December 7th, 2012, By Don Catalano
Commercial real estate executives looking to renegotiate their leases in 2013 can take advantage of what will likely be a tenant friendly market. While a big part of this is negotiating for a lower cost of occupancy, the market also presents opportunities to change the nature of the lease so that it is a less lopsided document that better serves the tenant’s needs. If the economy significantly rebounds and rents climb, tenants may lose leverage to reduce their rents, CAMs or escalations, but they can usually extract other concessions from landlords. Here are three clauses that can make a difference in the coming year and beyond.
Many leases contain renewal options that are set to a percentage, usually 95, of the fair market rent for the space at the time of the renewal. Building a renewal clause this has two key problems:
A more tenant-friendly formulation is to set the option rent to be a fixed increase over the rent in place at the time of the renewal. For leases with annual escalators, the increase is usually relatively close to whatever the annual escalation would be. For flat leases, the increase usually works out to two or three percent per year. In either case, this gives the landlord some income growth while protecting the tenant from skyrocketing rents.
A prevailing party clause specifies that, in the event of a lawsuit or other legal dispute between a tenant and a landlord, the prevailing party’s legal fees get paid by the losing party. This clause tends to dissuade people from launching frivolous lawsuits since it saves the frivolously sued party from having to bear the cost of defending themselves. This is particularly important for tenants since many landlords otherwise sneak in language that makes the tenant responsible for paying their legal fees, while landlords will not pay the tenant’s legal fees if the tenant wins. In other words, the clause levels the playing field.
Perhaps more unconventional than you would expect, and may be even a bit crazy, but more and more businesses are allowing employees to bring their pets to work. Many surveys show that this leads to reduced absenteeism, increased collaboration, reduced employee stress levels, and increased productivity. Allowing pets on-site is a cost-free benefit that can also increase retention.
Unfortunately, many leases contain clauses that prevent tenants from having any animals, other than those allowed as service animals under the Americans With Disabilities Act, on the premises. Working with the landlord to allow pets, especially for spaces that do not need to enter or exit indoor common area spaces, is an excellent negotiating point for modern workplaces.
In these uncertain times, tenants have a much stronger negotiating position than they may realize. In most property types and most markets, there are more spaces available than there are tenants to fill them. This creates an excellent opportunity to not only reduce costs of occupancy but also craft a lease that is more tenant friendly.