As Los Angeles commercial leasing attorneys we frequently deal with lease options. If possible, we always recommend that a tenant pursue a lease option at the outset of their lease. A lease option gives the tenant the right, generally within a specified period of time, to extend the life of the lease. This can be useful because it allows a business to avoid the risk of being forced to move at the end of their fixed term while still providing the flexibility in allowing the business to move if the location is no longer suitable for its needs. Here are three important questions to focus on when negotiating a lease option.
1. When is the option exercisable? Typically the lease option will provide a time frame when the lease option can be excised – for example, it could say that it cannot be exercised more than 6 months before the end of the original lease term but must be exercised 3 months before the end of the lease term. The time frame provides a window for both the tenants and the landlord to know whether the lease will be extended. Whether you are the landlord or the tenant you should consider how long you need to make your decision and what external factors may come into play that effect your decision making ability.
2. If you exercise the option, what will the new rent be? This is another important question to ask because a tenant’s decision regarding whether to exercise the option may, in large part, be dependent on the amount of rent that the tenant could expect to pay during the new lease term. We see options with many different calculations for rent during the new term. The calculations we see range from fixed amounts, percentage increases to appraised fair market rental value. We typically favor rent provisions with certainly and less opportunity for debate.
3. Is the option transferrable to an assignee? A lease option that is transferrable to an assignee tends to have additional value on the open market. This is true because sometimes business fail, businesses are taken over by other companies or circumstances arise that warrant the tenant assigning their interest in the lease to a new tenant. Having the ability to assign an interest in an option can really increase the value of an existing lease for transfer on the open market because if the lease and lease option have good terms it may enhance the value of your business or your leased location.
Of course, our Los Angeles based real estate attorneys have many more thoughts and input to share when we review commercial leases and much of this input is dependent on your business’ particular needs. At Schorr Law, we customize our approach to each client and take the time to make sure we are pursuing each of client’s objectives on an individual business level.
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