The AIR Option To Extend Addendum is frequently an afterthought when completing AIR lease documents. This Addendum is a well-drafted form and relatively straight-forward. Nevertheless, there are at least two key provisions that every real estate professional should know.
1. Fair Market Rental “Floor” Provision: If it is a fair market value option, the Addendum contains a “floor” for the benefit of Lessor. That is, the Addendum provides that the new fair market value cannot be below the Base Rent immediately prior to the rent adjustment. This provision can be problematic for certain Lessees. If the market rent at the time of renewal is below the final month of the Lease, the renewal option which the Lessee negotiated may be of little or no value. Or perhaps worse, if Lessee exercises the option without being aware of this “floor,” Lessee will be stuck paying above market rent for the option term. This provision in the AIR Option is included in many custom leases drafted by attorneys.
2. Options May Be Lost if Lessee Sells its Business or Assigns the Lease: The Addendum provides that if Lessee enters into certain types of sales of its business to a third party, the option to extend the lease term is essentially void. This can be particularly problematic for retail tenants, where the purchaser of Lessee’s business needs to remain in the same location in order to keep Lessee’s customers. In addition, if Lessee assigns the Lease during the term it is void even if Lessee assigns the Lease to an affiliate.
A Lessee should consider adding provisions that allows it to keep its option(s) in these two situations: (1) if it sells its business; or (2) if it assigns the Lease to an affiliate.
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