Spell Out Your Right to Rent Escalations During Extension or Renewal Period

If you want the tenant's rent to escalate during a lease extension or renewal, make sure you spell out the escalation formula in the lease's extension or renewal option clause, says Chicago attorney Neil T. Neumark. Otherwise, the tenant may argue—and a court may agree—that the tenant doesn't have to pay a rent escalation during that period, he says.

For example, a Utah appeals court told an owner that it couldn't require the tenant to pay an annual rent escalation during a lease extension period because the lease didn't specifically allow for such an escalation. The lease gave the tenant a three-year lease extension option and required the owner to determine the new rent for the extension period based on the “market rate.” But it didn't mention that this rent could escalate during the extension period. When the tenant exercised its option, the owner set the minimum rent and said that it would escalate by 50 cents per square foot each year during the extension period. The tenant rejected this. So the owner demanded that the tenant move out of the space at the end of the initial lease. When the tenant failed to do so, the owner sued.

Although the tenant won the lawsuit on technical grounds, the court said that the owner violated the lease by demanding annual rent escalations during the extension period. The court scolded the owner, saying that there wasn't even a “suggestion in the lease” that it had the right to demand these annual rent escalations. Rather, the lease authorized the owner to set only a single “new rental rate.” The owner's demand for rent escalations “was clearly contrary to the plain terms of the lease,” the court said [Parkside Salt Lake Corp. v. Insure-Rite, Inc.].

CLLI Source

Neil T. Neumark, Esq.: Partner, Schwartz, Cooper, Greenberger & Krauss, Chtd., 180 N. LaSalle St., Ste. 2700, Chicago, IL 60601; (312) 845-5402.