Question: What’s not to like when it comes to Expansion Rights? Answer: A landlord breaching these rights with no specified recourse. Expansion rights are indeed unilateral in nature. They do not benefit the landlord – only the Tenant. Therefore, landlords are resistant to providing these rights. They dislike the responsibility to inform tenants of availabilities because they are pre-occupied with a hundred other priorities, and also do not want the associated liability. Nevertheless, it is still important for you as a tenant to try to protect your interests as much as possible.
It’s logical that a landlord or their leasing agent would notify neighboring tenants of forthcoming availability. They are the most likely candidates for the space; however, landlords don’t want to be obligated to do so. What happens if they neglect to notify the tenant? What happens when the expansion space is important to the tenant’s long term corporate strategy? Especially when the tenant’s premises and subject expansion space are in a prime location in the property and cannot be easily duplicated. Is the only solution injunctive relief? Not necessarily.
The best protection against a landlord negligently or willfully leasing out ‘your’ expansion space is recording the Memorandum to Lease – citing the Right of First Offer or Right of First Refusal Expansion Rights with the landlord’s permission. This will not be easy to do unless the tenant and lease are substantial – and even then it could be difficult due to potential title issues. Absent that, the next best protection is to specify recourse in the lease – that and maintaining a favorable tenancy with the landlord. The first step in this case would be to attempt to reverse the lease that breached your rights. See if the landlord can work out an arrangement with the other tenant – even if they have taken occupancy already or made plans to do so. If they can’t, what would they agree to? Perhaps a relocation within the building to equivalent or superior space, i.e. a higher floor with better views or ground floor space, a highly upgraded office space, or possibly a larger space at the current annual rent. An alternative solution may be a right to terminate the lease early combined with a credit for relocating furniture, equipment, voice and data lines within the building, within the landlord’s portfolio, or elsewhere.
Other preventative solutions to this rare problem are mediation and arbitration. Litigation may potentially get expensive, protracted and hostile, but the other options could render a great solution for all – in a fraction of the time. Plus, many landlords prefer to not litigate matters like this. It could be very costly for them to pay the judgment – plus your legal costs (if the clause is written this way). A block of rental abatement might also be a great form of restitution – perhaps combined with a relocation to larger or additional space owned by your landlord.
If a severe penalty is spelled out, it may serve as an adequate deterrent and motivator. That said, although it is unlikely that a landlord will agree to a substantial penalty in writing – try anyway. You have negotiated hard to get the right to expand. (Hopefully at a specified, fixed rate as opposed to ‘market’, but few landlords today will agree to anything other than ‘the then market rate’. They may agree to 90 or 95% of market, though.) Bottom line: Tenants must try to specify in their lease a satisfactory penalty for the landlord to pay for their carelessness, distraction or just old fashioned greed.
A great Florida commercial real estate attorney can help you craft the best language. We can provide recommendations of excellent specialists upon request.