Real Estate Insights: Seeking Greater Flexibility in Leases

A Lease Is Not A Straitjacket

Nowadays, the combined effects of the growth and downsizing of companies, along with mergers and split-ups, have made real estate management an increasingly complex business.

Such organizational realignments translate directly into changing needs in terms of work space. Today, a company can substantially reduce the amount of space it leases by changing the configuration of its offices. To do this, an adequate degree of flexibility must be integrated in the lease contract.

When negotiating a lease or an offer to lease, it is important to obtain provisions that will allow for the expansion or reduction of space, or even for the cancellation of the contract.

When it comes time to trigger these rights, the parties are frequently surprised to discover that some clauses are ambiguous or silent on a number of important items. For example, when a company exercises a space reduction option, there is usually a penalty to be paid by the tenant.

The penalty includes the non-amortized portion of certain costs initially assumed by the owner in the leasing transaction:

  • What are these costs composed of?
  • How are they calculated?
  • What is the amortization period and its applicable interest rate?
  • When is the penalty payable?

While the answers to and the interpretations of these questions may vary, one fact remains: companies need more flexibility in their lease conditions, and owners are generally not inclined to grant that flexibility.

Depending on the market’s or building’s vacancy rate, the current economic situation might not favor tenants.

This is a classic example of “If you don’t ask, you don’t get”. What else could you be missing out on?


If you would like to learn more, feel free to connect with us:

Stay in touch with our newsletter