Option Periods in a Commercial Lease
Within a commercial lease there sometimes is an option period that has been negotiated Typical language for option periods states: (i) that both parties will agree, in the future, to the lease rates being charged during the option period; and (ii) but it fails to require the parties to agree in the future a procedure to determine the rents during the option period.
According to an attorney recently interviewed regarding an option periods for a commercial lease
“In law school, we learned that an agreement to agree in the future is generally unenforceable. It is illusory.”
You may wonder why a landlord would even allow this “agreement to agree” into the lease, knowing it is not likely enforceable, the other question that may come up is why a landlord would allow a tenant to extend a term to their lease as well?
Option period language in a commercial lease from landlords is usually a mirage and intended to be nothing more. An option almost never benefits the landlord. Tenant advantage when there is no language to offset the downside of the tenant’s option period in a commercial lease , an option will guarantee the tenant a lease with potentially lower rents in the future.
Quite honestly, as a tenant unless you practice carelessness or ignorance or both, the option when exercised plays out as follows typically: If the option rent is higher than market rent, the tenant won’t exercise the option. If the option period rent is less than market rent, then the tenant exercise their option and the landlord has no choice but to accept the commercial lease option period and perform.
Generally, a landlord will agree to an option to extend the term, to passify the tenant. Also the landlord will usually use language in an option period that won’t put the landlord at a huge disadvantage, hence you see the language that says “tenant may renew at current market rates”. So the real question still remains, does a negotiated option period really do anything for either party? For the tenant, if the market goes lower it does give the tenant the benefit of locking in a lower lease rate.