We’re continuing last week’s discussion of points that are negotiable within the leasing process. Commercial real estate leases are complicated, and it’s important to fully understand the process and even have an expert help you negotiate to get the best business terms possible. Here is a link to last week’s article discussing the first few negotiable points of term, rate, escalations and concessions; below is my continuation of a few more items that can be negotiated, including the parking allowance.
Sublease, Expansion and Termination Options
A possibility that you might want or even need to evacuate the space prior to your lease expiration exists, no matter the length of your lease.
Landlords have a lot of control in what the tenant can do, so it is very important to think about these provisions before you sign your lease. I recommend requesting these provisions in the initial stages. An early request for this information lets the landlord know these clauses/options are important.
Turning over your lease either entirely or partially to another tenant, or subleasing, is a great option for a tenant who is unable or unwilling to remain in their lease. A sublease allows the original tenant to move elsewhere without having to pay full price for a space they are not using, and the new tenant gets to move into the space without a wait and often at a reduced rate.
However, subleasing is not simply handing over your lease and walking away. For starters, the landlord has the decision power on whether subleasing is even allowed. They generally do not like subleasing, and may be hesitant to agree to it. You need to negotiate a favorable sublease clause in your original lease, or your sublease rights may be limited.
Even if you can sublease, it does not mean you will be completely free from your obligation. You are still responsible for the rent payments until your original lease expires, meaning if the new tenant stops paying, then you must continue to fulfill your lease obligation. Also, most tenants looking to sublease usually want a decreased rate, so you likely will still be paying a portion of the rent even after moving out.
Another option worth considering when negotiating commercial leases is the termination clause. If a landlord is set on leasing a space for 10 years, but you are only willing to commit to 5, then you could ask for a termination option in your lease to allow you to cancel the lease in 5 years. Landlords are typically reluctant to grant these, but it is an option worth considering.
Termination options are great rights to have in a lease, but some drawbacks need to be considered. Because some fees such as tenant improvements, free rent, and commissions are paid at the beginning of the lease, but intended for the entire lease; the tenant must pay a termination penalty to cover the unamortized amounts that result from the time lost when the lease terminated. This cost can be a big expense for the tenant depending on the size of the space and the length of the lease.
Tenants want the first say in whether they would like to renew their lease for another term, which is known as renewal rights. Rather than running the risk of losing the space to another tenant, this clause gives the current tenant security that they will have the option to stay in the same space when their lease expires.
You might think this clause is a given, but it is up for negotiation and interpretation. For example, if an adjacent tenant is interested in expanding into your space, the landlord may be inclined to offer your space to them rather than letting you renew your lease, especially if that tenant occupies more square footage than you or has a higher rental rate per square foot. With a renewal option, the landlord must offer the space to you first, regardless of any other interested parties.
It is a good idea to always use a tenant representation broker when working on any renewal as the length of the new term and rental rate is once again negotiable.
For growing companies, an expansion option is one you should consider; it gives the tenant the first say as to whether they would like to lease more space.
Two forms of expansion options are Right of First Refusal (ROFR) and Right of First Offer (ROFO). These essentially prevent other tenants from signing a lease on expansion space in the building before you are presented the option. The main difference between the two is the ROFR is typically triggered by an event while a ROFO can take place anytime within a certain period.
Some landlords insert a relocation clause in leases that allows them to move a tenant to a different suite if it is “comparable” to the company’s current space. You may want to consider having any relocation clauses removed from your lease during the negotiation process, mainly because your definition of comparable may not be the same as the landlord’s. If your location is important, like being on the first or top floor, then this is especially true for your lease. However, if the landlord is unwilling to completely remove the clause, we can help you negotiate by adding some contingencies if a move is enforced, such as: requiring the landlord to cover any moving or renovation expenses and ensuring your lease specifies you will receive the same rent, amenities and comparable square footage.
What you negotiate into your lease at the beginning can have a major impact on what happens while the lease is in effect. A good tenant representation broker will advise you on what clauses could cause problems down the road and how to minimize any risks associated with those clauses.
Parking for employees is a big deal in Texas’ large cities, especially in high-density, downtown areas; thus, parking can be one of the more important details when negotiating a lease. Since autonomous vehicle (AV) technology is not yet commonplace, we still need to plan this item since parking can be costly for employees, clients or visitors.
Be sure to leverage the parking point of the lease as landlords can offer a higher ratio of parking spaces per 1,000 sf or lower initial parking costs to make a commercial space more appealing.
In addition to ensuring the right amount of parking is available, you should consider whether the parking is covered or uncovered; if your spots are reserved or unreserved; and if your monthly cost is set or can the landlord increase it.
Each city has its own parking issues, and we know how to negotiate and find creative parking solutions for the tenants we represent.
Other Points of Negotiation
Even after covering these points of negotiation over our last two blog articles, you need to keep in mind countless other concessions when deciding what you want to be included in your lease. A fewof these items include: building hours, weekend access, signage, density restrictions, security deposit or credit letters.
Having the experience and knowledge to successfully navigate and leverage these negotiation points and concessions is just one of the many benefits of hiring a tenant representation broker to assist you throughout the entire leasing process. Contact us when you’re looking to renew, renovate or find something new.
Research also obtained from Aquila Commercial Blog, 42 Floors EDU Section, Lease Matrix and NOLO websites.