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Today we introduce the third section of the Commercial Lease Fundamentals series: Lease Options.
What is an Option?
A Lease Option is a right granted to either the tenant or the landlord to alter:
- the size and/or location of the Leased Premises or
- the time remaining in the Lease Term.
A Lease Option typically requires a time period (usually called the “Notice Period”) between receipt of a formal notice that an option will be exercised and the effective date of the option.
Lease Options are different from standard lease clauses in that they are expected to have a time sensitivity to them. That is, a tenant may be offered the flexibility to renew, terminate, expand, contract or purchase, but typically that right is exercisable prior to the expiration date of the lease. Likewise, a landlord may be granted the option to contract the premises or terminate the lease prior to expiration.
Lease Option provide the tenant with an incentive to sign the lease via security against an unpredictable future, such as:
- “My business is growing faster than I expected and I need more space.”
- “My business is not doing well and I need to reduce the size of my premises to lower my rental obligations or terminate the lease altogether.”
- “I like this building and do not want to be forced to move at the end of my term.”
As time moves on through the lease term, the landlord reclaims power of negotiation as the Lease Options expire. Lease Options provide the landlord with protections against an undesirable tenant or a tenant who is not performing well and is therefore a negative influence on the building.
Lease Option Types
Options are granted via lease documentation and come in different types:
- Renewal
- Expansion
- Contraction
- Termination
- Rights of First Offer
- Rights of First Refusal
- Purchase
Future publications in this Commercial Lease Fundamentals series will address each of these Lease Options in greater depth via their own article.
Relocation: Option or Clause?
The relocation clauses within a lease are considered a Lease Option by some (after all, the clause has a notice period and can be a right granted to the tenant or the landlord) and a non-option lease clause by others. Relocation clauses typically grant the landlord the right to move a tenant to a difference location within the building and (i) may be exercisable for the entire lease term (although some tenants will negotiate for a shorter relocation period);(ii) may provide limits as to where the landlord may relocate the premises or the size of such relocation premises; (iii) may grant the tenant with a right to terminate the lease if they are unhappy with the relocation premises; and (iv) typically require the landlord to build-out the relocation premises to a condition similar to the original premises and to pay the costs of the physical relocation. For purposes of this series, the description above shall suffice and no further information will be provided on relocation rights.
This concludes our introduction to Lease Options. Come back in two weeks as we delve into our first option type with the article entitled, “Renewal Options Explained.”