Today's Tenant Rep Tuesday Tip topic: Commercial Lease Option Clauses
What They Are + How They Work
There are many things to consider when negotiating a commercial lease such as rental rate, operating expenses, commencement dates, and more. There are also several options that a company must consider that if not negotiated properly can have a significant impact on the current and future business.
An option in a commercial lease gives the tenant the control, the choice, or the right to do something. Landlords are not required to give any options in a lease, they must be negotiated. Some of the common commercial lease options are: renewal option, expansion option, or sublease option. There are requirements around the options (e.g. time frame to exercise) that the tenant has to meet, however at the end of the day they have the ability to accept or reject the option during a specified time period.
Most commercial leases are 3 to 5 years. At the end of the lease term, the landlord can lease to another tenant or will allow you to renew the lease. However, if there is a lease renewal option, you would make your decision to exercise the renewal option during a specified time period (e.g. no later than 180 days before the lease expires).
Unexpected things happen, especially when it comes to business. Your company could get acquired, or you could hit a growth mode where your current landlord doesn't have any space in the building, which means you would have to rent commercial space in another building.
If anyone of the above happened you would have to have the ability to sublease or assign your lease. Without this you would be stuck with the space. Having a sublease option gives you the ability to rent the space to another company.
For growing companies, the ability to lease more space in the future is important. Landlords like long-term tenants are and likely to agree to an expansion option in the event you need more space, as long as they have it. Some expansion options may have an expiration date associated with it. Meaning you have until a pre-determined date to expand into a certain space and the deal terms would be the same as your original lease.
The expansion option might be in the form of a right of first refusal or a right of first offer.
Landlords don't give these too often however they are good to have in the back pocket. In most cases if they agree to one they will require that you pay the unamortized tenant improvement costs and lease commissions. Additionally they may tack on a few months of rent as an early cancellation fee. There is also typically an expiration date tied to it. For example the lease may say that can't termination until the 24th or 36th month of the 5 year lease.
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