Deciding whether to renew your commercial lease is a major strategic choice for any business. While exercising a lease option may seem like the simplest path forward, it’s not always the best one. Without proper assessment, what appears to be a straightforward decision could expose you to a range of risks, including increased costs and limitations.
Therefore, it’s essential to fully understand the risks of exercising a commercial lease option. Being fully informed will ensure that your next move supports the goals of your business, both in the short and long term. An experienced, qualified tenant advisor can provide you with the knowledge and understanding to ensure you’re making the right decision.
Book a consultation with the team at Niche Advisory today.
What is a lease option?
A commercial lease option is a clause written into many commercial tenancy agreements that gives the tenant the right, but not the obligation, to renew their lease for another term.
The option will outline details like how much notice must be given and what the new term will look like. It should also include details around whether rent will remain fixed or be reviewed to reflect market rates once the option has been exercised.
A lease option can provide security and continuity for commercial tenants. It lets you remain in the same space without having to go through another lengthy negotiation or relocation process. However, exercising a lease option locks you into a new term, and once you commit, the opportunity to renegotiate terms or find a better space for your business is usually gone.
Therefore, weighing up the pros and cons is always a must.
Why should you consider exercising a lease option?
There are several reasons why a tenant might choose to exercise their lease option. For many businesses, stability and familiarity are incredibly valuable assets. Staying in the same location avoids the expense and disruption of moving. It also allows business operations to continue smoothly, eliminating disruption for employees and clients.
Some businesses also find that the cost of relocating to a new office, both in terms of time and money, outweighs the potential savings of exercising a lease option. If your space still meets your needs and your rent is fair compared with current market conditions, remaining in the same space is perfectly acceptable.
That said, it’s important to treat the process as a fresh business decision, not an automatic renewal. Each lease cycle is an opportunity to review your current position, evaluate your space requirements, and negotiate terms that align with your future direction. Having expert assistance through this process is always advisable.
Key risks to consider before renewing
There are a number of risks of exercising a lease option that every tenant should evaluate carefully throughout the decision making process.
1. Locking into unfavourable terms
If your existing lease terms are outdated or above market value, exercising the option could tie you to a costly or restrictive agreement for several more years,this could be due to ratchet clauses in your lease which cause the rent only to go up on a market review regardless of the market conditions.
You might miss the chance to secure rent reductions, incentives or improved/updated conditions that reflect current market realities. Similarly if, your current rent is below market, most leases have a market review which will automatically increase your rent to market rates without much notice or negotiation available.
Exercising an option usually allows the lessor to go to market to determine the new rent, and the only way to challenge this market review in most cases is to follow the dispute process under the lease. In most cases you need to exercise your option before you become aware of the new rental charge, and by then it’s too late for negotiation or backing down. This could be seen as high risk in some circumstances.
2. Missed negotiation opportunities
When you formally exercise the lease option, the landlord is under no obligation to negotiate incentives or improvements. Rent-free periods, makegood reductions, fitout contributions and refurbishment support are usually offered during new lease negotiations, but not automatically on renewals. Therefore, you may be missing out.
3. Procedural and timing errors
Lease options usually include strict notice periods and formal procedures. Missing the notification window or providing notice incorrectly might void your right to renew or renew your lease without you knowing. This is one of the most common and costly errors tenants make, particularly when internal teams manage the process without professional guidance.
4. Market rent uncertainty
Some lease options stipulate that rent will be reviewed to “market value” at renewal. This might sound fair, but it can lead to unexpected increases, especially if property values in your area have risen significantly. Understanding how market rent is calculated is essential to avoiding these types of surprises.
5. Reduced business flexibility
A renewed lease can limit your options to relocate, expand, or downsize. If your business is growing and evolving, being locked into a space that no longer fits your operations can restrict growth and increase overheads unnecessarily.
6. Ongoing maintenance and make good obligations
When you extend your lease you might inherit greater responsibility for building wear and tear. If the property is ageing, maintenance costs could increase. Eventually, your make good obligations may become more expensive when you vacate the space.
Evaluating the market before exercising your option
Before deciding whether to exercise a commercial lease option, it’s vital to benchmark your lease against current market conditions. Start by comparing your rent to similar properties in your area. A lease review with our team can reveal whether you’re paying above or below market value and whether you have room to negotiate.
You should also consider your broader business strategy.
Does your current location still serve your operational needs? Is the layout of your space efficient for your team’s working style? Are your clients and staff well served by the location?
These factors often weigh as heavily as the financial ones.
Our team can help you analyse all these elements objectively. We can assess relocation versus renewal costs, advise on negotiation strategies, and ensure you make a decision based on accurate data and comparisons, not just convenience.
Book a meeting with our team today
If you’re considering exercising a lease option, take the time to understand the implications before signing on. What seems like an easy renewal can sometimes limit your flexibility, increase costs, or prevent you from negotiating a better outcome. At Niche Advisory, we help commercial tenants across Australia make informed property decisions.
