Can I request a higher rate than what is in the renewal clause?

Question

How enforceable are option to renew clauses in leases? I bought a building in 2020 and the current tenants price per square foot is very low. Their lease expires in August and they have reached out to renew. Their renewal clause has a 2% increase per year for three years, obviously rental rates are not what they were in 2017 when this lease started. Can we request a higher rate that’s closer to market value? Or do we have to honor the 2% increase?

Nathan Gesner · Answer

Your Tenant probably knows full well they are below market. That's why they are trying to lock in a new lease so early.

I have to disagree with the others.

1. From a legal standpoint, I don't know if a current lease can dictate terms of a future lease. I know it's in there, but just because two parties agree to something in writing doesn't mean it's legal or enforceable. I would talk to an attorney before making any decision.

Greg M. · Answer

These posts always blow my mind. Yes, you must honor the contract.

Phillip Austin · Answer

@Alexandra Isenhour I'm assuming their 2% renewal clause is in effect for their current lease which expires in August and you're wondering if you can increase their rent on a brand new lease starting in September? If that' the case, then yes, you can offer a higher rate starting in September.

Matt Devincenzo · Answer

Agreed with @Nathan Gesner and @Wesley W. that the contract governs, but your description leaves open a possibility for a rent increase. Without seeing the 'option' to renew clause it is hard to say. Any clause can be unilateral or bilateral dictating who controls to decision process. Also your description says that the 2% options were for three years starting in either 2017 or 2020 (your description isn't clear). It's now 2023 implying that we are past the 3 years (or soon will be) in either case. So if that timeframe has expired then you can institute a new lease, or simply terminate and rent to a new tenant if that's a better option.

Without seeing the lease it's hard to say what the real condition of the situation is.

Bill B. · Answer

If this is a commercial property and you don’t already have another client offering more. Don’t forget to calculate in at least 6-12 months of vacancy, $10-$100k in build outs and hope that you’re right about market rents in this environment. Make sure there went 10’s of locations that would love to have your tenant at their current rent.

If you can get 10% higher rent it will take 5 years just to break even (assuming ZERO build out expenses, rent concessions, commissions, or holding costs) if it only takes 6 months to find a new tenant.

Elise Newberry · Answer

@Alexandra Isenhour

I would suggest consulting with an attorney and I can recommend one in Cape Coral. If you do not choose that route, go with what the lease states. What year does this renewal clause expire?

Wesley W. · Answer

I've got to disagree with some that posted here and I think those folks are misreading the OP's situation. @Nathan Gesner saw what I saw.

Somewhere in that contract (and/or based on local/state statute) there is language on "notice to terminate." I would use those parameters to legally terminate the old lease and at the same time (at your discretion) offer them a lease of your own with terms you deem favorable to your business model.

Theresa Harris · Answer

If it is in the contract, then yes. When they renew and sign a new contract remove that part of the text and only do a 1 year renewal. You can then increase it next year.

Mason Hickman · Answer

@Alexandra Isenhour

There’s a reason the contract was put into place in the first place and it was to spell out everything so landlord and tenant had a clear set of expectations. You need to honor the contract.

Tim Herman · Answer

@Alexandra Isenhour Everything should be in your lease. Notice of termination. Automatic renewal. Timeline. We don't have a copy of your lease and most are not lawyers on BP. Your best bet will be to consult with a local real estate attorney.

Can I request a higher rate than what is in the renewal clause?

Can I request a higher rate than what is in the renewal clause?

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