Option to Renew Clause
How option-to-renew clauses work, exercise notice timing, FMV vs fixed-step renewal rent, and APAC norms.
Last updated: 2026-05-06
An option to renew is a tenant's contractual right to extend the lease beyond the initial term, on terms specified in the lease, by giving the landlord written notice within a defined exercise window. It is one of the most valuable rights in a long-term commercial lease — and one of the most often misunderstood. A poorly drafted option can be worth nothing; a well-drafted option can be the most leveraged piece of a tenant's real-estate strategy.
What it does in plain language
The option lets the tenant continue occupying the same space at the same building beyond the initial term, without negotiating a new lease from scratch and without facing competition from the open market. The economics of the renewal — base rent, escalation, operating-expense treatment — are set by the option clause itself, either as a fixed economic formula or by reference to fair market value at the time of renewal.
What a typical option contains
The clause has five essential parts.
Number of options and length of each renewal term. Common: one to three options, each 3 to 5 years. Larger long-term office leases may have one 10-year option or two 5-year options.
Exercise window. The dates between which the tenant can give notice. Typical: 9 to 18 months before the lease expiry. Earlier exercise gives the landlord more planning time; later exercise gives the tenant more market visibility.
Notice requirements. Written notice, delivered to a specified address, in a specified form. Some leases require the tenant to declare the renewal rent at the time of exercise (which the landlord then has to confirm or contest); others delay rent setting until after exercise.
Renewal rent. The economic terms during the renewal:
- Fixed step: a defined increase over the initial-term rent (e.g., "Base Rent during the renewal term shall be 110% of the Base Rent in effect at the end of the initial Term").
- Fair market value (FMV): rent reset to FMV at the time of renewal, determined by appraisal or negotiation. Often with a "not less than the prior rent" floor.
- CPI-linked: rent rises by accumulated CPI from a defined base date.
- Hybrid: a step plus an FMV true-up.
Conditions to exercise. The tenant must not be in default, must have continuously occupied the premises (no sublease arrangements), and may need to confirm continued credit standing.
Sample wording — fixed step
Tenant shall have one (1) option (the "Option") to extend the Term for an
additional period of five (5) years (the "Renewal Term"), exercisable by
written notice to Landlord delivered not less than twelve (12) months
nor more than fifteen (15) months prior to the expiration of the initial
Term, time being of the essence. The Option shall be exercisable only
if Tenant is not in default at the time of exercise. Base Rent during
the Renewal Term shall be one hundred ten percent (110%) of the Base
Rent in effect during the last month of the initial Term. All other
terms and conditions of this Lease shall apply during the Renewal Term.
Sample wording — FMV reset
Base Rent during the Renewal Term shall be the Fair Market Rent for the
Premises as of the commencement date of the Renewal Term, but not less
than the Base Rent in effect during the last month of the initial Term.
"Fair Market Rent" means the rent that would be paid by a willing tenant
for comparable office space in the Building or in comparable buildings
in the submarket, taking into account all relevant factors including
size, location, services, tenant inducements, and operating expense
allocation. Within thirty (30) days of Tenant's exercise of the Option,
Landlord shall propose Fair Market Rent in writing. If Tenant does not
agree, Landlord and Tenant shall each appoint a qualified MAI appraiser
within fifteen (15) days, and the two appraisers shall jointly select a
third within fifteen (15) days. The Fair Market Rent shall be the
average of the three appraisals, excluding any appraisal that is more
than ten percent (10%) above or below the median of the three.
What to negotiate — tenant side
Tenants pushing on options should focus on:
Multiple options. One 5-year option is good; two 5-year options is better; three short options may be even better depending on planning horizon. The tenant pays nothing for the right; the landlord just has to keep the option open.
Wider exercise window. 9 to 18 months pre-expiry gives the tenant time to evaluate the market against the renewal terms. Push for the wider end.
FMV with tenant-favourable comparable selection. The FMV definition should reference the same building and submarket, not the broader market. Comparables should reflect actual signed deals, not landlord ask rates.
Floor only, no ceiling. The renewal rent should not be less than the prior rent, but should not be capped by the prior rent either. This protects the tenant against losing the renewal value if FMV is below the prior rent.
Tenant inducements at renewal. If the renewal is FMV-reset, the FMV should account for the tenant inducements (free rent, TI allowance) that comparable new deals include. Without this, the tenant pays a fully-loaded FMV without receiving any of the tenant inducements that comparable new tenants would receive.
Default carve-outs. The "not in default" condition should be limited to material monetary defaults; minor or curable defaults should not destroy the option.
Survival of permitted transfers. If the tenant has assigned or sub-let in the meantime, the option should still be exercisable by the assignee or sub-tenant if the assignment was permitted.
What to negotiate — landlord side
Landlords want:
Single, short option if any. One 3-year option is preferable to multiple long options.
Narrow exercise window. 6 to 9 months pre-expiry, with strict adherence to notice formalities.
FMV reset upward only ("ratchet"). The renewal rent cannot decrease below the prior rent, regardless of market.
Fixed-step over FMV if the market is volatile. Fixed-step gives the landlord predictable revenue; FMV is risky in soft markets.
Strict default carve-outs. Any default at the time of exercise voids the option.
No survival on transfer. The option is personal to the tenant; assignment or sub-letting voids it.
Common drafting traps
Notice timing. "Time is of the essence" language means the deadline is strict. Late notice = no option, regardless of materiality. Tenants should diary the exercise dates well in advance and confirm receipt by the landlord.
FMV without method. "Fair market rent as agreed by the parties" is unenforceable if the parties don't agree. The clause must include a fallback method (appraiser selection, baseball arbitration, etc.).
Floor below prior rent. Without a floor, FMV reset can produce a rent below the prior rent, which the landlord may resist post-exercise. Always include a floor at the prior rent level.
"All other terms apply". If the lease has aged terms (e.g., a TI allowance schedule that expired during the initial term), the renewal will inherit them by default. Specify which terms continue, which terminate, and which reset.
Conflict with other rights. If the tenant has a right of first refusal on adjacent space and the option exercise covers different space than the ROFR space, the rights can conflict. Clarify hierarchy.
APAC variations
Hong Kong office leases often have fixed-step renewals rather than open-market FMV resets, especially in shorter (2 to 3 year) lease structures. The renewal rent is typically negotiated at the time of renewal rather than tied to a formula.
Singapore office leases follow a similar pattern. Larger international tenants negotiate FMV reset clauses with appraisal mechanics.
In Japan, the Land and Building Lease Act provides statutory renewal protection — the tenant has the right to renew under certain conditions, and the landlord cannot easily refuse. The lease's express renewal terms must be read alongside this statutory backstop. International-grade Tokyo office leases for foreign tenants increasingly include US-style express options on top of statutory renewal.
If you have a portfolio with renewal options approaching exercise dates, capturing each lease's option count, exercise window, notice requirements, renewal rent formula, and conditions per lease is what makes lease-renewal planning feasible. LeaseTrace extracts those fields with page-level citations to the source PDF.