Split Length of Renewal Option for Jittery Retail Tenant

Issue to Negotiate

Your lease with a desirable retail tenant is set to expire soon. The lease has a renewal option for a relatively long period—say, six years. But the tenant is hesitant to exercise the renewal option. What can you do to persuade it to do so?

Owner's View

Here's how the owner may be looking at things. You want the tenant to exercise its renewal option. After all, you want to keep a desirable tenant in your center. Otherwise, you risk winding up with a less desirable replacement tenant or one that pays a lower rent. Or worse—you could be stuck with vacant space. Plus the tenant's customers may no longer shop at your center if it moves out.

Tenant's View

The tenant, on the other hand, may be thinking that in today's economy, getting locked into a long renewal term isn't a good idea. With the decline in consumer spending and the uncertainty of the retail sector, the tenant may have to downsize or change its retail strategy in the short term. It may even have to close its store at your center at some point in the future.

Compromise: Split Renewal Option

To persuade a jittery retail tenant to exercise its renewal option, try this compromise, suggests Virginia attorney Paulette B. Peltz: Split its renewal option in half—that is, create two successive renewal options, each for half the length of the original renewal option's term.

For example, for a six-year renewal term, you'd split the renewal option into two successive options, each for a three-year renewal term, she explains.

Tenants Like Compromise Strategy

Through her work with Charter Oak Partners, an owner of factory outlet shopping centers, Peltz has discovered that tenants seem to like this compromise strategy. By using it, her company has lost fewer tenants, she says. Tenants seem to be more willing to renew for a two- or three-year renewal term. They probably wouldn't have renewed at all and may have walked away if they had had to commit to double that amount of time, she says. That's because the shorter renewal term makes it easier for these tenants to adapt if their business needs change, she explains.

And you benefit from the compromise strategy, too, Peltz points out. Although the tenant may not be staying in its space for as long as you had hoped, at least the tenant is staying in its space longer than it would have if it didn't exercise any renewal option at all.

Amend Your Lease

To set up this type of compromise strategy, you'll need to amend your lease, says Peltz. Say in the lease amendment that the renewal option clause is modified to create two successive renewal options that the tenant may exercise if it hasn't violated the lease or if the lease hasn't been terminated. Each option should be for half the length of the original renewal term. If your lease gave the tenant one renewal option for an additional term of six years, then the amendment should say:

Model Language

Clause [insert # of renewal option clause] of the Lease is modified to read as follows: “Provided Tenant is not in default under any of the terms of this Lease and this Lease has not been otherwise terminated, Tenant is hereby granted two successive options to renew this Lease for additional terms of three years each.”

Practical Pointer: Make sure that your lease amendment also says when the tenant must exercise each renewal option, says Peltz. For more information on that topic, see “Plugging Loopholes: Stop Tenant's Simultaneous Exercise of Multiple Renewal Options,” CLLI, June 2000, p. 9.

CLLI Source

Paulette B. Peltz, Esq.: Senior Vice President & General Counsel, Charter Oak Partners, 8000 Towers Crescent Dr., Ste. 950, Vienna, VA 22182; (703) 905-4400.