We’ll begin with some controversial thoughts about a tenant’s right to renew its lease or, as we prefer, to extend the lease term. They are all grounded in the position that the right of a tenant to extend the term of its lease is not a gift from the landlord. It is bought and paid for, much as is any other right in the lease. It is part and parcel of the deal. “How much is the rent if I lease the space for five years and get the right to extend the lease term for another five years?”
Let’s make it clear, Ruminations is neither a poll follower nor a flip-flopper. We still abide by the principle that the terms of a lease (or any other agreement for that matter) are the result of negotiation and that the outcome of such negotiation is heavily influenced by the relative bargaining powers of the parties. But, we also think that the marketplace has norms or starting points and (also) if you don’t ask, you don’t get. [Why some attribute this axiom to Stevie Wonder, we don’t know. But, we didn’t ask, so we didn’t get.]
With that in mind, here goes: We don’t think there is a difference between the right to extend a lease’s term beyond its initial (or earlier extension) term and the right to “kick-out” (terminate) a lease at the end of its initial (or subsequent extended) term. In each case, the landlord only can expect that its tenant will stay for each successive segment, one at a time. Lenders underwrite each approach in the same way, as if the lease’s term will not be extended or continue. Brokers can be paid as each extension term begins. The business outcome is the same.
Wait, you say, isn’t a lease with a “kick-out” provision the equivalent of an automatic renewal, with the tenant taking the risk of being stuck for another five or whatever years when it forgets to kick-out? Yes, it is. But, which scenario is more likely – a fat, dumb, and happy tenant forgetting to renew its lease OR a troubled tenant, looking to end its misery, forgetting to exercise its right to terminate the lease? To us, it’s simple. So, simple, that we won’t even answer our question, deeming it to be rhetorical.
Well, if the notion of the kick-out right seems somewhat pinko commie liberal (now, when did you last hear that!), how about an automatic lease term extension that can be voided by a notice from the tenant? Does that sound better? For some strange reason, actual experience has taught us that landlords favor this option approach by better than 3 to 1 over the usual “tenant sends notice of its option exercise” (our made-up research informs us). What we are saying is that it seems landlords prefer to see automatic lease renewal (extension) provisions. Yes, that’s been our experience.
On the other hand, tenants seem to accept “tenant must send renewal (extension) notices” as the norm. Obviously, we must be reading the tea leaves incorrectly.
Whatever our experience teaches us or what your experience teaches you, we think a tenant should prefer a lease whose term is automatically extended UNLESS the tenant sends notice to the contrary. That’s because we think the greater risk (and likelihood) for a tenant is that it forgets to send an extension notice not that it forgets that it wants to get out of the lease. If a tenant’s business isn’t strong enough to sustain itself at a particular notion, it will independently be looking for ways to cut its losses and if “canceling an automatic extension term” is an available option, it will do so. If the tenant’s business is so strong that it wants to relocate, it will (again) look at its lease and find the extension-cancellation option. On the other hand, if the tenant’s business is good and the tenant is fat, dumb, and happy (blissfully and rather bovinely contented), forgetting to extend is a more likely outcome. “Automated” tenants rely on (sometimes flawed automation or personnel) to trigger the sending of renewal (extension) notices, and failures are rare, but are well-known to happen. There is, however, no automation for triggering a search as to how to get out of a lease. That decision is made by managers, not administrators. And, when it happens, extension-cancellation provisions in a lease will be found.
Getting down to “The Bottom line” (15 West 4th Street between Mercer Street and Greene Street in the Greenwich Village neighborhood of Manhattan, New York City), the real risk to a tenant is that it forgets to exercise an extension option and its landlord serendipitously gets the opportunity to have a tenant who very much wants to remain in the space, a tenant who is now willing to pay more than almost any other prospective tenant for that right. After all, the existing tenant (with a now, soon-to-expire lease term) has made improvements to the space, trained a staff for the space, and built good will in the location. Such a tenant is “motivated” to make a deal, usually one that will be more expensive than the deal it made when it bargained for the now-lost extension option.
The prophylactic for such a possibility is a “landlord must remind tenant” clause. Yes, landlords (even those that would welcome an automatic lease extension provision in the lease) are uncomfortable with taking on such an obligation/burden/responsibility. But, really, what’s the big deal? OK, we know what the big deal is – landlords welcome the possibility that their tenants really, really want or need to stay in the location and are forced to “renegotiate” the price to do so. They have “seller’s remorse” after signing a lease with a whole package of rights and duties for each party. If a landlord doesn’t want to give a tenant a lease extension right, then find a tenant who will make a deal without one.
Ruminations believes that the basic assumption at the time a lease is signed is that the lease term will be extended, and not that the parties hope it will not be extended. Landlords know when lease terms are near their end. They don’t want to start looking for a new tenant only when their property managers call to say that there are moving trucks at the property. Basically, landlords want 6 or 9 or whatever number of months to get the ball rolling. So, they don’t want to forget that the lease’s term is going to expire. Why not, then, shouldn’t a landlord send a reminder notice?
What is a “reminder notice”? We won’t explain. We’ll just show you and perhaps write about the sample notice next week (or maybe not). You’ll just need to “tune in” next week to see what we decided).
Provided that this Lease is in full force at the time, Tenant will have the right to extend the otherwise expiring Lease Term for up to 3 additional, successive 5 year periods (each, a “Renewal Term”). If Tenant wishes to extend the Lease Term for a given Renewal Term, it may do so by giving Landlord notice of such election (“Renewal Notice”) not later than 9 months before the date upon which the Lease Term would otherwise end (assuming no intervening, earlier termination) [“Renewal Notice Date”]. Notwithstanding the foregoing, if Tenant does not send a Renewal Notice on or before the Renewal Notice Date or, before the Renewal Notice Date, did not send Landlord unequivocal notice that Tenant was going to send a Renewal Notice, Tenant’s right to send a Renewal Notice will not be extinguished unless it fails to send a Renewal Notice within thirty (30) days after its receipt of a written notice (“Reminder Notice”) from Landlord notifying Tenant of Tenant’s failure to send a Renewal Notice. Landlord will have the right to send a Reminder Notice not earlier than five (5) months before the Renewal Notice Date. Tenant may send a Renewal Notice by the later of: (a) 30 days after Tenant receives the Reminder Notice; or (b) the Renewal Notice Date. If Tenant receives the Reminder Notice but does not send a Renewal Notice by the later of the date set forth in subsection (a) or (b) of the immediately preceding sentence, then this Lease will terminate (assuming no intervening, earlier termination) on the later of: (x) the date upon which the Lease Term would otherwise have ended; or (y) at the very end of the last day of the 6th full calendar month after Tenant received the Reminder Notice. If Landlord fails to send a Reminder Notice by the date upon which the Lease Term would otherwise have ended, then this Lease will continue in full force and effect until: (m) the date which is 6 months after Landlord sent the Reminder Notice (if Tenant fails to send the Renewal Notice as set forth above); or (n) the date which is 6 months after Tenant sends notice to Landlord that Tenant desires to terminate the Lease (if Landlord fails to send the Reminder Notice). In addition, if Tenant had not previously exercised its right to extend the Term for a particular Renewal Term and sends Landlord an unequivocal notice that it will not be exercising such right (“No Exercise Notice”), the Term will end at the very end of the day that is the later of: (i) the last day of the then expiring Term; or (ii) 9 moths after Tenant sends the No Exercise Notice. Regardless of whether a Reminder Notice has been sent by Landlord, in the event that the Lease Term continues after the Expiration Date, Fixed Rent payable for the period after the date upon which the Lease Term would otherwise have ended will be at the rate that would have been payable for the corresponding Renewal Term. If, however, Tenant occupies the Premises after this Lease terminates, then Tenant will be deemed a holdover tenant, and the Provisions of Article X will apply.