When tenants lease office space with terms that exceed three years, they usually anticipate that their space needs will not materially change during that period. If they anticipate that this may change, they often include exit strategies like expansion or contraction provisions, rights to assign or sublease, or the ability to terminate the lease early by paying market-based penalties. Landlords, and especially their lenders, prefer to limit these unilateral rights for tenants; however, as a tenant, you should cast as wide a net as possible to secure these rights for the future. You do not know what you may need down the pike.
Expansion and contraction clauses are great because it’s easiest to remain on-site, and especially in the premises, or a fraction of it. Expansion into adjacent space and contraction by demising the existing space are easy because the mailing address can remain the same, and the work of movers and telecom/data vendors is minimal. Relocation within a building or business park is second best because there will be less disruption with moving, with phone numbers, and for staff & clients. This is why it is best to fight for and include these ongoing rights in the original lease.
Assignment & Subletting are important because sometimes business goes sideways and the obligation originally acquired cannot always be met – sometimes because of prior planning or decision making, sometimes as a result of market forces beyond our control, and sometimes by choice where one sells the business or geographically relocates it. In most of the cited circumstances, a commercial real estate broker can be engaged to provide the best solution. When at least a year or two of lease term remains, one can hire a commercial broker to promote your space for sublease or assignment for a fee. Optimally, a substitute tenant will be procured that will sign a new 3-10 year lease with the landlord and then you, the original tenant, will be removed from the middle by paying a brokerage fee on savings and possibly a negotiated penalty for the landlord – which would be far less costly than fulfilling the balance of the term. The alternative would be a sublease – where a subtenant would be qualified to take over the space for the balance of the term and pay anywhere from a subsidized rent in many cases to above-market rent in favorable cases.
Early Termination is another exit strategy – but more difficult to obtain. In ‘Tenant Markets’, landlords are more likely to grant these to tenants whereas in ‘Landlord Markets’, they are more resistant – and often blame their lenders. The best right is to be able to exercise it anytime – after a certain period in time. Frequently, landlords that grant this right will limit it to a certain period of time, or provide more than one time fuse when tenants may exercise it. Typically, there is a penalty to be paid in trade for this. A common formula for this penalty is up to three months or so of Base or Gross Rent, plus the landlord’s unamortized costs to acquire the transaction, i.e. rent abatements, brokerage and improvements. The total cost is often far less than the cost to see out the balance of the lease term. Also, in the absence of these rights in the lease, sometimes a tenant may negotiate a ‘buyout’ with a landlord – paying a lump sum – which enables the landlord to lease the subject space to another tenant that needs to expand, or lease to a 3rd party for a longer term and at a higher lease rate. This is more likely to occur in a ‘Landlord’s Market’ where they have much less risk.
The best action a tenant with surplus space can take is to contact a proficient commercial real estate broker that can review the lease, the subject building’s status including its recent history & potential upcoming lease expirations, and the market in general to provide informed advice. A tenant should always gather as much intel as possible so that they may make the most informed decisions with regard to one of their most expensive line items in the company’s budget.
Office leasing is all about maintaining the highest ground possible when dealing with the landlord. Tenants can do this with respect to leasing new office space, re-negotiating existing leases, and providing solutions for surplus space by working with an expert commercial real estate broker with extensive market knowledge and the most cutting-edge information and resources.