Is Your Renewal Option Enforceable?

Renewal options provide a tenant with crucial flexibility by ensuring the tenant can remain in a desirable location. But what happens when the lease provides 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 held unenforceable in Florida as illusory (i.e., an “agreement to agree”). As such, in the event of a dispute over the renewal rental rate, the landlord could simply elect to disregard option and find another tenant. This risk creates a massive problem for tenants seeking to rely on the option 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 decisively make this determination. In Jahangiri v. 1830 North Bayshore, LLC, the Third District Court of Appeals held a provision for 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 surrounding the option, including the following:

1. Who is responsible for obtaining the “comparables”?
2. May the other party object and who will resolve any such objections?
3. What factors are to be considered in determining that another property is truly comparable? Is it the square footage of the space, its location, its condition, its use, or must other factors also be considered?
4. And what is the “prevailing market rate”? Is it the mean, medium, or mode of the three comparable commercial properties? Is it the highest or lowest price of the comparables?

As a lesson from Jahangiri, drafters inserting a fair market value clause in a lease should include a detailed, definite procedure for determining the renewal rent amount, such as a joint appraisal process, in the event the parties cannot agree within a certain timeframe.

Similarly, landlords seeking to demand a new rent amount 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 silence in a renewal option as to the rent amount represents a continuation of the rent from the original lease. Such a result is usually problematic for Florida landlords, as the market rent at the expiration of the initial term is typically much higher than at the onset.

Recent caselaw concerning renewal options emphasizes the importance of hiring an attorney to review your lease. At Williams Parker, our team of experienced real estate attorneys frequently guides landlords and tenants through these legal issues.