Do you know one of the greatest challenges facing even the most successful business owners when it comes to commercial lease negotiations? Surprisingly, it's effective planning for the future growth and expansion of their business. In the fourth year of a five year lease business owners are facing the realization that they may have to pick up and move in a year or less; disrupting not only their business but the entire culture and climate of their organization.
What can you do? When negotiating a lease, two ways to prepare for this growth and avoid the disruption to the business are Rights of First Refusal and Options on adjacent space. We'll discuss the distinction between these two commonly overlooked lease provisions and ensure that your next lease negotiation properly addresses the future space needs of your company.
The first lease provision to consider is a "Right of First Refusal" on adjacent space in the building. This gives the tenant the ability at a time in the future to match a third party offer to lease adjacent space ensuring the tenant's future expansion can be accommodated. The way this works is that upon receipt of a bona fide offer from this third party, a landlord must give the tenant the opportunity to match the offer prior to accepting it. The benefit of this is that you have the ability to match any other company's offer to lease space that you may need in the future for your business. The drawback is that you may have to make this decision at a time when you are not ready to expand and may have to refuse the space thereby opening the door for the third party to lease space you were hoping to occupy at a future date.
The second commonly overlooked lease provision is the "Option" to occupy adjacent space. The way this works is that rather than having to match a third party offer for adjacent space, you are given the "Option", for a specific period of time; typically a few months to several years, to occupy adjacent space at a pre-determined rental rate. The benefit of this provision is that the adjacent space is effectively off the market to other companies during your option period and waiting for your future occupancy. The rental rate for the option space is commonly set at the same rate as what you are paying for the rest of your space but can vary depending on required improvements and other deal specific factors. A drawback to this type of lease provision is that options typically require some sort of monetary exchange such as a non-refundable deposit or option fee. In order for a landlord to agree to take vacant space off the market for a period of time, a fee is typically paid to offset some portion of the forfeited rental income and as good faith that you intend to exercise the option on the adjacent space. You should be fairly certain that your company will require the additional space before paying any option fees since these fees are typically non-refundable in the event you do not exercise your option to occupy the additional space.
Commercial leases are complicated legal documents. Since leases are typically drafted by the landlord, you should always consult a real estate professional and/or attorney when negotiating a commercial lease. The above-mentioned provisions are just the tip of the iceberg when it comes to executing a lease for professional, industrial, or any other type of commercial space. A poorly negotiated lease can mean the difference between years of efficient, planned growth and several thousands of dollars in unanticipated moving expenses.
About the Author
Rob Beland is the VP of Sales at Apex Properties with a focus on the sales and leasing of commercial real estate throughout Leominster North Central Mass. Apex Properties helps investors and business owners to build wealth and expand their business through commercial real estate investment.
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