Options: Do They Benefit Tenants or Landlords?
Options are beneficial to either the Landlord or the Tenant. Landlords want to provide the Tenant with as few options as possible to securitize the lease as strongly as possible. Many Landlords use their rent roll to securitize a refinance or sale. If a tenant for instance, has an option to terminate at the end of year three of a five year lease, then many lenders or purchasers only value the lease for three years instead of five. Many Landlords won’t offer an option to terminate for that very reason. Another option a Landlord likes is the Right to Relocate. A prestigious law firm signs a lease on the 32nd floor with amazing views of the river and granite floors in the entrance and conference rooms. Three years into a ten year lease, the Landlord has a letter of intent from a large corporation who would like to lease floors 32 to 35. The only way the Landlord can do the large deal is to relocate the law firm from the 32nd floor. The Landlord exercises their right and provides them space on the 5th floor. Is that fair? The law firm ends up moving to the 5th floor with building standard finishes. Per the lease, the Landlord had to pay to relocate the tenant but did not have to provide them comparable views or quality of space.
Tenants must demand options that will benefit them. Here are a few options that a Tenant should always have:
- Right to Expand: Tenants always want the right to expand into any contiguous space. Yes, companies try to plan for the future but for many of them, the crystal ball doesn’t always work and a couple of years into the lease they are out of space and full of lease term.
- Options to Renew: Options to renew are critical. As a company you don’t want to be stuck without an option to stay in your space at the end of the term.
- Sublease Option: The option to sublease is another important clause that provides you the right to sublease your space. What it doesn’t give you is the right to walk away from your space. Even with a sublease you are still obligated to pay the rent.