Leasing Office Space - Relocation

Relocation Clause

For example, consider a local business leasing 2,000 square feet of office space in a 1,000,000 square foot high-rise downtown office building. The landlord is attempting to lease 100,000 square feet of space to a Fortune 500 business. However, to consummate the lease they need the 2,000 square feet of space occupied by the smaller, local tenant.

You Lose

Even if the landlord pays 100% of the cost to move your business, you will incur a loss. In addition to the time spent planning and executing the move, it will disrupt your business. Relocation clauses are another issue where the interests of the landlord and the tenant diverge.

Event of Default

An "event of default" is when either party does not perform as agreed upon in the lease. In some leases, the landlord has the right to terminate the lease if the tenant defaults. This can include both objective and subjective issues. An objective issue is timely payment of rent. A subjective of issue could be a product or service offered by the tenant which was not initially contemplated.

Non-Financial Event of Default - Example

For example, the tenant put large boxes in the hallway. (Office equipment came packed in the boxes.) However, the lease and / or building rules and regulations clearly prohibit putting trash in the hallway.

Financial Event of Default - Example

Most landlords and most tenants act reasonably. However, some people are unreasonable. Consider the following example. Office space is leased at a fixed rental rate agreed upon 5 years ago. The contract rent is $15 per square foot but the market rent has increased to $22 per square foot. The lease continues for another 5 years at the same rental rate. Due to a clerical error, the tenant forgets to send a rent payment one month. The tenant has an exemplary history of timely payment for the previous 5 years.

However, this is an event of default on the lease. Instead of calling the tenant to inquire regarding the current month's rent, the landlord sends the tenant a notice of default. The notice of default informs the tenant the leases been terminated and demands the tenant vacate the premises within 30 days.

What is Reasonable?

A reasonable solution is for the landlords to provide written notice in the event of a default. The tenant should have a reasonable period of time to cure the default. This issue becomes more complex when it is not possible for either the tenant for the landlord to cure the default.

What if Landlord Can't Perform?

For example, a lease includes an affirmation by the landlord to comply with local laws and regulations. However, city council retroactively increases the parking requirements. (The number of parking spaces required per 1000 square feet of space.) This issue is being intensely litigated by local office building owners. However, final resolution of the litigation is not expected for three or four years. Should the tenant have the right to terminate the lease in this situation?

Dispute Resolution

Most office space leases address the venue for resolving disputes between the tenant and landlord. In most cases, the venue is state district court in either the location of the office property or where the landlord is headquartered. The former is prevalent. There's a growing trend to require binding arbitration for disputes. The advantage it is a less expensive process to resolve differences of opinion. The disadvantage is forgoing some of your rights for a process which can be even more arbitrary than state district court.

Right to Terminate

Finally, tenants should consider providing themselves an escape clause. When starting a business, a high level of optimism and the excitement is typical and understandable. However, the actual business results sometimes fall short of what was expected.

Right to Terminate - Example

For example, assume you had expected sales of $80,000 per month for your business and thought the very lowest level that could possibly occur would be $20,000 per month. Even though the $20,000 per month seemed like a very pessimistic scenario, you were comforted that the business would be profitable at this level. At least you'd be all the pay your expenses and pay yourself a barely adequate salary.

Example Continued

Unfortunately, the pessimistic scenario turned out to be wildly optimistic. For whatever reason, the business is only generating sales of $6000 per month. This is inadequate to pay your cost of operations.

What Rights Should You Require?

Should you have a right to terminate your five-year lease in this scenario? If you do terminate the lease, what is a reasonable amount to pay for expenses incurred by the landlord?

Beware of the Consequences

Although termination clauses and personal guarantees may seem like an arcane nuance when negotiating the lease for your new business, they are critical factors. If you personally guarantee the lease and do not have an option to terminate the lease if your business performs poorly, in a worst-case scenario you are faced with personal bankruptcy or funding an operating deficit for a long period of time.

Conclusion

This concludes the article on leasing office space. By defining your office space criteria, selecting an experienced broker and carefully negotiating the lease, you have reduced the time to find space and negotiate the lease. In addition, you will have mitigated your exposure in the event your business is not successful.