CRE glossary
Renewal option
A renewal option is the tenant's contractual right to extend the lease for a defined period (typically one or two 5-year extensions) at predefined terms. The tenant must give the landlord written notice, usually 9–12 months before expiration, and the lease continues at the predefined rent (often fair-market value) without renegotiating the entire document.
Renewal options come in two main flavors: defined rent (the renewal rent is set in the lease, e.g., 'Year 8 = $66/SF' or 'CPI-indexed from year 7') and fair-market revaluation (the renewal rent resets to current market rates determined by appraisal or by the parties' brokers' opinions of value). FMV is the most common for office; defined rent is more common for industrial and retail.
FMV revaluation is the most negotiated clause in any renewal option. Negotiate the methodology precisely: what comparable buildings (specific list or defined criteria), what date (snapshot at notice date, not exercise date), what process (single appraiser, three-appraiser arbitration, broker opinions of value), and what happens in case of dispute (binding appraisal, last-best-offer arbitration, or just walk away). Without methodology, FMV becomes whatever the landlord wants.
Notice timing is critical. Most renewal clauses require written notice 9–12 months before expiration, with a hard cutoff. Miss it and the option is gone, even by one day. Calendar this aggressively (180 days before notice deadline). Also negotiate notice to be exercisable in writing-via-email, old-school certified-mail-only requirements have created multiple lost-option lawsuits.
Example
- Initial term
- 84 months (7 years)
- Two 5-year renewal options
- At FMV
- Notice required
- 12 months before expiration, in writing
- FMV determined by
- Three-appraiser arbitration if parties can't agree
- Tenant exercises option
- Lease continues 5 years at FMV; all other terms unchanged
Broker perspective
Renewal options are free at signing, landlords give them for nothing. Always include at least one. Two 5-year options is market for office; some retail and industrial deals get three. The negotiation focus should be 100% on the FMV methodology, not whether to include the option. A bad FMV clause is worse than no option because it commits the tenant without giving them protection on price.
Frequently asked
People also ask
How many renewal options should I get?
Two 5-year options is market for office. Three for industrial. Cost is essentially zero, always include.
What's a defined-rent vs FMV option?
Defined-rent: renewal rent is set in the lease. FMV: rent resets to market at the renewal moment. FMV requires careful methodology negotiation.
Can the landlord refuse to honor a renewal?
No, once you give proper notice, the option is binding. The only escape for the landlord is if the tenant is in default at the time of notice.
What if I miss the notice deadline?
Option is forfeited. Permanently. This has destroyed millions of dollars of renewal value across the industry.
Related terms
Letter of intent (LOI)
A non-binding outline of the major business terms, rent, term, TI, options, that becomes the basis for the binding lease.
Base rent
The headline rent before pass-through expenses, usually quoted in $/SF/year and the starting point for every comp.
Fair market value (FMV)
The market-based rent for a defined space at a defined date, used in renewal options and ground-lease resets.
Right of first refusal (ROFR)
Tenant's right to match any third-party offer for a defined space, most common for adjacent expansion premises.
See renewal option extracted from a real lease.
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