Bargain Renewal Option

Bargain Renewal Option

The right but not the obligation for a lessee to renew a lease at the end of its term for a periodic payment significantly below market rates. For example, if an apartment ordinarily rents for $1,000 per month, but a lessee may renew his/her rental agreement for $600 per month, he/she has a bargain renewal option. This effectively gives the lessee some of the rights associated with property.
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An example of a benefit to be foregone is a bargain renewal option, which is defined as a "provision allowing the lessee, at his option, to renew the lease for a rental sufficiently lower than the fair rental of the property at the date the option becomes exercisable that exercise of the option appears, at the inception of the lease, to be reasonably assured." If the penalty or foregone benefit is significant, the lessee can assume that the renewal option will be exercised and the renewal period should be included in the lease term.