Since the pandemic struck, conversations return to the same topic: will working remotely mean commercial tenants will need less space coming out of COVID-19. The quarantine period has educated employers about their employees' ability to work from home. Many employees are able to perform their jobs equally well from home as their workplace. Employers realize they may not need as much leased space if 20% or more of their personnel work remotely, and have begun to consider reducing the square footage they rent: "I have 4,000 square feet, but I only need 3,000;" "I want to reduce my 30,000 square feet to 25,000 or 20,000 square feet;" etc. That prompts follow up questions: "Do I have the right to reduce my space in my lease? What are my options?"
Tenants have the most leverage when looking for new space, but for some companies, that could be years from now. If you are not looking for new space, and want to reduce the footprint and monthly cost, here are some suggestions for doing so within the terms of your lease:
- Early Termination Clause: Some leases have clauses permitting termination before the expiration of the term if certain conditions are met (e.g., the property no longer satisfies the tenant's purpose, the passage of a certain number of years, etc.). Review your lease to see if it has an early termination clause, how you exercise a termination right, and whether there are requirements to exercise such right, such as a termination fee that might make an early termination less appealing.
- Sublease: Nearly all leases have sublease clauses governing the subletting of all or part of the premises. You may be able to work with a broker and the landlord to find an acceptable subtenant to sublease part of your space for the remainder of your term. When considering subleasing options, review the requirements in your lease carefully, as some leases require tenants to satisfy specified criteria before they can sublease their space (e.g., the subtenant must have a financial status as good or better than the tenant, tenant exclusivity rights in other leases restricting a subtenancy, etc.). Some clauses are very restrictive, requiring the landlord's prior written consent which may be withheld in landlord's sole discretion, for example. And some clauses allow the landlord to terminate the lease if a certain percentage of the leased premises is to be sublet. Reaching out to the landlord prior to engaging a broker is recommended since landlords prefer to know what's going on with a tenant before being given notice of a request to consent to a sublease.
- Automatic Renewal Terms: Some leases have total terms that last 10 or more years, but that are broken up into a series of shorter initial terms with automatic renewals unless either party notifies the other of its desire not to renew the lease. Review your lease to determine if it contains an automatic renewal term. If so, you may be in a position to send notice of termination to the landlord before an established date. If that is the case and you wish to terminate the lease rather than extend it, confirm the procedure to notify the landlord that you will not renew: where to send the notice, the required contents of the notice, the timing required for the notice, etc. Do pay particular attention to the timing of the notice as some automatic renewal clauses have a set period within which the notice may be sent, such as no earlier than 9 months or less than 6 months before the end of the then-current term. Being too early or a day late allows the landlord to reject the cancellation notice.
- Options to Extend: If your lease contains an option to extend that is coming up in a year or so, you may consider talking with the landlord now about extending the term but with less space. While the option clause may not grant that right, simultaneously looking for smaller space in the event the landlord declines to reduce the space affords you the opportunity to locate alternative space and possibly secure it under a letter of intent that you may use as leverage in your negotiation with the landlord.
- Negotiating Smaller Premises: If none of these options are available to you, but you know that you want to remain in your current location, albeit with less space, you can try to negotiate that with your landlord. In exchange for reduced square footage now, you agree to extend the term of the lease.
Tenants are in the best position to dictate their square footage when entering into a new lease or renewing an existing lease, but even under existing leases, they might have options to reduce their square footage. If you believe you or your organization is stuck in leased premises too large for your needs coming out of the COVID-19 pandemic, consider the suggestions above or consult with a McLane Middleton real estate attorney to discuss your options.
Originally published 17 June 2020
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