What Is the Right of Renewal on a Commercial Lease?

The Hidden Risk in Your Lease

Your business has operated from the same location for five years. Your clients know where to find you, your employees have established routines, and your brand is synonymous with that address. Then, six months before your lease expires, your landlord informs you that they have other plans for the space, or worse, that your rent will increase by 40 percent if you wish to stay.

This situation is more common than many business owners realize, and it often stems from a single oversight: failing to secure a right of renewal when the original lease was negotiated.

Understanding this critical clause could mean the difference between business stability and unexpected disruption. For commercial tenants, knowledge is leverage, and the right of renewal represents one of the most powerful tools available in a lease agreement.

Defining the Right of Renewal in Plain Language

A right of renewal is a lease clause that grants a tenant the option, but not the obligation, to extend their lease for an additional term once the current lease period concludes. Think of it as a form of insurance for your tenancy. It provides you with the ability to remain in your space under predetermined conditions, rather than being subject to whatever the landlord decides at the end of your term.

Importantly, this clause is negotiable. It is not automatically included in commercial leases, which means tenants must proactively request and negotiate its terms before signing. When structured properly, a right of renewal protects your business from displacement while giving you flexibility to make decisions based on your company’s evolving needs.

The Four Key Components of a Right of Renewal

Not all renewal clauses are created equal. To ensure your right of renewal actually serves your interests, you must understand and negotiate four essential components.

1. Renewal Notice Period

The notice period specifies when and how you must inform your landlord of your intention to exercise your renewal option. Commercial leases typically require written notice anywhere from 6 to 12 months before the current lease expires.

Missing this deadline can forfeit your renewal rights entirely, regardless of how favorable the terms might have been. It is critical to calendar these dates and understand the exact notification requirements, including whether notice must be delivered by certified mail, email, or another specified method.

2. Renewal Rent or Rent Formula

This component determines what you will pay during the renewal term. Renewal rent structures generally fall into three categories:

• Fixed rate renewal, where the rent amount is predetermined in the original lease, providing maximum predictability.
• Market rate renewal, where the rent adjusts to fair market value at the time of renewal, which introduces more uncertainty.
• Formula based renewal, where rent increases by a predetermined percentage or is tied to an index such as the Consumer Price Index (CPI).

Each approach carries different levels of risk and benefit. Fixed rates offer budgeting certainty, while market rate renewals may work in your favor if market conditions soften, but they could also result in significant increases if demand rises.

3. Duration of Renewal

The renewal term specifies how long the extension lasts. Common renewal periods range from one to five years, though longer terms can sometimes be negotiated. Some leases include multiple renewal options, allowing tenants to extend their occupancy in successive increments.

The ideal duration depends on your business outlook, growth plans, and tolerance for renegotiation. Shorter terms offer flexibility, while longer terms provide stability.

4. Other Terms and Conditions

Beyond rent and duration, your renewal clause should address additional factors that affect your tenancy:

• Space modifications, clarifying whether you retain the same square footage or have expansion rights.
• Tenant improvement allowances, specifying whether the landlord will contribute to updates or renovations during the renewal term.
• Operating expense caps, protecting you from disproportionate increases in common area maintenance (CAM) charges.
• Assignment and subletting rights, ensuring you maintain flexibility if your business needs change.

These details matter significantly. A renewal clause that addresses only rent and term length may leave you vulnerable to unfavorable conditions in other areas.

Why Including This Clause Is Vital

Securing a right of renewal delivers three significant advantages for commercial tenants.

Business continuity is perhaps the most immediate benefit. Your location often becomes integral to your brand identity, client relationships, and operational efficiency. A renewal clause ensures you can maintain that continuity without relying on your landlord’s goodwill.

Negotiating leverage is another critical advantage. When you have a renewal option, you negotiate from a position of strength. Without one, you approach renewal discussions as a supplicant rather than a party with contractual rights.

Budgeting certainty rounds out the benefits. Knowing your potential rent obligations years in advance allows for more accurate financial planning, particularly for businesses in industries with tight margins or long planning cycles.

The Risks of Leases Without a Renewal Clause

Tenants who sign leases without renewal protections expose themselves to substantial risks.

Surprise vacate notices can occur when landlords choose not to renew, forcing your business to relocate on the landlord’s timeline rather than your own. The costs of an unplanned move, both financial and operational, can be staggering.

Unexpected rent increases become a real possibility when landlords hold all the leverage at renewal time. Without a predetermined formula or cap, you may face dramatic rate hikes that strain your budget or force you out of the space entirely.

Business disruption extends beyond the move itself. Client relationships may suffer, employee commutes may change dramatically, and your marketing materials and online presence may require costly updates.

Protect Your Business with Expert Guidance

Negotiating a right of renewal requires market knowledge, attention to detail, and an understanding of landlord tactics. Many business owners lack the time or expertise to navigate these complexities while also running their companies.

This is where professional tenant representation becomes invaluable. Working with experienced advisors who understand local market conditions, rental rate trends, and lease negotiation strategies can help you secure renewal terms that truly protect your interests.

If your lease is approaching expiration, or if you are negotiating a new lease and want to ensure your renewal rights are properly structured, Mazirow Commercial can help. With over 30 years of experience representing tenants exclusively in Southern California, our team provides conflict free guidance designed to level the playing field between you and your landlord.

Learn more about how our lease renewal services can benefit your business: https://tenantadvisory.com/services/lease-renewals/