Many lease transactions include an option for the tenant to extend its lease term. The AIR CRE Option(s) To Extend Addendum is frequently added as an afterthought when completing an AIR CRE Lease. This well-drafted addendum does provide that Lessee can lose its option under certain circumstances.
Question: If Lessee subleases all (or a portion) of its Premises, does it lose the ability to exercise an Option to extend its Lease?
Short Answer: Yes, if the sublease is in effect at the time of exercise of the Option. No, if the sublease has expired at the time of Lessee’s exercise of its Option.
Option To Extend Can Be Exercised Only While Lessee is in Full Possession: The Option To Extend Addendum provides that an Option to extend the Lease can be “exercised . . . only while the original Lessee is in full possession of the Premises.” (See excerpt below.) The determining factor is whether a sublease exists at the time of exercise.
Example: For example, assume that Lessee has entered into a 5-year lease with a 5-year option. At the beginning of year two, Lessee enters into a sublease which is scheduled to expire one year before the original 5-year term ends. If Lessee exercises its Option six months before the original term expires (i.e., 6 months after the subtenant has presumably vacated), then the exercise of the Option is valid.
However, if Lessee instead entered into a sublease which expired on the last day of the 5-year term, then the exercise of the Option To Extend is invalid, and Lessee has, in essence, lost its Option to extend the term.
Excerpt from AIR CRE Lease – Option(s) To Extend Addendum
- OPTION(S) TO EXTEND:
(iv) This Option is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and without the intention of thereafter assigning or subletting.