Options are used in a variety of business and commercial transactions. One may be familiar with stock options, employment options, purchase options and others. Options commonly arise in real estate leases and purchase transactions as well. Whether you are a landlord, owner, tenant, buyer or seller, decisions, choices and opportunities are presented in every real estate transaction, and options are an important strategic tool to use as a part of the negotiating process.
OPTION NEGOTIATION STRATIGIES
Prospective commercial tenants are often cautious about their business future and new business owners in particular are concerned about their long- term prospects. In those settings, an option to renew or extend the initial lease is a strategic tool for tenants to limit their overall exposure and risk.
Tenants generally strive for:
- A shorter lease;
- One or more options to extend the lease;
- Minimize their financial risk and exposure;
- Fixed rental increases over the base term and known rental increases during the option term;
- Release of Personal Guarantees during the option renewal term.
- A long time period to exercise the option and as close to the expiration of the initial lease as possible; and
Landlords generally strive for:
- Longer base terms;
- Rental increases during the base and option terms;
- Assured income and cash flow;
- Limiting the exercise of the renewal option too far in advance of the expiration of the base term;
- Limiting the time frame within which to exercise the option;
- Setting large rent increases or at least market rental rates during the option term;
- Terminating the option in the event of tenant’s default under the lease;
- Limiting the broker’s commission during the option term; and
- Continuing personal guarantees and other guarantees during the renewal term.
Future blogs will deal with after the option is negotiated, purchase options, first refusal and a conclusion to this series of blogs on options as a strategic tool in the real estate negotiating process.
Lat J. Celmins