What happens when the initial term of your commercial retail tenant’s lease agreement expires?
Truth be told, several things can happen… But one of the most common outcomes is the lease converts to Month-To-Month lease agreement.
What is a Month-to-Month Lease Agreement?
A month-to-month lease is an agreement that renews every month and can be terminated with 30-days’ notice given by either the landlord or tenant.
On occasion, commercial retail leases are originated on a month-to-month basis. But these instances are rare. Most commercial retail leases extend for 1, 3, 5 + 10-year periods. With 5 + 10-year terms being the most common durations.
Much more commonly, however, upon expiration, the lease converts to a month-to-month agreement.
Under a month-to-month lease agreement, the terms of the original lease remain in force. Most importantly (unless otherwise noted in the original agreement) this means the tenant continues to pay the same rent and CAMs upon lease expatriation.
Does an Expiring Lease Automatically Convert into a Month-to-Month Agreement?
A lease only converts to a month-to-month agreement upon expiration of the original lease includes a month-to-month clause.
Without this clause (or any other clauses, such as renewal options), the lease extends into Holdover Tenancy. And Holderover is your least advantageous outcome when a lease expires — an important point to note.
What Are The Benefits of a Month-to-Month Lease Agreement?
Let’s say you’re unable to agree upon the terms of a lease renewal when your tenant’s lease expires.
A month-to-month agreement is the most straightforward means to keep that tenant in place.
Or let’s say… You’re courting potential replacement tenants. Completing a remodel that could make your property more attractive to replacement tenants. Or anticipating an upswing in the market.
A month-to-month agreement allows you to keep the current tenant for the time being. And when you’re ready to pursue another option, you’re free to serve the current tenant with a 30 notice to vacate.
And to reiterate, including a month-to-month lease clause avoids Holdover Tenancy.
What Are The Disadvantages of a Month-to-Month Lease Agreement?
Rental rates remain flat under month-to-month lease agreements. Your tenant continues to pay the same amount they were paying upon lease expiration.
Also, basically the only way to secure a rent increase is to negotiate a lease renewal. But signing a renewal virtually guarantees a rent increase. Thus, your tenants have little incentive to act under a month-to-month agreement.
Your tenant is also free to leave with only 30 days’ notice on a month-to-month agreement. This leaves you with a short turnaround time to source a new tenant. And replacing a retail tenant can be difficult at times. Which could leave you with a vacancy for months, if not longer.
Need Help Negotiating + Drafting Leases?
When it comes to leasing a commercial retail space, landlords are heavily focused on the terms of the initial agreement.
But many retail tenants remain in place long after their initial lease expires. As such, it’s prudent to consider the potential outcomes following lease expiration.
And advising retail shopping center landlords on such matters is one of the key services CBM’s leasing agents and property managers provide.
Our team of retail specialists will help you draft leases that not only secure advantageous terms for the initial lease, but also address possible outcomes after the original lease expires.
With our ultimate goal being that your best interests are served in the long term.
For more details on CBM’s leasing support, visit our leasing services page: cbm1.com/services