The Word that Cost a Landlord a Rent Increase

This. It’s such a simple, little word, one that we all use countless times per day. But used the wrong way in a commercial lease, “this” can bite a landlord in the backside. If you don’t believe it, ask the Arizona landlord that lost a juicy rent increase because of “this.”

This Happened

It was a straightforward case. A lease gave the tenant “the option to extend this lease for an additional term of five years.” The tenant sought to exercise the option. But the landlord said no, knowing that it could lease the property for a much higher rent once the lease expired. The dispute landed in court, where the landlord argued that the option was too vague and indefinite to be enforceable since it didn’t specify how much rent the tenant would have to pay during the extended term.

But the Arizona appeals court saw it differently. There was nothing uncertain about the extension option, the court reasoned. It clearly stated that the tenant had the right to extend “this lease.” And “this” lease meant the original lease. Result: The tenant could not only extend the lease for five more years but extend it at the same rent [McCutchin v. SCA Services of Arizona, Inc., 709 P. 2d 591 (Ariz. App. 1985)].

This Is What It Means to You

Beware of including the word “this” before the word “lease” when granting tenants an extension or renewal option. Stated more broadly, be careful about how you refer to the lease being extended. If wording suggests that the extension applies to the original lease, you may end up getting stuck with the original rent. So, clarify that the extension, if exercised, will be at a higher rent. Also keep in mind that the extension may not be enforceable if the extended rental amount is too indefinite. Solutions:

  • First Choice: Specify an exact extension rent amount;
  • Second Choice: Specify an exact formula for calculating the extension rent; or
  • Third Choice: Specify a rental range, which should be as narrow as possible.