Written by Brandi McDonald
Regardless of what type of industry your business belongs to, the chances are high that your commercial real estate needs will be ever-changing. These might be minor or major fluctuations, but they can be driven by a variety of factors, including:
- Global economic dynamics: Just like the global markets ebb and flow, so too will your business needs. It must react to recessions, depressions, expansions and more, and those will bring different needs for commercial property.
- Seasonal consumer behavior: Business is rarely steady all year long for a company. Take a retail operation, for instance. Sales peak around the holiday shopping seasons. Or, for other types of business, transactions that are fiscal year driven close in record numbers at the end of the year. Tax strategies can also drive close dates. This can mean different commercial property needs at various points in the year.
Knowing that your real estate needs are going to shift is important, but there is one major problem: Lease contracts don’t always support these types of fluctuations. Luckily, there are ways to negotiate flexibility into a lease contract.
Consider all of your renewal options
Having foresight is important as it’s better to negotiate optionality that you never use than to need it after execution when you have no leverage.
Renewal options provide the right to renew the lease beyond the expiration date. Even though they are rarely executed as prescribed in the lease, they are good insurance against a third-party leasing your space after it expires.
Expansion options come in many forms, too, including:
- A right of first refusal (ROFR) will give you the right to match third party terms if someone comes along and wants to lease your defined expansion area.
- A right of first offer (ROFO) provides the right to make an offer on space that is or becomes available for lease.
- A more aggressive position requires the landlord to hold an area of space off the market until a future date, precluding anyone else from leasing it until after such date.
- Hard expansion options require the tenant to pre-commit to an expansion area no later than a future date defined in the lease.
- A termination option will provide an opportunity to terminate the lease at a future date. For such powerful flexibility, Landlord’s typically expect significant advance written notice accompanied by a penalty payment.
- Contraction options provide the right to reduce your space over time. Like a termination option, they are typically accompanied by a penalty.
- Sublease and assignment rights are the most common lease options. They allow companies to lease unneeded space to third parties that fulfill certain criteria prescribed by the Landlord.
These options give you more flexibility and leverage in your lease, and often it takes a little negotiation to add these perks to a deal.
Having knowledge and experience in your corner is vital in negotiations
There are multiple variations and respective negotiation strategies for each option. If you are not comfortable with negotiating a lease on your own, teaming with competent commercial real estate professionals can be a wise step.
With the right professionals in your corner, you can come out with a lease agreement that proactively addresses the changing potential needs of your business.