Because your company’s future space needs are uncertain, renewal options for an office lease can be quite helpful. However, some landlords may be reluctant to grant such options, because doing so limits their flexibility to market the space to prospective tenants.
If the landlord is amenable to a renewal option, try to get the option rent at a fixed pre-determined price. If you can, avoid the renewal options that are based on “fair market rent.” Here are the key issues for renewal options:
- How many option terms can you get?
- How long is each option term?
- What is the rent for the option term?
- How much notice do you have to give in advance to exercise the option? (The shorter, the better.)
The length of the lease has a significant impact on the rental rate. Landlords typically like longer term leases and are more willing to make concessions for such leases. With a long lease, the landlord enjoys the financial security of a regular rental stream over a number of years. And the landlord can avoid the hassle and expense of re-leasing the space.
From the tenant’s side, a long-term lease has both benefits and risks. The benefit is knowing that the premises are available at a predictable cost for the long term. The risk is that the company may outgrow the space, may need less space as its business contracts, or is locked into paying what turns out to be above-market rent if demand for rentals subsequently declines.
If you can get it, the best of all worlds is a shorter-term lease with renewal options. You are usually much better off getting a 2-year lease with four 2-year renewal options rather than getting stuck in a 10-year lease.
Regardless of why you want to break your lease — you want to move to another location, you can’t afford the rent, the people upstairs are too noisy — you’ll want to refer to your contract. Terms in any lease are likely to vary from one county to another, but you can still follow some general rules.
Here are a few to consider:
Renegotiate with your landlord. If you can’t fulfill your terms of the lease, you’ll need to try to renegotiate with the landlord. It is, after all, in the landlord’s best interest to be paid what is contractually due. However, you might ask the landlord to terminate your tenancy so that you’re no longer liable for future fees. Also, you could ask your landlord if you can find a replacement tenant in exchange for a release from your financial obligations. Offering to place an ad in your local newspaper is one way to demonstrate your goodwill.
Get it in writing. If your landlord does agree to release you from your lease, make sure you get this in writing. You’ll want to make sure, for instance, that the landlord signs a new lease with the new tenant. Hold on to the paperwork for at least three years. It is advisable to consult with an attorney on this point.
Consider subletting. If your landlord is stubborn and prefers not to renegotiate, consider subletting the space to someone else. Again, make sure you get everything in writing and consult with the landlord so that you know what he or she expects from this new arrangement. Remember, your name will still appear on the contract, so you could be liable.
Open your wallet. If you do break a lease in the middle of the term, be prepared to pay for the remaining payment, or, in lieu of that, a penalty for breaking the lease. Just because you don’t want the space anymore doesn’t mean that the landlord doesn’t want his or her money. Remember, when you signed the lease, you made a promise. This might all sound very simple and obvious, but often even the most well-meaning entrepreneurs forget that their vendors are in business, too.
Conduct some intelligence gathering. Once you inform the landlord that you plan to break the lease, find out what you can about his or her efforts to find a replacement tenant.
Consider the penalties. It may be easy to ignore a piece of paper, but a signed contract is binding. A standard penalty may mean forgoing your security deposit and paying the remainder of the rent owed until the landlord finds a replacement tenant. And don’t forget: word travels fast — a bad reference from a landlord or just a disparaging word about your ethics could impact your opportunities for renting new space, especially if you want to relocate nearby.
Invest in some legal advice. It doesn’t take long for an attorney to review a lease, so make the wise choice by investing in some legal advice. It could save you a bundle in the long run and you’re likely to learn something that you’ll be able to use in the future.
Take notes. You may be out several thousands of dollars for breaking a lease. That’s the bad news. The good news is that this doesn’t have to happen again, especially if you keep good records — a solid chronology of events. For example, if the main reason you’re leaving the property is because of space limitations, be particularly cognizant of your square footage needs the next time around. If you missed a specific clause in the leasing contract, one that will heavily impact your wallet, make sure that the next document you sign has been carefully reviewed.
International Tenant Representative Alliance