Expert: Jim Avancena, CPM - 12/5/2008

Question
I have an option to renew my lease for another 5 year term at "Fair Market Value."  With the exception of the increase in rent, does the other terms of the initial lease carry over into the renewal period?  In other words, if the Landlord is trying to propose many changes to the terms other than rent, is this something that I can fight legally ?  Also, I have my 90 day notice of my intention to excercise the option, if we do not come to an agreement by the end of the initial period, what will happen to my business.  Is there a "hold-over" period where my rent will stay the same until we come to a new agreement ?  My current lease does not specify anything should this event occur.

Answer
Henry-

Tenants never seem to notice the ambiguity and potential risks involved with the language of their lease option and other terms until the time to act approaches.   

How critical is it that you renew this lease at true Fair Market Value?   If you stand to risk substantial business and income benefits if you encounter unexpected problems with the renewal, I advise you to retain a skilled attorney with significant experience in Landlord / Tenant Law.   Do not rely on your brother-in-law who has experience in divorce cases. Just kidding, but you get my point.

Landlords always use lease forms that contain language that benefits their interests.

It would be quite possible to write an entire book on the subject of "Fair Market Value" and the legal disputes that have developed over that definition.    Many leases referencing Fair Market Value attempt to define specifically what the term means in the specific case that the parties anticipate in the future.   Even good-hearted attempts by reasonable parties will come up with questions regarding what certain terms or practices mean.

You may not agree with my opinion on this, but any landlord that allows another party to sign a lease using the language your lease contains for Fair Market Value. knows at the time they are asking you to sign the document, that they have not really given you a reasonable opportunity to acquire an additional 5 year term on reasonable terms.   They expect that if you exercise your option, they will tell you what they believe the Fair Market Value ("FMV") is, and after the two of you discuss your conflicting opinions, the landlord will tell you the renewal terms that he will accept - regardless of what you feel is correct.   If you reject his final description of the Fair Market Rental, he can simply say that you are incorrect and you have no choice but to accept his final determination.    What reason can you give to dispute his determination?   Your lease does not describe any basis for which you can challenge his determination.  If the provision stated that the two parties have to consider similar leases in the area, for similar retail uses, that have similar amenities and similar sized square footage, etc. etc, you would have at least some basis to challenge his appraisal.

If your lease also only gives you 90 days to resolve the determination of Fair Market Value, at the end of 90 days, he can tell you: "sorry, we couldn't agree, your option is now void".

If there is some doubt regarding the depth of the market at this time to lease your space, then perhaps you are lucky and the landlord will be reasonable with his negotiation with you because he has a self-interest in keeping you in the space for another 5 years paying rent.

If the landlord believes there are plenty of other people that wish to lease your premises on better rental terms, you will likely have a problem.

My interpretation of your renewal right would be that the other terms of the lease do carry over into the next 5 year term, however, there are usually a few terms in the original lease that do not make sense for a renewal term.   For example, if your lease says that you pay CAM costs based on the actual costs for the first year of the lease; that may or may not be fair or make sense depending upon the rental the two parties agreed upon for the option term.

Finally, regarding a "hold-over" situation, your lease should specifically address what happens if you have to hold over beyond your initial lease term.   The lease text might say: "If the tenant holds over in the premises beyond the initial term of the lease, the tenant shall be considered a tenant at sufferance and be required to pay a monthly rental of 150% of the monthly rent in effect at the time the initial term expired".    See if you lease has any text similarly addressing an extended stay.

I suggest that you attempt to determine - objectively - what true Fair Market Value should be for your lease renewal by checking with other tenants with space similar to yours in as many ways as possible and asking them the terms of their lease.    If you think you might make a mess of such an attempt; don't try it.

Since I have no idea of the scale of the economic terms we are talking about with your lease rental and the size of your space, nor am I the least bit knowledgeable about lease law on Fair Market Value matters in your geographic area, I cannot advise you about the feasibility of hiring an attorney to assist you.    You might consider what the cost of one meeting with a real estate attorney in your area would cost you, vs. the economic benefit you might realize if the attorney were to tell you some information that allows you to renew your lease on a reasonable rental basis.

I wish I could help you more with your problem.  Best of luck.

-Jim