The New Normal of Commercial Leasing
Given the constantly evolving market in the commercial office sector, there are always considerations for landlords to keep in mind as they enter into new leases. Or perhaps a lease is up for renewal or extension, and the original agreement came under vastly different local market conditions. A number of these terms seem to be garnering recent attention and should certainly be part of the discussions and negotiations when looking at commercial office leases. Many renters remain interested in tenant improvements to their planned office space and continue to look for landlords to assist in paying for those improvements. It could be to fund an initial buildout or to freshen up stale space at the time of an extension or renewal. Sometimes a tenant will ask a landlord to provide cash allowances to tenants who then complete their own improvements, but many times the landlord will be asked or will choose to the complete the work themselves. In either situation, the lease should be clear as to what the allowance amount will be and how and when it may be used. In the cases of tenant-completed improvements, issues to consider range from the approval of tenant contractors to insurance requirements to mechanics’ lien concerns. If the landlord is doing the work, it would prudent to have a well-developed work letter that clearly establishes the specifications and tenant inspection rights for the work to avoid any disputes. Timing is also key. The lease should be clear as to what happens if the improvements are delayed beyond an agreed upon completion date, as most office tenants need to get settled quickly to avoid business disruption. If an allowance is provided, it is also important to be clear as to how it’s wrapped into the lease. For example, if a tenant is to repay an allowance as part of the rent, landlords should consider what might happen if a tenant defaults or requests an early termination of the lease. In the case of a default, the remedies section of many leases often provide for accelerated rent for at least some portion of the remaining term of the lease. As landlords know, these provisions can be very difficult to enforce, because defaulting tenants no longer have any resources to pay and because courts can be reluctant to enforce accelerated rent provisions over long periods of time. It’s particularly difficult if a landlord rents the space to another tenant, bringing “double dipping” into play. It might be worthwhile to consider a liquidated damages provision to establish a fixed or easily quantifiable damage amount as part of – or instead of – a pure accelerated rent provision. That can provide some better clarity for the damage amount and may be more likely to be enforced by a court than an open-ended accelerated rent provision. Another hot item in the office lease sector is the implication of assignment provisions. Historically, office tenants may have been more stable than retail, but with corporate restructuring, downsizing and reorganization happening all the time as business models around the world change at an alarming rate, the office tenant a landlord initially bargains with may not end up being there long-term. Tenants may be looking to assign a lease to a new corporate owner or perhaps a third party altogether when unforeseen changes occur. Considering these matters up front and addressing them in the lease can often eliminate future uncertainty and ambiguity. For example, if a tenant remains the same legal entity, but its ownership changes, should that trigger a lease assignment provision and therefore possible landlord approval? If a tenant wants to assign the lease, should the original tenant be fully released? What if the original tenant is going out of business or is being absorbed by merger? While incorporating these types of provisions into leases often takes some more time and effort up front, the longer term benefit can be great if – or perhaps more likely when – these issues arise. John Coles is an attorney in Barley Snyder’s Real Estate Practice Group in the firm’s new Harrisburg, PA, office.