Frazier Baker and Will Barden
A lease is a lease is a lease, right? A certain amount of square feet at a set rate per square foot, maybe with some kind of built-in increase during the lease period.
And, of course, you know exactly what will happen with your business over the next three to five years: how many employees you will hire, how much office space you’ll need … right?
The recession may be in the rear-view mirror, but most of us glance back occasionally to remind ourselves how quickly things can change. Even in the best of times, it’s difficult to predict where your business will be in the next 12 months, much less for the next several years. That’s why negotiating flexible lease terms can make your office space equally flexible to expand, contract or even go away if that’s what your business situation dictates. While some of these options may be difficult to get an agreement on by your landlord, they are worth pursuing, particularly if your business is likely to experience more than minor fluctuations during your lease term. Just be sure that you understand how incorporating these options may impact your lease rates.
Let’s talk first about the ups and downs of business and the lease options dealing with expanding and/or contracting your space. If expansion is a goal or likelihood for your business, negotiate the option to lease additional space in your building if you need it. With a right of first refusal, when the landlord has an offer from someone to lease available space, he/she must give you the opportunity to lease that space at the same terms first. With a right of first offer, the landlord must offer you the chance to lease the space before marketing it to other prospects.
Downsizing is never something we want to think about but if it might be a possibility, including terms in your lease that allow for this may make sense. Subleasing is one way to deal with this, but you probably don’t want to become a landlord yourself. Instead, consider negotiating a contraction option that provides the right to give space back if things don’t go as planned. You might go so far as requesting a termination option. While this is typically the toughest option to negotiate, it ensures maximum flexibility – regardless of the reason you wish to vacate your space early.
Finally, what do you do when it is time to renew? It never hurts to consider relocation when your lease is near expiration. At the very least, you want to see how market rates have changed to ensure you are getting a good deal. At a minimum, you’ll want to have the option to renew, even if you decide not to exercise it. Your best-case scenario is to try to negotiate favorable renewal terms in your initial lease, though most landlords will want to renegotiate at the time of renewal.
When it comes to lease negotiations – just be sure to consider all the options!
Frazier Baker, vice president of office services, and Will Barden, vice president of office services, provide office tenant representation services for Colliers International Memphis.