Incorporating Flexibility into Long-Term Leases

Last Updated March 10, 2017

Given the fact that most office lease agreements can run anywhere from three to 15 years, it is often essential for a company to build some flexibility into a long term lease, in case market and economic fluctuations demand an unexpected relocation or contraction. How can this be achieved? The following are some helpful tips that can help a company incorporate the wiggle room they need in a lease to deal with the ups and downs of business without having to sign onto a less cost-effective short term lease.

Dealing with Unused Space

Any number of factors, including an underperforming market, cutbacks, or the need for a larger space can leave a company with unoccupied space on its hands that is consuming money while serving no purpose. Mitigating the risk of these types of situations can be readily ameliorated by building an assignment or sublet provision into a lease. In this way, if you are left with unused space or have to relocate to a larger space, you can bring in other parties to absorb the cost of the unused space.

Incorporating Renewals & Extensions into a Lease

If a current location is still serving the space needs of your company, you may well want the option of remaining in an existing location. Landlords, however, sometimes want to leverage the option of bringing in a more attractive tenant willing to play a higher rate. To protect against this and ensure that you can remain in an attractive office space, build renewal options and extensions into your lease. When the current term matures, you can use these options to stay put and avoid the excessive costs of finding a new space.

Termination and Contraction Options

Termination and contraction options can also be useful tools to incorporate into a lease. Termination options allow a tenant to evacuate a space before lease maturation, provided the tenant gives sufficient notice. This option can incur some costs in terms of rent penalties, for example, but these costs are still much lower than the cost of retaining an unused space. For larger tenants with a good amount of square footage, contraction options can be a great way to downsize when a business is underperforming and should also be considered.

Allowing for Expansion

Sometimes companies require more space. Instead of negotiating a new lease for a new space when expansion comes up, companies can build a series of expansion options into an existing lease. These include hold options, which involves a tenant taking over a pre-defined space at some point during the lease, Right of First Offer, which allows a tenant a “first look” at any space that opens up in their building, and First Right of Refusal, which requires that a Landlord present any third party deal for a predefined space to the tenant first.

Ergonomic Solutions and Alternate Work Structures

There are also several ergonomic techniques and design solutions that can help a company use a space more flexibly. Using common areas as general, rotating workspaces is one option, as well as the practice of hoteling, which allows employees to come in and work at generic workstations on an “as needed” basis. These flexible approaches may require that a building let a tenant’s employees enter at odd hours and that a building keep essential services on at odd times, as well. A tenant should confirm with a building that these adjustments can be made to accommodate these alternative practices.
The Value of Flexibility

While negotiating flexibility into a lease can, at times, feel like an uphill battle and there can be some additional costs associated with these types of options, in the long run flexibility in a lease can function as a much needed insurance policy against future scenarios that could serve as a much larger drain on a business’ coffers. When negotiating a lease, try to incorporate some of these options to mitigate your risks and protect you in today’s volatile economic and market conditions.

Coy Davidson

Senior Vice President at Colliers International, based in Houston, Texas.