One Small Mistake Could Cost You Millions
Commercial leases often contain dense language that makes it difficult to navigate the details spelled out in the contract. In today’s rather sophisticated commercial real estate industry, overlooking even the smallest detail in the lease negotiation process can have adverse effects on your final lease agreement. Hiring and retaining the right representation during these proceedings will be important in the long run so you avoid mistakes that could result in surprise costs.
When should you start considering your real estate options, i.e. renewal or relocation?
You should allow yourself between 12-18 months lead time to explore all viable options so YOU have control of your commercial real estate matters and not the other way around. This timeframe gives you enough time to perform all the necessary steps to ensure your new space will be in line with your operational goals. Typical steps include:
- Touring the market;
- Creating a short list of your preferred sites;
- Performing the necessary proposal process and negotiating Letters of Intent to any would be qualifying options;
- Having your real estate representative run financial analysis models comparing short-listed spaces with your operational goals;
- Putting together a detailed space program/space plan;
- Negotiating a lease with review from your legal counsel; and,
- Moving forward with construction documents, permitting and construction should your selected option include project management services.
Since some commercial leases can last, for example, for five or ten years, it’s easy to put the real estate process to the back of your mind and forget about it. But what happens if you’ve waited too long?
What happens if you don’t find a new space by the time your lease expires?
In not so rare cases, if you’re unable to find a new space before your lease expires, you may become a “tenant of sufferance,” or holdover tenant. Holdover tenancy means you’ve remained in your space after your lease has expired with the permission of the property owner/manager with all the original lease conditions being met, including your obligation to paying rent. On the one hand, this option could buy you a little more time to find another adequate space, but beware! Your landlord could also negotiate a 200% or more holdover rent structure meaning you’d end up paying more than the original rent amount under the previous agreement. Although an experienced occupier representative can help mitigate some of this impact and lower the percentage considerably, it can will be very costly to you.
What are the consequences of being a holdover tenant?
Here is where it gets tricky: Most landlords add a “consequential damages” clause into your lease. This means if you’ve remained in the space after your lease expires and the landlord has already secured a new tenant who’s ready to move into the space, you’ll be on the hook for any potential lost monies that are a direct result of your occupancy. Your tenancy could inadvertently forsake the landlord’s new lease agreement with another occupier and end up costing the property owner if the deal is voided.
If you have language in your master lease allowing the landlord to pursue consequential damages, you’ll have a much bigger problem than you originally thought. You could potentially be tied up in litigation while your landlord pursues all of the monies he would have gained had he been able to move the new occupier into the space. As a holdover tenant, you’d be made wholly responsible for all of the lost rent plus attorney fees.
What can you to do avoid being a holdover tenant?
If you have more than 18 months left on your lease, message me! My team and I will review your lease and create a lease abstract at no cost to you. A lease abstract is a one- to two-page document highlighting all the important details relating to your lease. It will examine things like holdover, renewal options, Right of First Offer to expand and will determine if there’s any consequential damage language in place and what it could mean for you. This will also help you identify which aspects of the lease you may wish to renegotiate with your landlord upon renewal time.
If you are less than a year out from your lease expiration, contact us immediately. Time is of the essence. We can still effectively help you navigate your commercial real estate needs and help you make the best decision to avoid becoming a holdover tenant.