Bargain renewal option definition
/What is a Bargain Renewal Option?
A bargain renewal option is a clause in a lease agreement that gives the lessee the option to extend the term of the lease at a rate that is substantially lower than the going market rate. Many lessees who want to remain in their leased premises for an extended period of time will negotiate for a bargain renewal option. This can also be an attractive option for landlords, who can use it to be assured of extended tenancy in their properties.
When this clause is present and it is likely that the lessee will trigger the clause, the lessee accounts for the lease as a finance lease.
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Example of a Bargain Renewal Option
In 2020, Greenfield Organics (the lessee) entered into a 10-year warehouse lease with Meadowbrook Properties, LLC (the lessor). The lease agreement included a bargain renewal option allowing Greenfield Organics to extend the lease for an additional 5 years at $4 per square foot, significantly below the anticipated market rate of $7 per square foot at the end of the initial lease term. The renewal option was granted in exchange for Greenfield committing to substantial tenant improvements upfront. By 2030, warehouse space in the area appreciated, and the market rate rose to $8 per square foot. However, Greenfield exercised its renewal option, securing the space for $4 per square foot, less than half the going rate. This provided Greenfield with considerable financial savings while Meadowbrook honored the initial agreement, despite the disparity with current market prices.