In Focus: Tenants Must Plan for the Unimaginable
Business shifts are often unimaginable to the tenant at the beginning of a lease term, but planning for them is as important as negotiating any other element in the agreement.
Nora Hogan, Principal, Transwestern (Q2 2014)
During 30 years in the business, I’ve never heard a tenant ask, “How would
I get out of this lease if I no longer need the space?” And that question needs to
be asked when entering a lease. Many companies neglect to plan for a possible
shift in their real estate requirements. A firm might need to close parts or all of its
operations due to an economic slowdown or industry shift. On the other hand, it
may need to expand if business is booming. Certain lease language could prevent
a company from expanding in its existing building — forcing a costly relocation.
Tenants must plan for the unimaginable, so it’s wise to keep as many options open
as possible. Pay close attention to lease language concerning “use,” “parking” and
“assignment and subletting.” Negotiate to keep the “use” as broad as possible, even if
the company only needs space for “general office use.” Also, secure as much free parking
as possible, whether it’s needed or not. Afuture expansion or decision to assign
more employees to work in less square footage would make extra parking a plus.
For example, we represent a 17,000-square-foot technology company in Dallas
that needs another 5,500 square feet. The company next door was marketing 9,000
square feet for sublease, but my tenant could not take any of the space because
that company’s lease prohibited subleasing to another tenant in the building. My
tenant was prevented from expanding in place, even though no other square
footage was available in the building.
The lease’s assignment and subletting language is key to a tenant’s flexibility.
Subleasing may be a firm’s only option if its real estate needs change, but many
companies overlook this portion of the lease and discover costly roadblocks to
subleasing space. The following sublease information could save the day if that
bridge needs to be crossed:
- The most likely sublease candidate is the tenant next door or one that’s nearby
in the building.
- A good sublease candidate might have recently toured the building without
finding suitable space.
- Secure as many rights as possible to pass along on the sublease, such as those
connected to building signage and advertising sublease space.
- Subleases tend to happen quickly so it’s good to strive for a landlord consent
time of seven to 10 days.
- Sublease space typically garners lower than current market rates, but a company
will not be able to charge those rates unless it’s specified in the original lease.
- In the rare case that a company can secure above-market rent, it’s advisable for
the firm to request that expenses, commissions, and tenant improvements be
covered first as part of a profit-sharing agreement with the building owner.
- It’s advisable to design space in such a way that it can easily be divided in the
future to create functional space for two parties.
Tenants need to plan for future successes or slowdowns and not be singularly
focused on the status quo. Business shifts are often unimaginable to the tenant at
the beginning of a lease term, but planning for them is as important as negotiating
any other element in the agreement. Forward-thinking companies design their
space in such a way that it can be easily divided in the future to create functional
space for two parties. This is not always easy to do and takes some extra planning,
but if companies truly need flexibility, it is worth the extra time and effort.