by Thomas M. Rickart – There are many issues to be addressed when entering into a Commercial Lease but one of those issues is a determination of the duration of the lease. Not surprisingly, this is an issue upon which landlords and tenants may frequently differ. Landlords will generally be motivated to lock in a tenant for a longer initial term in order to have the benefit of sustained rental stream. Long term leases with credit worthy tenants ensure operating income which enhances value to the landlord, whether for resale, financing, or simply for long term investment purposes.
While a tenant may also be interested in locking up the leased premises for a long term in order to provide operating stability, the tenant may have other concerns, particularly if it is a start-up business. Committing to a long lease term may be a financial risk for a new business without a proven track record, or even for an established business opening in a new location. Therefore, it is often a better strategy for a tenant to seek a shorter initial term and supplement that with provisions that provide for an extension or multiple extensions of the lease term at the tenant’s option. While this structure may be less desirable for a landlord, most landlords are amenable to option period extensions, particularly if coupled with rent adjustments.
Another means of dealing with tenant uncertainty is for a tenant to negotiate an early termination provision. This can take multiple forms but generally involves an option on the part of the tenant to walk from the lease prior to the expiration of the entire initial term either upon providing a generous advance notice, or more often upon payment of a termination fee designed to address the landlord’s carrying costs required to refit and re-lease the premises. While not ideal for a landlord, an early termination arrangement is generally preferable to the uncertainty of a tenant vacating or defaulting without notice, and the resulting enforcement costs.
Whether you are a prospective landlord or tenant, make sure to discuss the lease terms with your attorney prior to signing anything in order to ensure that you fully understand your alternatives and their consequences.