Don’t Take Automatic Renewal Clause for Granted

September 17, 2013
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If you agree to an automatic renewal, pay close attention to the terms and make sure that they are as specific as possible. First, make sure you have the sole right to cancel the automatic renewal. Also, negotiate rent for the renewal term when you're negotiating the specifics of the initial lease term, and either specify the dollar amount of the rent, or tie the rent to a consumer price index. Why? Doing so will provide a more solid basis for the renewal rent projection. It’s difficult for a tenant to make an informed decision about the cancellation date if the renewal rent is based on “fair market rent” or some similarly unpredictable standard.

If you’re not able to avoid a fair market rent formula, negotiate a cap on the rent increases. Similarly, operating expenses and taxes should be subject to the same caps, if any, that the lease imposes on the tenant's initial term. Finally, consider including a refurbishment and redecoration allowance. Owners may be more likely to give this to a tenant when the lease provides for an automatic renewal.

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