Negotiating Commercial Lease Renewals
In a typical commercial lease, the landlord and tenant will agree to renew the lease on the same terms and conditions of the original lease; however, the base rent is typically subject to negotiation upon renewal. Case law in Ontario suggests that a Court will enforce a renewal clause if it is sufficiently clear and unambiguous.
Ambiguous Renewal Clauses
Where the rent is simply to “be agreed” where there is no formula for determining the rent upon the renewal or extension period, the clause would be considered void due to uncertainty. Courts have found phrases such as “current market rents” or “fair market rent” to be enforceable, rather than those terms that indicate “rent is to be determined based on a mutually agreed upon” amount.
Use of the Premises
The type of ‘use’ of the premises ought to be considered as well in the formula for determining the rental rate at renewal. The fair market rent based on the tenants existing limited use may be different than the fair market rent of the premises with a broader use, or at the highest and best use; as such, the type of use that will be applied to determine the market value of the rent should be stipulated in the renewal clause.
Landlords should not assume that the value of tenants improvement are to be included in the “fair market rent” that is negotiated upon renewal or extension. If the clause indicates that the renewal rent will be based on the “as is” condition of the property at the date of the original lease, then the current market rent will be based on the unimproved condition of the property (and as such, the tenant will not have to pay twice for its capital investment into the property). With specific wording in the renewal clause, such as the “rental rate will be based on the current and finished condition of the property as of the date of renewal, and with reference to similar properties for a similar term,” the value of tenant improvement would be included in determining the fair market rate.
A number of issues are considered in determining the fair market rental value of a commercial lease renewal and extension and the language of the commercial lease agreement will guide the analysis. For a consultation with a commercial leasing lawyer, contact Goldstein Law and we will advise you to maximize the value of your commercial property.