What Options Do I Have?

Probably one of the great existential questions of life – right? However, in order to ensure flexibility in their corporate existence, many commercial tenants insist upon other types of options - such as, renewal, expansion and early termination - being incorporated into their Lease Agreements.

In order to make certain a tenant can remain in its space at its building, a renewal option just makes sense for long-term planning. While the tenant doesn’t have to commit to a longer term up front, it has the right to remain in the space for an extended term by providing notice to the landlord (usually between 9 and 15 months) prior to the end of the initial term. An expansion right (the two most common are called a Right of First Offer and a Right of First Refusal) gives the tenant the opportunity to expand in a building in the event that its business increases. Finally, given appropriate negotiating power, a tenant may be granted a right to terminate a Lease early by paying the landlord’s unamortized costs or some other agreed upon amount.

Landlords, however, are reluctant to grant options, as they restrict the landlord’s ability to freely lease available space in its building, and, frankly, they're hard to keep track of. Unless a landlord has a proven method of tracking outstanding option rights in its building, it could easily overlook an option and find itself in default of the Lease for failing to properly notify the tenant. Since an option solely benefits the tenant, who can blame a landlord for hesitating to grant them?

Given the landlord's reluctance to grant options, it is important to recognize certain points that apply to most options and address them at the Letter of Intent phase:

· They are considered a business term which should be set forth in the Letter of Intent or a landlord is unlikely to agree to provide one in the Lease.

· An option is often limited to the named tenant. You can often negotiate that it may also be exercised by an affiliate or certain types of transferees.

· Options are often conditioned on the tenant being in possession of the entire premises. Thus, the sublease of all or a portion of the underlying premises may negate an option. Many tenants will negotiate that they may lease some portion of the premises, such as up to 25%, without voiding the option.

· Finally, a tenant default will frequently nullify an option. The negotiated response is that an “Event of Default” (beyond applicable notice and cure periods) cannot exist at the time the option is exercised and at the time the option takes effect.

Whether or not a tenant is able to negotiate the inclusion of any or all of these options in a Lease is heavily influenced by the respective bargaining powers of the landlord and tenant. Bear in mind, however, that even though options are often one of the most negotiated provisions in a Lease, in practice they are rarely applied as drafted. Instead, the parties often renegotiate the terms at the time of the exercise (or well before then if there are pro-active brokers involved).

Knowing which options may help your client and how to negotiate the specific terms are just a few ways you can assist your client when negotiating its Letter of Intent and Commercial Lease. If you or your client are looking for experienced commercial real estate attorneys to help with the lease negotiations, give the lawyers at Oliveri & Tammadge, LLC a call.