Good news, you have located a strong tenant that wants to lease an entire floor of your office building. Bad news, the floor that they desire to lease only has about one-quarter of the space vacant, with the remainder leased by other tenants. No sweat – like all good landlords, or brokers, you can solve this puzzle. Before you can decide where and how to place that first puzzle piece, however, you must first lay out your pieces to visualize the final picture of the completed puzzle.
Do the leases for the current tenants contain relocation clauses?
Once you have identified the ideal space for the prospect and alternative space for the current occupants, you should determine whether a legal right exists to relocate the current occupants. Many office leases in today’s climate contain clauses that allow the landlord to relocate the tenant to a different premises within the building while protecting the rights of the tenant to maintain an office space that meets its needs. As many office markets continue to heat-up, landlords and their agents are particularly focused on maintaining flexibility within the building by including key relocation rights for the landlord. A review of the exact lease language is necessary to pin down the details of the proposed relocation. The following factors should be considered prior to invoking the right to relocate an occupant: 1) restrictions on location within the building or size of substitution premises; 2) the length of the required notice period (a minimum of a 60-day notice period is typical); 3) the cost to the landlord to move this tenant (including construction of improvements and payment of moving costs); and 4) perhaps most important, whether this tenant has the right to terminate its lease if the substitute premises does not comply with the stated restrictions or if the tenant simply does not approve of the substitute premises.
Do any other tenants have rights to space on the floor?
It is important to look beyond the current lease terms for the current tenants in the targeted space. Review other leases for the building to confirm that there are no rights of first refusal, rights of first offer or expansion rights to any premises on that floor. If so, you will again need to pin down the details of how to proceed to eliminate those issues as a road block to landing your strong new tenant. This will include complying with written notice requirements and should include obtaining written confirmation of a waiver of those rights from the applicable tenant.
The new tenant’s lease.
Now that you have a plan for who goes where and when, it is time to translate the plan into a new lease for your new tenant. Often, some of the pieces of your puzzle are still shifting into place as you begin negotiating the lease. It is critical, however, to have that “picture on the front of the box” in focus before you finalize the lease so that all contingencies and risks can be addressed. The lease must take into account the timing and details of all of your moving pieces including 1) the scope of the improvements to be constructed for the new tenant; 2) whether the space will be vacant and available as a whole or in stages; 3) whether any of the current occupants you must relocate present more of a challenge (such as a tenant in holdover status or a tenant in default) which may lend more uncertainty to the timing; and 4) whether the improvements can be constructed in phases. The body of the lease and the work letter can work together to map out the timing and process for getting this tenant in their brand new space. The lease language should also account for the consequences if delivery of the premises is delayed beyond the promised date. While this is true for most leases, this element becomes critical when dealing with so many moving parts. If the new tenant needs new space quickly, the tenant may request termination rights if the new space is not delivered on time or ask the landlord to pay holdover penalties that the tenant suffers under its existing lease. The landlord should negotiate for as much flexibility as possible in delivering the premises to the new tenant and understand the scope of the consequences for a delay.
With careful planning and consideration of the legal issues in play, you have mapped out a plan for welcoming a great new tenant to your office building and maintaining a healthy relationship with your existing tenants. You are now ready to execute on that plan as you watch the pieces of your puzzle snap into place.
Originally published in the Colorado Real Estate Journal.
ABOUT THE AUTHOR
Thomas M. List
Jennifer L. Stenman
Co-Chair, Real Estate Section