Friday, March 23, 2012, 12:49 PM

The Leasing Tool Kit - Part One

By: Pamela V. Rothenberg, Esq.
To be most effective in its leasing transactions, a high growth company should develop a leasing “tool kit” that includes a checklist of lease provisions to be pursued as a matter of company policy for every one of its occupancy leases. By including these strategic clauses in its leases, the company will be armed with the legal rights necessary to address its changing real estate needs,
particularly as the company continues to grow. In my next few blog posts, I will share my top 10 suggested key lease provisions to include in a high growth company’s leasing tool kit. Here are the first 5 clauses:

1. Customized Lease Terms. The company should seek maximum lease terms that best suit its anticipated expansion plans, as reflected in its strategic real estate plan. For example, the company should pursue shorter lease terms that include renewal options for leases in jurisdictions where the company may merge with or acquire another company. This will best position the company to eliminate redundant lease holdings. Conversely, longer lease terms (that usually result in a more favorable rental rates because landlords prefer them) can be accepted in locations where the company has a clear sense it will be operating for the foreseeable future.

2. Early Termination Rights. Early termination rights in leases permit the company to terminate the lease prior to the expiration of the stated lease term. Typically these rights require the payment to the landlord of an early termination fee (as compensation for the premature termination of the rental income to the landlord) plus the reimbursement of the landlord for any unamortized amounts of the tenant improvement allowance and brokerage commissions associated with the lease.

3. Expansion Rights and Rights of First Opportunity to Negotiate. Expansion rights and rights of first opportunity to negotiate enable the company to increase the size of its premises in a given building as space becomes available. An expansion right gives the company the option to lease specific (and often adjacent) space by a certain date. A right of first opportunity to negotiate permits the company to lease other space in the building, regardless of its location, as it becomes available. Both of these options enable the company to expand while keeping transaction costs down, since expansion space can be leased on the same terms as the initial premises and is often simply added as “additional premises” through a lease amendment. However, the rental rates and other economic terms for space resulting from the company’s exercise of rights of first opportunity to negotiate will likely be based on the terms prevailing in the market at the time such space is leased by the company. If the landlord and the company cannot agree on the prevailing market terms, then they should resort to a “three broker” method process for the determination of these key lease provisions.

4. Contraction Rights. Contraction rights permit the company to reduce the size of its premises and the associated rental obligations under the lease. As with the early termination right described above, these rights may be conditioned upon a payment to the landlord of some type of compensation for the loss of the future rental stream on the space that the company gives back, plus any unamortized tenant improvement allowance and brokerage commissions associated with that space.

5. Renewal Rights. Renewal rights give the company the right to extend an existing lease term for a stated period. The company can negotiate in advance for the rental rates and other economic terms for the renewal term that would give the company some predictability in its budget (i.e., rent for each year of the renewal term could increase at the same 3% per year escalation rate that the company would pay each year during its initial lease term). Depending on the tenant-friendliness of the market, the company might have enough leverage to renegotiate for even more favorable rental rates prior to exercising its renewal options. If the renewal rental rates are not specified in the lease, the company should at a minimum have the lease specify that the “three broker” method will be used to determine the economic terms for the renewal term.

Labels: , , , ,

10 Comments:

Blogger Unknown said...

Excellent Job i really enjoyed reading your post thanks for sharing. Property Management

January 8, 2013 at 6:51 AM  
Blogger Unknown said...

New to automatic leasing? Thinking of renting that next vehicle? Understand the market terminology. Here is a useful reference of renting conditions that are generally mentioned during the settlement process.
www.rentalprotectionagency.com.

January 17, 2013 at 11:34 PM  
Blogger Unknown said...

I read your whole blog. Your work is really good and inseparable .Thanks for sharing.

Facebook App Developer

January 23, 2013 at 2:50 AM  
Blogger Unknown said...

Spending unwanted usage expenses when an automatic rental finishes is something most customers take care to prevent. But many of these same cautious lessees get an disappointed shock at turn-in because of other expenses and expenses they did not think about. Properly considering things such as best duration of rental and recurring value and then getting a few easy actions at the starting of the rental and during the rental phrase can pay big benefits when the rental finishes.
rentalprotectionagency.com.

January 28, 2013 at 8:06 PM  
Blogger Alex said...

You are a Great while writing in the blogs it is awesome I liked it too much good and informative thanks for the sharing.

Night Club Logo Design

February 25, 2013 at 2:20 AM  
Blogger Alex said...

Hey Great Comments on this blog. And the Information is also Great. Thanks, for a really nice read.

Photography Services In Collins

April 19, 2013 at 4:15 AM  
Blogger Alex said...

Thank you for another great article. Where else could anyone get that kind of information in such a perfect way of writing? I have a presentation next week, and I am on the look for such information.

emf shielding

April 22, 2013 at 2:52 AM  
Blogger petcummins said...

I completely agree with you. I really like this article. It contains a lot of useful information.
salaries

June 12, 2013 at 12:31 AM  
Blogger Unknown said...

Great post i must say and thanks for the information. Education is definitely a sticky subject. However, is still among the leading topics of our time. I appreciate your post and look forward to more.
Peruvian Hair Extensions

November 22, 2013 at 3:06 AM  
Blogger Unknown said...

Wishing you the best of luck for all your blogging efforts.This is my first opportunity to chat this website I found some interesting things and I will apply to the development of my blog.
Tax Preparation Business

November 22, 2013 at 3:39 AM  

Post a Comment

<< Home

back to top