Sam,
I have run into the same scenario before. Sometimes it is just better to go with your gut instinct. In this case you do not want to go along with their terms and their proposed terms appear to be in the their favor. The tenant could stay for a year or two on a month to month basis with no increase in rent. A couple of questions to ask yourself.
Why do you not consider them a model tenant? Non payment of rent? Damages? Do you not like them? (for whatever reason)
Will you eventually have to evict them?
How long will the apartment sit vacant if you do re-lease to a new tenant? Short term rent loss? Leasing costs?
If they vacate can you make any improvements that will increase the rent above the existing market levels?
Given the experience of others that follow and comment on these posts I am sure that there are some others that have had different experiences that they can share that will help you make a well informed decision. Best of luck to you.
Adam
