Media Room Bylined Articles In down market, good deals for savvy tenants
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In down market, good deals for savvy tenants As published in the Fairfield & Westchester County Business Journals - By John Hannigan December 21, 2009. The Typically, the second or third largest expense for most companies, a commercial lease affects your financial obligations in a profound way. By learning the salient points of your lease, you will understand your obligations and be prepared to negotiate superior terms when renewing or relocating. FINANCIAL OBLIGATIONS Additional rent: An “additional rent” clause makes a tenant liable for increased costs to operate the building. Gross leases are based on increased operational costs, generally after the tenant’s first lease year. The extra rent is based on the percentage of the building occupied, so the base year should reflect a fully occupied building to apply future cost increases fairly. Security deposit: Tenants who post large security deposits may be able to negotiate a partial refund during the course of the lease (provided they avoid default). Confirming your space: A lease should delineate your space in accordance with an industry-wide standard of measurement. The “loss factor” can be calculated by visiting www.boma.com to translate useable square feet (what you occupy) into rentable square feet (what you pay for). The difference can be affected by mechanical rooms, lobbies or common conference rooms, for example. Large loss factors may be caused by increased open space or more amenities, indicating a higher quality building or services. CHANGES DURING LEASE TERM Expansion / contraction / termination options: Some leases include options to expand, contract or even cancel within specific time periods with notice to the landlord. Options to expand, such as a right of first offer, mean the landlord must notify the tenant about a specific space when it becomes available. A right of first refusal gives the tenant a choice to lease the expansion space only after the landlord has obtained a negotiated term sheet with another company ready to lease the same area. Assignment / subletting: A tenant marketing sublease space becomes a competitor of the landlord. Recently, landlords have imposed restrictions against advertising at a discounted rental rate, subleasing to another tenant in the building or even approaching someone the landlord has negotiated with in the past six months. These restrictions should be avoided, although the landlord should receive a limited right to take back the space you wish to sublet. Any net profits should also be split between the tenant and landlord. Alterations: This clause lets tenants alter their space, at their own cost, as long as the value, image and functionality is unaffected after they leave. If restoration is required, the landlord should give notice at the same time the alteration is approved. In addition, if tenants must use their landlord’s contractors, a competitive bidding process should be followed. EXPIRATION OF THE LEASE Renewals: A renewal option blocks the landlord from leasing your space to another tenant. Typically, landlords invest to alter the space for a new tenant and want to keep you unless you are surrounded by larger organizations. If your lease includes a renewal option, the new rate should be based on fair market value and readjust all base years for operating expenses and taxes. Surrender and holdover: Referring to lease expiration, a surrender clause often requires you to return the space in its initial condition, except for reasonable wear and tear. Tenants are generally required to pay a premium for failing to vacate the premises by the expiration date; 150 percent of the amount paid for the last month of the term is common for this “holdover” period. Additional damages can create an open-ended exposure. In light of today’s economy, executives should be acutely aware of their obligations before signing an office lease. Activity is on the rise with many firms ready to cash in on the tenant’s market. Companies must be educated on these clauses to avoid major liabilities and create flexible leases to account for future changes.
Posted with permission of Westfair Communications, Inc. |