How to Get a More Flexible Office Lease
“The report of my death was an exaggeration.” If offices could talk, they might borrow this rather famous line of Mark Twain’s. Of course, the rise of the work-from-home model has inarguably impacted companies’ ideas about office leases. In addition, these uncertain times make predicting future growth—or decline—harder than ever. That’s why many businesses are looking for a more flexible office lease. With this in mind, here are a few ideas on how to build more flexibility into a lease agreement.
Opt for a Short-Term Lease
No surprise—landlords prefer long-term leases because they provide greater security. However, now that the pandemic has shaken up the office market, landlords sometimes must offer tenants more flexibility, and that includes short-term leases or cancelation provisions.
Adding an option to renew on pre-negotiated terms will allow you to stay longer, but a short-term lease means that you’re initially committed to less time. A word of caution—a landlord may be less inclined to offer concessions with short-term leasing. Therefore, you’ll want to negotiate a lease that strikes a balance between flexibility and cost savings.
Cancelation provisions can be an option, but also come with penalties associated with the cancelation.Therefore, you’ll want to create an aggressive long-term lease with the ability to cancel for a fraction of the remaining lease costs.
Forego Tenant Improvements
Landlords often offer incentives to defray the cost of building out a space that accommodates your company’s needs. But what if you don’t really need to customize a space? In that case, find out what the landlord would be willing to offer in exchange for declining a tenant improvement allowance. For example, this could be leverage toward helping you negotiate a short-term lease as well.
A company can also save money by exhausting all product in the market of spec suites and vacant built-out space that require minimal improvement costs to meet the criteria of a facility. In addition, some of these suites also are furnished, thereby creating additional savings to the bottom line.
Subletting and Assigning
If the needs of your company change before the lease is up, then having the right to sublet or assign will help you avoid paying for unused office space. With a sublease, a tenant gives someone else the right to occupy a space. The sublessee pays the sublessor (tenant) who continues to hold the lease and makes payments to the landlord. With assignment, the lease is turned over to the new tenant and the assignor is relieved of liability under the lease.
Whether you’re signing a short-term or long-term lease, you can incorporate flexibility by including certain clauses. Some of these are:
Expansion Clause—gives you the right to occupy office space in your building if it becomes available.
Contraction Clause—gives a tenant the option to lease less space. Landlords typically don’t favor a contraction clause for obvious reasons: less space, less rent. Be prepared for some resistance. At the very least, expect some strict parameters for how and when a contraction clause can be invoked and a flat fee if it’s used, too.
Early Termination Clause—allows you to break a commercial lease, under specific circumstances, before the expiration date. Once again, landlords are reluctant to include such a clause. If you’re able to secure one, expect restrictions such as the requirement to wait a few years before the clause is executable as well as a termination fee.
Right to Renew—is an option that gives a tenant the right to renew the lease in accordance with designated terms in the agreement. It’s best to work out the renewal option and any rental increases associated with it at the time of lease negotiations with your landlord.
Modify Your Current Lease
In uncertain times, a landlord might be willing to negotiate lease modifications that reflect a tenant’s current situation. For example, the blend and extend strategy can be a win-win for both landlord and tenant. In this instance, tenants opt for early renewal and extended lease length in exchange for more favorable lease terms, such as lower rent or fewer rentable square feet. Blend and extend reduces a tenant’s real estate costs and could help a landlord avoid a vacancy.
Work with a Tenant Representative Broker
A tenant representative broker is familiar with what can be included in a lease to maximize flexibility and protect the interests of your business. Furthermore, a tenant rep works exclusively for you. During lease negotiations, he or she acts on your behalf, thereby increasing the likelihood that a landlord will agree to a more flexible office lease.
It’s important to work with a broker who is able to bring creativity and experience to the deal structure. There are dozens of areas of negotiation, compromise and structure that can be presented to landlords for the benefit of the tenant. Thinking outside the box in this environment is critical to the success of the transaction.