The Leasing Tool Kit - Part Two

Here are the remaining 5 leasing provisions that a high growth company should include in its leasing “tool kit:”

1. Relocation Rights. Relocation rights in a lease enable the company to relocate its premises to another location in the building that may be adjacent to unoccupied space, thereby positioning the company to more efficiently consolidate its operations in the building as the company grows.

2. Sublease Rights. Sublease rights provide the company with the flexibility to sublease all or a portion its premises for less than the remaining term under the lease. While the landlord will likely retain consent rights over proposed subleases, the landlord should be prohibited from unreasonably withholding its consent to a sublease. In addition, the company should have the unqualified right to permit its affiliates, subsidiaries and successors by merger to occupy the space without triggering any consent or other rights on the part of the landlord.

3. Assignment Rights. Assignment rights enable the company to assign all of its rights and obligations under the lease for the entire remaining term. As in the case with subleases, the landlord should be prohibited from unreasonably withholding its consent to a proposed assignment. Further, the definition of “assignment” in the lease should be scaled back so that merger and acquisition transactions engaged in by the company do not trigger landlord consent rights. If a landlord refuses to consent to a successor tenant, the company may be forced to breach its lease in order to consummate the merger or acquisition transaction, which could have a significant adverse impact on the company’s balance sheet, particularly if the lease is for a substantial amount of space.

4. Telecommunications. The company’s leases should include telecommunications rights that are broad enough to enable the company to increase the broadband bandwidth serving the premises as needed to accommodate company growth, including expanding needs for videoconferencing and similar collaboration capabilities as new offices and locations are added to the company’s real estate holdings.

5. Audit Rights. The company should have the right in each of its leases to perform an audit of the landlord's calculations of operating expenses that may be passed through to the company, with clear remedies in favor of the company if it finds an error through this audit process (including reimbursement of associated audit expenses). Audit rights can position the company to strictly scrutinize its operating cost pass-throughs, in particular where the company has redundant space in certain locations.

A high growth company that incorporates these provisions into its occupancy leases will be better positioned to manage its changing real estate needs, including as it grows organically or through merger and acquisition activity or as it may change its area of geographic focus.

Permalink: http://fastrealestategrowth.blogspot.com/2012/03/leasing-tool-kit-part-two.html

The Leasing Tool Kit - Part One

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.

Permalink: http://fastrealestategrowth.blogspot.com/2012/03/leasing-tool-kit-part-one.html