Commercial property lease agreements are typically long term arrangements between a tenant and a landlord and range anywhere from 3 to 10 years. Landlords tend to shy away from short leases in favour of long term ones that offer more stable, predictable cash flows for long term profits. Unfortunately, predicting future business cycles is becoming increasingly difficult. This means that for a tenant, anticipating space requirements is a challenging proposition.
During the initial stages of a new tenancy, landlords typically have to inject significant capital in order to finance tenant installation costs, leasing commissions and complete a reasonable vetting process. In order to successfully recoup these occupation costs, they’ll always prefer longer term lease structures. For tenants, short term lease structures or mistimed relocations can also prove costly in the long run – particularly when other alternatives may be available.
In order to reduce the risk associated with an unpredictable economic landscape, it’s critical for both parties to secure a flexible long term lease structure. For example, securing the right to terminate the lease prematurely at a specific point during the lease term could prove very valuable to you as the tenant. This kind of termination option will require a specific notice period in advance of the termination – typically 6 -12 months.
If you’re a larger tenant with a growing business, you certainly need to factor in variable staff requirements. This means you may want to structure an expansion or contraction option for predefined spaces at various points during the lease. Once additional spaces become available, the landlord would be obligated to offer these to you before engaging the market.
A “first right of refusal” means that the landlord is obligated to present any deal to you, the primary tenant, that they are willing to sign with a third party tenant for a predefined space. If there is interest from the existing tenant for the expansion option, that tenant may elect to match the deal and pre-empt the transaction with a third party tenant.
The workplace is rapidly changing, and new ways of incorporating flexibility with office design and alternative work strategies are becoming popular. A volatile global economy means that being able to reduce risk by allowing flexibility is becoming increasingly important.