Option to Renew in an Office Lease: What the Clause Should Say Before You Sign

The lease renewal clause, part by part

• The extra term. One or more further periods, each of a stated length. Ask for a length that suits how far ahead you can plan, and for more than one period if the first term is short.
• The notice window. You exercise by written notice, no sooner than one date and no later than another ahead of expiry. Too narrow and it is easy to miss. Too early and you must decide before you know your headcount.
• The renewal rent. Either fixed in advance, set as a stated share of fair market value, or set at fair market value with an appraisal or arbitration step when the two sides disagree.
• The conditions. Most clauses require that the tenant is not in default and still occupies the space, and some make the right personal to the tenant that signed.

How the renewal rent gets set

A fixed schedule is the simplest to budget and the easiest to regret, because it ignores where the market goes. Fair market value follows the market, and its weakness is the definition. A clause that says nothing about concessions lets the landlord price your renewal as though you were a new tenant receiving no free rent and no improvement allowance. Ask for a definition that counts what a newcomer would get, and for a clear process when the two numbers differ.

Why the option belongs in the letter of intent

An option costs the landlord nothing on signing day, so it is cheap to grant while the landlord is still competing for you. That competition ends when you sign a letter of intent with one building. Whatever was left out gets negotiated afterward, in drafts written on the landlord's form, with your alternatives gone.

So the proposal should name the option and its four parts in plain terms: how many periods, how long, the notice window and the rent mechanism. The letter of intent explains what else belongs there. Your broker sets the option at this stage, and your attorney drafts the notice mechanics once the lease arrives.

Renewal option, automatic renewal and holdover are three different things

With a renewal option, the lease is extended only when you act. Automatic renewal extends an agreement unless someone gives notice to stop it. That is typical of service contracts and coworking memberships, and unusual in an office lease. Holdover is staying past expiry with neither, at a punitive rate. Check which one a draft describes, because a tenant expecting the lease to roll over can find it has simply ended.

Whether the option survives an assignment or a sale of the company

That depends on the wording. Options are frequently personal to the original tenant and disappear when the lease is assigned. For a company that may be acquired, ask at the proposal stage for the option to travel with the lease to an affiliate, to the surviving company in a merger or to whoever buys the business, matching the transfers that the assignment and sublet clause already allows without consent. Have your attorney confirm the final wording. This page is general information, not legal advice.