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Easy As FMV: Modern Fair Market Value Renewal Methods
The owner of a local business wants to lease commercial property to use as a retail storefront or for office purposes. When she finds her ideal space, the landlord suggests an initial 10-year term. The potential tenant envisions staying in the space longer than that, so she wants to negotiate for the option to renew the lease at its termination. However, the landlord is reluctant to agree on a fixed amount of rent for the renewal term, as market conditions will undoubtedly change over the course of a 10-year period. So, how will the parties agree on the future rental amount?
Most commercial leases include a renewal option for the tenant, providing for the time the option is to be exercised, and the length of any renewal periods. If the parties are unable or unwilling to agree on a future rental figure, the most common approach is to state that the renewal rental rate will be mutually determined in the future based on fair market value (FMV). But how do the parties define what the term “fair market value rent” means? This article discusses the competing interests and criteria of landlords and tenants in defining fair market value, explores various mechanisms used for resolving disputes over fair market rental rates, and concludes with proposed language that represents a healthy compromise for both sides.
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