Is Your Renewal Option Enforceable?
Renewal options in a lease provide a tenant with crucial flexibility by ensuring the tenant can remain in a desirable location. But what happens when the lease stipulates the rent during the renewal term will be at “fair market value” or “at the then-prevailing rate for comparable commercial office properties” or “at a rate to be agreed upon by the parties” without any further guidance as to how to make this determination?
Unfortunately for tenants, these rudimentary options have consistently been ruled unenforceable in Florida as illusory. This gives landlords leverage in negotiations over the renewal rate and creates a significant risk for tenants relying on the options for long-term planning.
Conceptually, setting the renewal rent at the then-prevailing fair market value is not problematic. The problem arises when the lease does not provide a specific procedure to enable the parties to make this determination. In Jahangiri v. 1830 North Bayshore, LLC, the Third District Court of Appeals held a renewal at the “then prevailing market rate for comparable commercial office properties” was too indefinite to be enforceable. The Court raised several unanswered questions, including the following:
- Who is responsible for obtaining the “comparables”?
- May the other party object and who will resolve any such objections?
- What factors are to be considered in determining whether another property is truly comparable?
- What is the “prevailing market rate”? Is it the mean, median, or mode of the three comparable properties? Is it the highest or lowest price?
As a lesson from Jahangiri, drafters inserting a fair market value clause should include a detailed, definite procedure for determining the renewal rate, such as a joint appraisal process.
Similarly, landlords seeking to demand a new rental rate during the renewal term must show a clear intent in the lease to do so. In Certified Motors, LLC v. Aventine Hill, LLC, the Second District Court of Appeals recently held a renewal option that is silent as to the rent amount represents a continuation of the rent from the original lease. Such a result can be problematic for Florida landlords, as inflation and market factors often require periodic increases to the rental rate.
Recent case law emphasizes the importance of hiring an attorney to draft or review your lease. At Williams Parker, our team of experienced real estate attorneys can help you navigate these legal issues.