Your Southern California Retail Property Expert
Understanding a Lease Renewal: What Are the Pros + Cons?

When you lease a space in your retail shopping center or retail property, eventually that lease agreement expires.

The term could be a year, three years, five years, or even a decade. But sooner or later, the initial term comes to an end.

So, what happens next?

In some cases, the tenant leaves, and you’re left seeking a replacement.

Sometimes, the original lease may include an option (or options) to extend the agreement for an additional term (or terms).

And in other instances, the lease may convert to a month-to-month agreement.

Or, baring any clause in the lease stating what happens after the lease expires, the tenant could remain in place in what’s known as: “holdover tenancy.”

But most commonly in a commercial retail lease, you and the current tenant execute a Lease Renewal.

What’s a Lease Renewal?

A lease renewal is new lease with the current tenant, usually with terms similar to the original agreement.

In some cases, an original lease agreement includes a clause that outlines the terms of a potential renewal.

This might include a lease option (or options). Or a clause that automatically converts the lease to a month-to-month agreement.

In absence of any such clauses, the landlord and tenant free to negotiate the terms of the lease renewal however they choose.

It’s important to note, however, if a commercial retail lease expires without a renewal, and does not convert to a month-to-month lease, the leasehold therefore transitions into what’s known as “holdover tenancy.” And, for a variety of reasons, this is the least advantageous outcome for you as retail shopping center landlord.

What Are The Advantages of a Lease Renewal?

Retaining a Productive Tenant is Smart Business

Are you satisfied with the current tenant? If so, it’s likely in your best interest to keep that tenant.

Replacing an Existing Tenant Takes Time + Costs Money

If a tenant on an expiring lease departs, you’re looking at the time and effort to source a replacement. It’s tough to say how long this will take. And who knows what a potential replacement tenant may demand in terms of a tenant improvement allowance or other possible rent concessions?

More critically, you’re losing money while the space sits vacant. And depending on how long it takes to fill that vacancy, you could lose a considerable chunk of revenue.

Plus, if you’re smart, you’ll hire a leasing broker to market your property and source a new tenant. But then you’re also on the hook to pay broker commissions.

What Are the Disadvantages of a Lease Renewal?

Losing Money on a Down Market Renewal

What happens if a lease comes up for renewal in a down market? Basically, your tenant has the leverage to renew at a lower rate.

But you’re locked-in at below-market rent if you agree to a multi-year renewal.

If there are signs the market’s improving… It may be in your best interest to sign a short-term renewal. Or stick with a month-to-month lease for the time being.

Failing to Capitalize on Your Property’s Highest + Best Use

Is your current tenant’s use the highest and best use for your property? If not, you could be missing out on a huge income increase.
If you oust an underperforming tenant, the door is open for a more lucrative use-type with higher rent potential.

Renewing a Struggling Tenant

You may be tempted to renew a faltering tenant just to avoid vacancy. But in doing, you could be signing up for big problems… Months of delinquent rent payments. Or even non-payment of rent if the tenant ultimately goes out of business.

Seeking Guidance On Lease Renewals?

Advising landlords on Lease Renewals is one of the key aspects of CBM’s leasing and management services.

Trying to decide whether to keep an existing tenant? Struggling to evaluate your property’s highest and best use? Need help drafting a lease renewal that serves your best interests?

These are all matters CBM’s leasing + management team consult with landlords on regularly.

And if you have questions about these and other retail property management and lease concerns, by all means – get it touch TODAY!

Contact CBM President, Rick Rivera: 310.5751517 Ext. 201 or rickr@cbm1.com

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