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Landlord's Favorite Clause, Tenant's Biggest Risk

At WRA, we often hear tenants breathe a sigh of relief when they see a renewal option in their commercial lease—especially one tied to “Fair Market Value” (FMV). At first glance, it can seem like a convenient way to extend the lease without hassle. However, landlords include these clauses for a reason—and it’s not to benefit the tenant. If that were the case, landlords wouldn’t be so eager to offer them. The truth is renewal options are among the most landlord-favorable provisions in a commercial lease. They allow landlords to retain tenants at above market rents without offering concessions and avoid the costs and risks associated with vacancy.



What Is FMV in a Renewal Clause?

In most leases, FMV is defined as the rental rate a willing landlord and tenant would agree to in an open market. Sounds fair, right?

Not so fast.

While renewal options offer convenience, they work against the tenant’s financial interests. Here’s why:

  • Landlord-Leveraged Fair Market Value (FMV): Landlords define FMV vaguely and often base it on inflated comps—buildings with better locations, amenities, and finishes—to justify higher rents.

  • No Concessions Included: Renewal terms exclude standard incentives such as tenant improvement (T.I.) allowances and free rent, which any new incoming tenant would receive, especially in a tenant-favorable market.

  • Credit Blindness: Your credit strength, which would improve your negotiating position in the open market, is not factored into the FMV under a renewal clause.

  • Limited Negotiating Power: Renewal options lock you into a process that removes the

    competitive leverage you’d have if you explored the open market.


Bottom line: A renewal option may seem like a safe fallback—but it often leads to paying more and getting less than what’s available through proactive lease negotiation or relocation planning.


Avoid Renewal Options at All Costs:

  • Inflated Base Years: Renewal options often do not reset the base year for real estate taxes and operating expenses, leading to significantly higher pass-through costs for the tenant.

    • Example: If your original lease was signed in 2020, the base year for expenses would be set at 2020 levels. Upon renewal, if the base year is not updated, you would be responsible for all increases in taxes and operating expenses since then—potentially resulting in a substantial financial burden.

  • No Negotiating Leverage: By choosing not to gain leverage and signing a renewal option, the landlord will present their own calculation of "Fair Market Rental Value." If you disagree with their proposed rate, be prepared for a lengthy and costly arbitration process—one that can drain both time and energy. Worse yet, after months of back-and-forth, the outcome may leave you stuck with the same rental rate the landlord originally proposed.

  • Missed Opportunity to Renegotiate Language in Lease:

    • The opportunity to obtain more tenant friendly lease language and flexibility within the lease is now gone.

    • Including: Early termination options, Expansion or contraction rights, Holdover rent caps, Favorable sublease clauses, and more responsibility on landlord for maintenance & repairs. 

  • Failure to Recognize Market Conditions: In today's tenant-favorable market, landlords are highly motivated to retain existing tenants. They’re often willing to make significant concessions—but only if they believe there’s a genuine risk of losing the tenant. Exercising a renewal option signals the opposite. It’s the ideal outcome for a landlord: the tenant commits to staying, likely pays above-market rent, and the landlord avoids spending money on tenant improvements or concessions. In this scenario, the landlord wins—at the tenant’s expense.

  • No Concessions:

    • Renewal options do not include any free rent or tenant improvement (T.I.) allowance, even though these concessions are given to new tenants in the same building.

  • Additional Factors That Landlords Use to Try to Justify Increases:

    • Property Improvements: If the landlord has recently renovated the building—such as upgrading common areas, lobbies, or building systems—they may use those improvements to justify higher rental rates.

    • Rising Operating Costs: Increases in property taxes, insurance premiums, and maintenance expenses are often passed through to tenants, contributing to higher overall occupancy costs.

    • Larger Annual Escalations: Landlords may push for higher annual rent increases (e.g., $1.00/SF instead of $0.50/SF) to offset market volatility and protect long-term revenue.

  • Missed Opportunity to Explore Better Alternatives:

    • In a tenant-favorable market, landlords are competing for your business. This creates an opportunity to explore higher-quality buildings, whether through better location, amenities, or both—while potentially lowering your overall costs and benefiting from substantial concessions.

  • Space Needs Change Over Time:

    • The post-pandemic workplace has brought on numerous changes in how companies utilize their space. Organizations may require less square footage due to hybrid or remote work models. Others prioritize different layouts, such as open collaboration areas, fewer private offices, and more flexible meeting spaces.

  • Lack of Flexibility in Term Length:

    • A renewal option locks you into a predetermined length of term specified in the original lease, which may no longer align with your company’s long-term plans or strategic direction. In a tenant-friendly market, landlords are often more willing to negotiate shorter or more flexible lease terms, giving you the opportunity to adapt more easily to changes in headcount, growth projections, or business priorities.



Bottom line: Before you exercise a renewal option, reach out to Webster Realty Advisors. We give tenants the full picture, real market leverage, and the upper hand in negotiations to make the best decision for your business, not just the easiest one.

 
 
 
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