As a tenant representative, we obtain the best possible arrangements and terms for our clients in many respects during lease negotiations. This month we’ll focus on some of the lesser-known negotiable economic provisions in a commercial lease. Then in March we’ll explore various obscure non-economic lease provisions that can be negotiated to your advantage.
Your landlord is well-aware of these details and fine print ... and you should be too!
Certain economic considerations in a commercial lease are well-known and easy to identify. The rental rate, obviously, is a primary factor, along with provisions related to security deposits, tenant improvement allowances, and parking abatements.
But tenants shouldn’t stop there.
Our clients are often surprised to learn that many other provisions in their lease can be negotiated to significantly reduce their long-term costs – items that are open for discussion and not set in stone until the lease is signed.
Here are just a few:
Caps on operating expenditure costs. These provisions can help a tenant limit their financial exposure for certain controllable expenses – for example service contracts related to maintenance and snow removal or pass-through costs for capital expenses.
Holdover. This refers to situations in which a tenant chooses to remain in the space beyond the expiration of their lease term. Contracts typically allow the landlord to charge a premium in this case – often set at 200% of the prior monthly rental rate. It’s possible, though, to negotiate this down to 125% for the first month or two and then cap it at 150%.
The tenant can also seek to contractually limit consequential damages if the landlord claims to incur additional costs (for example due to a delayed construction schedule or forfeited rent from a new tenant) when the tenant delays their exit.
Amortize additional tenant improvement allowance into the rent. In some cases, the tenant improvement allowance isn’t sufficient to cover the full cost of a construction buildout. Under this provision, the landlord would pay the additional construction costs and then amortize the expense (with interest) into the tenant’s rental payments over the length of the lease. In this way, the tenant won’t have to deal with a significant capital expense at the start of the lease term.
Renewal provision. This provision prevents a tenant from being required to move out at the end of a lease term – the landlord must renew the tenant’s lease as long as the tenant meets specified moveout timelines. It’s even possible to require the landlord to provide additional tenant improvement allowances in this case, such as free rent, free parking, and more.
Restoration. Tenants can negotiate the restoration provision to where they won’t have to pay to return the premises back to its former condition after the lease expires. These restorations can be extremely expensive since they might involve removing walls, replacing ceiling grids, removing flooring, and reversing other improvements.
Termination option. This provision allows the tenant to end their lease without penalty before the actual lease expiration. It can be difficult to obtain this in 5-year leases, but landlords are more likely to agree to it in a 7- or 10-year lease.
Interruption of essential services. This allows a tenant to stop paying rent after a defined period of time if the landlord is unable to provide essential services to the premises, such as electricity, water, elevator service, and more.
Moving/furniture allowances rolled over into additional free rent. In market conditions like we see currently, it may be possible to not only negotiate for the landlord to provide a lump sum allowance to pay for a new tenant’s relocation costs, but to have any remaining amount of that allowance applied to the cost of new furniture or even converted into additional free rent.
These are just a few of the lesser-known financial provisions tenants are able to negotiate. They can all add up to substantial savings over the life of the lease – and beyond.
If you’re preparing to negotiate a new lease, please give us a call. We’d be glad to put these strategies to work for you!