December 14th, 2012, By Don Catalano
Lease Clause
Corporate real estate administrators that have been nice this year may be in a good position to ask Santa for favors. Rather than asking for socks, scarves or jackets, why not ask for a better lease? Here are three clauses that are extremely tenant-friendly, but are also achievable for tenants in a good negotiating position.
While a flat lease would be a great thing to have, most landlords will not offer them. Landlords typically like leases that have rental increases tied to the Consumer Price Index and that allow CAMs to adjust with the building’s actual expenses. In periods where the CPI remains low and where building operating costs also remain low, the risk in having uncapped increases may seem very minor.
It isn’t. Given the large amount of monetary stimulus that has already been pumped into the economy, inflation is likely to return. At the same time, many local and state governments have shown a willingness to increase property taxes to close budget shortfalls. Energy prices could also increase if the government chooses to increase regulation or add a carbon tax. All of these could easily lead to skyrocketing occupancy costs.
Instead of asking for a flat lease, tenants should negotiate for capped increases. A lease with rental increases tied to CPI or three percent, whichever is less, allows the tenant to benefit from low inflation while protecting them from high inflation rates. Doing the same with CAMs, although many landlords will request a higher cap, has the same impact. Tenants that live in states like California where property taxes get significantly reassessed on sale may also want to negotiate an exclusion on increases due to a property sale.
Business is more fluid than ever. Tenants can easily find themselves outgrowing a space or, on the other extreme, choosing to vacate a space and leave a market completely. Many leases contain subleasing clauses that allow tenants to sublease their space to a replacement tenant, but this leaves them responsible for the lease in the event that the replacement tenant defaults. An assignment clause that allows them to assign the lease, and responsibilities for it, to another company of comparable financial strength is much more desirable. It allows them to be completely free of the space and of responsibility for it. It’s a good deal for the landlord, too. The landlord gets a comparable tenant that wants to stay in the building and is more likely to execute renewal options.
Most landlords like to have their tenants exercise their options to renew their lease. Having existing tenants renew leases saves them the cost of finding a leasing agent, the cost of doing new tenant improvements, the cost of vacancy and the risk of having a new tenant that may or may not pay the rent. Furthermore, most options include rent increases which put the landlord in an even better position.
To make options more tenant-friendly, tenants can try to negotiate for a pre-defined TI allowance. Even a small allowance, like five to ten dollars per square foot for office space, can pay for new carpets, painting and the like to keep the space attractive. The landlord still benefits because they lock in a low TI cost and keep a tenant. The tenant benefits because they have a minimum TI allowance that is guaranteed, but can still negotiate for more if the market bears it.