideal for tenants, they require more effort from the landlord. If the tenant leaves after one year, the landlord is back at square one. They have to look for a new tenant to lease the property and may have to invest in repairs or remodels in order to release.
The longer the lease, the more likely the landlord will feel comfortable customizing the space for the tenant. Why invest in the space if the tenant plans to leave within one to three years? Tenants should keep this in mind as they negotiate with a landlord. If you are asking someone to invest in your space, they need a reasonable payback period on the investment.
Compromise: Options to Extend or Renew
Options to extend or renew a lease are a compromise between parties. If you want a fixed option price, expect the landlord to increase the rent to a level that protects him should market rates increase.
On the other hand, if you want to share some of the risk with the landlord, your option rate could be at current market rent at the time of renewal. If rents don’t go up or down, you will benefit without being locked into a higher fixed rate.
What if market rents are higher when you want to renew? Then, you are free to negotiate a new rate. The landlord may not take the full increase if you’ve been a good tenant. Before you begin negotiations, you should look at other locations and research comparable rents so you don’t overpay.
Options to Extend
Are you happy with the lease agreement? If you’re the tenant, talk with the landlord about adding an option to extend before you sign. Extending your lease gives you the ability to continue the current lease after it expires.
Extension Periods
Having multiple extension periods written in the lease gives the tenant and landlord more options in the future. You’ll want to note how many extension periods are offered in the lease and how long those periods last.
For example, a lease may offer two options, each to extend the lease for three to five years. The tenant could decide after the first extension, whether to continue with the lease again.
Extending Your Lease
If you want to maintain your arrangement, you should exercise the option to extend within the notice period stated in the lease. Your notice period may be anywhere from three to nine months depending on the length of your lease. Waiting until your lease expires renders the option no longer valid.
Lease Extension Agreements: After You’ve Signed
An extension option may not be included in your current lease. In that case, either party may reach out in writing to offer or request an extension. You’ll want to include your reasoning for the extension, the proposed extension period and date when the extended lease will end.
Right to Renew
Renewing leases lets you create a new agreement. Unlike extension agreements, exercising your right to renew isn’t a continuation of your current lease. A right to renew lets the tenant and landlord discuss terms for a new lease should the tenant decide to renew.
Renewing Your Lease
With a right to renew, you can renegotiate the lease agreement with your landlord or tenant. You may want to adjust certain terms moving forward. Tenants may ask for new provisions in exchange for a slightly increased rental rate or a transfer of responsibilities.
A tenant may want the landlord to agree to a shorter renewal. The landlord may ask the tenant to take on maintenance costs for offering a shorter term. In this example, this change of responsibility would be documented in the new lease agreement.
What about deposits? If you renew your lease, do you have to pay another deposit? A landlord can ask a renewing tenant to pay an additional security deposit, if you have not made payments promptly or your financial situation has changed since your initial term. If you’ve been a good tenant, more than likely, you won’t have to pay an additional deposit.
Do Leases Automatically Renew?
Depending on the language in your lease, it may automatically renew. However, automatic renewal is not the same as exercising a right to renew. Giving the tenant the right to renew lets them decide whether to renew the lease or move out of the location. It is always best to have a clear written understanding as to the exact terms.
You may be wondering how to renew your lease, as a landlord or as a tenant. The first step is to review your current lease and contact the other party involved. You should offer or request a renewal in writing. From there, you can begin negotiations and come to an agreement.
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