Glossary / Lease terms and deal stages
Also known as: Option to renew, extension option
A renewal option is a tenant's contractual right, but not obligation, to extend its lease for an additional term on terms set in the lease. Whether a broker earns a commission when the option is exercised depends on the commission agreement.
The SIOR lease glossary defines a renewal option as "a clause giving a tenant the right to extend or renew the term of a lease, usually for a stated period of time and at a rent amount as provided for in the lease and option clause." Cove lists common ways to set renewal rent, including a fixed rate, fixed escalation, fair market rent, and index-linked approaches.
The tenant must usually exercise the option by notice within a set window. The Arizona School of Real Estate and Business gives an example window of no earlier than nine months and no later than six months before the end of the term. Aaron Hall warns that missing the notice deadline can forfeit the right to renew. Rules vary by state and by lease.
Renewal commissions depend entirely on your commission agreement. A CBRE agreement with the State of Michigan paid commission on renewals and expansions based on the additional rent, payable when the extended term commenced. A Grubb & Ellis commission agreement limited the commission to the initial term and specified expansions, with no commission on other extensions or renewals. Cove says renewal commissions are typically lower than new-lease commissions.
Timing matters too. If the renewal commission is payable when the extended term starts, you may wait until the end of the original term to be paid.
Make sure your original commission agreement says whether you are paid if the tenant exercises a renewal option, how much, and when.
