Building Flexibility into Commercial Leases

Commercial leases typically run anywhere from three to 20 years in length.  As we saw in the past 10 years, a lot can change in that period of time economically.   Now, when negotiating a commercial lease, it is best to make sure there is some flexibility built into the lease in case the market fluctuates, leaving your business in a precarious economic situation or in an unexpected boom. 

If there’s a significant downturn, and employees need to be let go, your company may have a large amount of unused office space.  Alternatively, if there is a surge in the economy and your company needs to hire more people, and hence requires more space, how and where can you expand without moving locations entirely.

Economic Downturn

If a company is making cutbacks, and a portion of the office is no longer being used, there is often significant money being spent for the space with no purpose.  One of the best ways to anticipate or prepare for this in a lease is to make sure there is an assignment or sublet provision in the lease – so other tenants may be brought in to absorb the cost of the empty space.

More and more people are also negotiating early termination and contraction provisions into their leases.  A termination allows a tenant to vacate a space before the end of the lease, so long as they provide notice per the lease terms.  Often, tenants are also agreeing to pay penalties in the event they exercise an early termination option (i.e. reimbursement to the landlord for tenant allowances for initial build-out, several months of rent payments, etc).   With very large tenants, it is also a good idea to add language that allows tenant to contract the size of its space.  However, these provisions need to be specific and contemplate possible changes in rent and the cost of contraction.

Status Quo

If the space is serving its purpose, and there is no reason to think that will change, tenants should make sure there are renewal and extension options in their leases.  Again, these provisions should be very specific and define how rent will be determined during the option periods and how much notice needs to be given to exercise the options.

Economic Growth

In good times, companies may need more space.  So along with anticipating downturns, tenants should also negotiate expansion options into their leases.  This might be done by way of negotiating a future expansion into a pre-determined space at some point in the lease.  This can also be done by including a “Right of First Offer” which would allow the tenant to have the first view of any space that opens up in the building.  Similarly, with a “First Right of Refusal,” Landlords must present any third party offer to the existing tenant first.  These provisions should include, among other things, a timeline for presentation of the offer by the Landlord and a timeline for Tenant to exercise the option.

Changing Work Environment

Times have changed over the last 10 to 15 years, resulting in different attitudes regarding the workplace and mobility which can also alter a tenant’s needs when leasing space.  With technology allowing employees to work from just about anywhere – companies can be more efficient with space by considering new floor layouts, rotating workspaces, shared spaces, varying work hours.  If your company is seeing more employees working remotely, it is a great idea to consider this when negotiating your lease and the ability to alter the size of your space.

If your company is considering a new lease, new space, or downsizing space, contact an attorney at Lavelle Law at 847-705-7555 to discuss the best way to negotiate some flexibility into your lease so that you can avoid the pitfalls of a volatile market.