KNOW YOUR COMPANY
Do you have a history of erratic growth or contraction? Are you likely to grow or shrink?
WHAT TYPE OF EXPANSION MAKES THE MOST SENSE?
RIGHT OF FIRST OFFER: Tenant has the right to lease the expansion premises on terms offered by the Landlord. If Tenant does not do so, the Landlord can take the space to the market on terms not materially more favorable than those rejected by the Tenant.
RIGHT OF FIRST REFUSAL: Tenant has the right to match a third party offer for the expansion premises.
MUST TAKE SPACE: Expansion space is automatically incorporated into the leased premises on a certain date on pre-negotiated terms and conditions.
MAY TAKE SPACE: Tenant has the option to incorporate expansion space into the leased premises on a certain date on pre-negotiated terms.
KNOW WHEN AND HOW TO EXERCISE THE OPTION TO EXPAND
If the Tenant fails to exercise the expansion option in strict accordance with the negotiated terms, the Landlord may not have to honor the expansion option. Remember - expansion options really favor the Landlord. Keep an eye out for form of notice, timing of notice and notice recipients.
CONFIRM THE RENTAL AMOUNT
In order for the expansion option to be enforceable, the rental rate for the expansion space must be clearly stated in the lease or a mechanism for determining the rental rate must be set forth in the lease. Also, consider whether the base year for operating expenses for the expansion premises should be the base year being used for the balance of the premises or the base year at the time of the exercise of the expansion premises.
KNOW THE RAMIFICATIONS OF THE TERM
Is the expansion space coterminous with the balance of the original leased premises, or is it for a separate period of time? For the most part, it is in the Tenant's interest to have the lease term with respect to the expansion premises be coterminous with the balance of the original leased premises, but note that as a result of having a shorter term for the expansion space, the Landlord may require that any non negotiated tenant improvement allowance be prorated over the balance of the remaining term and in such event, the Tenant may have to fund a greater portion of the build-out for the expansion space than they did for the build-out of the initial premises.
CONTRACTION
Contraction options need to be negotiated early.
Contraction options rarely benefit the Landlord.
KNOW HOW TO NEGOTIATE THE CONTRACTION OPTION
Landlords do not appreciate contraction options. If the Tenant fails to exercise the contraction option in strict accordance with the original terms of the lease, the Landlord may not have to honor it and the Tenant will be forced to continue to lease such space.
KNOW WHAT THE TERMINATION FEE IS
Fees can include:
Unamortized brokerage commissions
Unamortized tenant improvement allowances
Unamortized Free rent
Rent for the anticipated time required to re-lease the premises (pre-negotiated)
BE PREPARED FOR POSSIBLE LOSS OF SPECIALLY NEGOTIATED RIGHTS IN THE LEASE
If a Tenant shrinks, the Landlord may cancel items such as:
Renewal options
Expansion options
Building or monument signage
Relocation clauses
Reserved parking
Any other amenities or concessions
A well-negotiated lease will often stipulate rights to contraction and rights to termination. There are nuances that must be considered, such as the notice provision elements embedded in these rights. It should stipulate that the termination/contraction penalty is due on the actual date of termination or contraction, not on the notice date. That way you will not have to write a check to your landlord any earlier than you have to. This strategy also enables you to use the termination/contraction option as leverage to renegotiate the terms and conditions of your lease without penalty if you find yourself in a lease that's well over market.
Your Tenant Rep should negotiate a lease that includes language that allows space expansions, contractions and terminations. Inserting the proper language into the lease document enables you to exercise greater control and enjoy more flexibility as the dynamics of your company changes throughout your lease term.
