Many tenants underestimate the importance of reviewing their property lease and making note of any future special terms, conditions or deadlines. This is a task that should be done annually as important dates come and go and you may miss windows of opportunity that will greatly impact your business operations and costs.
The top three future dates you should know and understand in your lease are:
1. Lease Expiration Date/Termination Date
The lease expiration date is the most important item for a tenant to track. It reminds the lessee of the date they need to contact the lessor and either exercise an option to renew or give notice of intentions to vacate the property at lease termination.
The lease expiration date is especially important because this date tends to creep up on you faster than you think. As businesses grow, owners get so focused on their business and they ignore their lease termination date. Many tenants think the property manager will take care of them, however, the property manager works for the Landlord and is only interested in keeping the building leased. Letting the clock run out on your termination date means you will not have time to make choices or room to negotiate, and thus, may be stuck staying at your current location.
The prudent tenant is well aware of their lease termination date and the operations of the company. They place great value on advanced planning and understanding the real estate market conditions. These tenants know time is the enemy, so waiting too long to address space needs means it will cost you more money, you’ll have fewer options to choose from, and you’ll settle for less at a higher cost.
Knowing your Lease Expiration Date also allows a lessee to plan ahead with a move. Pre-planning in a timely fashion helps reduce costs and avoid the higher costs of any “hold over” clauses in a lease.
With location being a critical piece in the retention of employees, the lease document and its flexibility is supreme.
2. Early Termination OptionIn today’s market, tenants agree to longer-term leases, such as 10 years, because the costs of relocation, furniture and space improvements are so high.
Sometimes a company may be in the early stages of its life, knows of a big opportunity coming in 2-3 years that impacts its space needs, or maybe just a little unsure of its growth cycles. These tenants may have negotiated an option to terminate the lease early as a safety value in case business is not going as well as projected. The Early Termination Option allows for flexibility in the lease with a shortened lease term with specific written notification to the lessor and –in most cases– a financial payment.
It is imperative that you know the actual “Notice of Exercise Date” in your lease. If this date sneaks past you, the lessor will be able to collect rent from you over the full term of the lease which may not be your desired outcome. Knowing the details of an Early Termination Option helps a company’s strategic business planning and profitability.
The Renewal Option provides tenants a date by which they need to notify the landlord if they plan to renew the lease or let it expire. If you fail to respond by this date, that does not mean you still can’t renew the lease and stay in your space. However, if the building is in high demand or there are other key tenants expanding in the building, your space may be taken away from you, forcing you to relocate and find alternative space.
Although most lessors won’t commit to the net rental rate in a Renewal Option, the Renewal Option does give piece of mind to the lessee and allows time for them to have a broker look for other choices which may be a better fit for the company. This market knowledge gives the lessee leverage to negotiate a potentially better economic deal for themselves at renewal time.
Ron Scholder, SIOR
RScholder@Ackerberg.com
612-924-6425
“If you have any questions about your lease, or how any of these items could affect your business, please don’t hesitate to contact me. I’d be happy to listen to your situation, understand the problem and help provide assurance you make the right real estate choices for your company!”
If you realized how powerful your thoughts are, you would never think a negative thought.