Simplifying the Arbitration Process for Renewal or Extension Rent: Achieving a simple, effective and cost-efficient process for determining rent

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In order for an option to renew or extend to be enforceable (as opposed to being a mere “agreement to agree”, which is unenforceable at law), there are two required elements:

       (1)   a formula or reference standard to fix the new rent; and

       (2)  procedural machinery to determine the new rent in the event that the parties don’t  Agree (i.e. an ADR process)

Formula/Reference Standard

The formula or reference standard should specify the valuation date for the rent determination, whether it is for a restricted or unrestricted use (e.g. “market rent for a financial institution” vs. “market rent”), and any geographic restrictions (e.g. the plaza/complex, within a particular radius of the subject location, within a specified city3). Sometimes the reference standard includes a “floor” e.g. not less than the rent for the prior term. The valuation date and the terms of the valuation are critical and should be specified in the Lease clause as part of the formula or reference standard. The valuation date could matter in a rapidly changing market or where the renewal notice is permitted to be served very far in advance of the commencement of the renewal term4. The terms of the valuation should indicate whether it is the premises in the condition at the time of the original demise, or with the improvements made by the tenant or landlord during the last term. If all the improvements would otherwise revert to the Landlord at the end of the lease term, there is an argument that they should be included in the valuation. The language used in the Lease clause will determine whether the standard is objective (e.g. “fair market rent”, “fair market value”, “market value” or “market rent”) or subjective ( e.g. “fair value”, “rent”, “worth”).

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