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Negotiating the Best Commercial Office Lease: Relocation Clauses

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You’ve found a great commercial office space rental to house your business operations and, with a great tenant representative (like we have at OfficeFinder) and any other needed advisors such as legal and accounting counsel; you are deep into the process of negotiating the best possible office lease for the office space location you want and need. At this point in the negotiation process take care to identify any relocation clause in the office lease and analyze how it could potentially impact your organization’s operation and earning potential.

What exactly is an office space relocation clause? This provision is contained in some, but not all, commercial office space leases, and gives the landlord the right to require the tenant to relocate their office space within the same premises in order to provide space for another tenant’s needs. Upon learning about this clause, you are very likely to say, “How very unfair to me and my firm!” and most tenants would agree. Keep in mind that most provisions in any lease tend to protect and be in favor of the property owner. For this reason, working with an experienced commercial office space tenant representative is important to protect your interests.

In an ideal situation, the landlord will simply agree to completely remove any office relocation clause in the office lease provisions. Some landlords, however, simply will not completely remove this verbiage, and then very clear, legally binding provisions must be negotiated to protect financial losses and periods of inability to effectively conduct business on the part of the tenant. It can be especially difficult when the property owner attempts to insist on keeping the verbiage “at the sole option of the property owner”, allowing the office tenant no right to refuse the request to relocate without terminating the lease at substantial penalty.

A scenario in which the landlord’s flexibility provided by the office tenant relocation clause could be invoked is a building consisting of three floors of 4,000 square feet of useable office space each. The first floor is currently empty and Tenant #1 leases 3,000 square feet of the second floor; the third floor is occupied by Tenant #2, a smaller office requiring only 700 square feet. A new tenant offers to lease 8,000 square feet of commercial space, but only if the office space can consist of the entire first and second floors. Clearly there is space on the third floor for both Tenant #1 and Tenant #2. Due to the much larger rental income from the potential new tenant who desires 8,000 feet of space on two floors, the landlord would find it most advantageous to require Tenant #1 to move to the third floor, sharing that floor with Tenant #2 who will not have to relocate. Of course, Tenant #1 may be very unhappy to uproot and relocate. If the lease were negotiated to avoid financial impacts to Tenant #1, the move might only be an inconvenience instead of a total disaster.

Points to be included in the negotiations for the relocation clause of a commercial office space lease you are considering for your enterprise should include:

  • A reasonable notice period should be defined in the relocation clause to be used as a minimum guideline.
  • The landlord should bear all costs caused by the relocation, including but not limited to finish work, painting, and moving costs.
  • Office space tenant improvements completed in the original space at the cost of the renter should be redone in a comparable and agreed upon manner in the new location at the cost of the property owner.
  • Costs associated with relocating utilities and other services such as network wiring should be borne by the landlord.
  • Expenses incurred due to changing the business address, such as letterhead, business cards and signage, including those visible on the exterior of the building, interior doors and directories, and outdoor signs, should be paid by the landlord invoking the relocation clause.
  • The relocation should not stop the company from doing business in that the space in which the company will move should be completely ready before the date of the relocation.
  • If the space is less desirable for any reason, the tenant should have the right to terminate thie office lease, attempt renegotiation of the rental charges or receive some type of incentive for relocating.
  • There should be no verbiage stating that the landlord has the right to terminate the lease should the tenant not agree to relocate. It could be in your best interest to negotiate verbiage stating that you have the right to terminate without penalty should you choose not to relocate into the space offered.

Clearly, this area of a commercial office lease can be quite tricky to negotiate. Your real estate professional will help you work with the landlord to obtain a relocation clause that both parties can agree to, should such clause be required by the landlord.  

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Office Leasing Tips , Office Relocation , Office Rental , Office Space Negotiations

US Office Space Markets are Showing Modest Improvement

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The CCIM Institue has come out with their market analysis of the commercial real estate sector and it calls for very modest growth in the office space sector (full discussion below). Slower employment growth, as would be expected is the main culprit.

"Office Space: Office markets are showing only modest improvement. Office employment has increased 2.2 percent during the past year, compared to average growth of close to 3.0 percent during the past cycle and well over 4.0 percent during second half of the 1990s. Moreover, firms continue to find ways to squeeze more workers into fewer square feet. Even with modest growth, net absorption has risen for five consecutive quarters, but growth is exceptionally modest by past standards. With little new construction, vacancy rates have edged lower, falling 0.4 percentage points over the past year to 17.2 percent, according to Reis.

While the overall market is seeing only modest gains, there are a few pockets of strength. Major technology centers, including the San Francisco Bay Area, Seattle, Austin, and Raleigh, N.C., all continue to see strong demand. Rents have grown the most in the San Francisco Bay Area and New York, which is also increasingly driven by the tech sector.

Despite the sluggish pace of recovery, office property sales have increased this year. Properties in key technology centers, areas with a great deal of exposure to healthcare, and a few major energy markets, such as Houston, continue to outperform most other major markets. New York appears to be successfully navigating the slowdown in the financial services industry and is seeing an influx of technology jobs. Washington, D.C., however, has seen demand for space and buyer interest wane as continued anxiety and uncertainty about the federal budget has sent chills through market. The suburbs of Washington, D.C., are faring better with the tech sector fueling gains in northern Virginia and healthcare driving gains in suburban Maryland and Baltimore."

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Commercial Real Estate , Manhattan Office Space , New York Office Space , Office Space Negotiations , San Francisco Office Space , Seattle Office Space , Washington DC Office Space

Negotiating the Best Commercial Office Lease: Financial Analysis

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Business transactions require careful financial analysis and commercial office space leases are no different. Whether your organization is negotiating an office lease for its first facility, relocating into a larger office space, or negotiating a lease renewal for the same facility you’ve rented in the previous lease period, a complete evaluation of the costs should be to reveal exactly how beneficial the current negotiating position is to the future of the company as well as to compare options.

By this point in the commercial office property lease negotiation process, you should have already selected a real estate professional, a tenant rep, to assist you in obtaining the best possible office lease. Property owners, of course, want to realize as much money from their real estate investment as possible while you, as a business owner, want to secure an appropriate venue for your firm at the least possible cost. Experienced OfficeFinders are office space lease negotiators and know exactly how to analyze the cost of occupying the commercial space so that there are no unpleasant surprises in store for you.

You may have found what appears to be the perfect location for your business and, at first look, the lease costs appear to be a fair deal. Comparing the lease cost of the selected office space to the cost of other available properties in the same market area will strengthen your negotiating position and allow you to establish a final lease agreement that is beneficial to your company.

The real estate professional acting as your lease broker will include in the financial analysis each and every cost identified in the lease document as being your responsibility. These will include but may not be limited to:

  • Rent per square foot
  • Useable square feet available
  • Operating expenses charged to the renter
  • Caps on rent or operating expense increases
  • Provisions for reduced rent due to damages or other circumstances
  • Tenant improvement allowances
  • Value of parking
  • Incentives for lease renewal, longer lease term, expanding rented space, or early payment of rent
  • Cost of utilities paid by renter
  • Penalty for early lease termination if necessary
  • Cost of adhering to any applicable county, state and federal regulations
  • Repairs and maintenance required to be paid by renter
  • Common area maintenance, repair, upgrade
  • Charges to renter associated with security and cleaning services defined and selected by the landlord

Computer software applications make accurately calculating and comparing the total cost of rental easy. It does requires trained professionals to understand the complex lease terminology and translate this into accurate dollars and cents to be able to use in making your office space decision. If any areas requiring further negotiation are identified as a result of the financial analysis, you will be prepared with documented reasons for requests in lease changes. The assistance of a commercial office lease broker can save your company thousands of dollars.

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By: James Osgood

Office Relocation , Office Space Negotiations , Tenant Representation

The most Expensive Office Space in the World

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Hong Kong $248.83 per square foot

London - Central (West End): $220.15 per square foot

Tokyo  $186.49 per square foot

Beijing (Jianguomen — central business district): $180.76 per square foot

Moscow: $171.53 per square foot

Beijing (Finance Street): 166.89 per square foot

Hong Kong (West Kowloon district): $158.72 per square foot

São Paulo, Brazil: $144.75 per square foot

New Delhi (Connaught Place — central business district): $140.21 per square foot

London - Central (City): $131.51 per square foot

Midtown Manhattan average only $114.30  per square foot. What a deal!

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London Office Space , Office Rental , Office Space , Office Space Negotiations , Tokyo Office Space

When Disaster Strikes Your Office Space

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When Disaster Hits, You Want to Know What your Commercial Office Lease Outlines

Disasters do happen. Hurricanes, tornadoes, earthquakes, wildfires, mud slides – every building in every location is subject to one or more potential natural disasters. And then there are the disasters that are the fault of man – a truck can drive into your office front, another tenant can cause a fire due to neglect, or faulty workmanship can result in plumbing pipes bursting or any of several other major disasters.

Major disasters are likely to make your commercial office space uninhabitable for a long or short period of time causing major impacts to your cash flow and the lives of your employees. Even a minor disaster can cause your business to be impacted for days at a time. More importantly, who is responsible for fixing what damage in the event of a disaster not caused by you or your employees’ neglect?

The time to learn the answers to these questions is not after the disaster has occurred. You should discuss and review these areas of the lease and negotiate if needed to obtain lease provisions that will protect your business. You’ll also want talk with your insurance agent and go over policy clauses in view of the impacts of disaster on your business.

Rent Abatement:

A common but tricky provision in commercial property leases is rent abatement. This provision states that in the event the property is damaged the landlord will allow the tenant to suspend paying rent until the property is repaired. Some damages covered may include fire, flood, and common natural disasters such as tornado or earthquake, as well as any forced evacuation due to mandate of the city or county government. The landlord’s business liability insurance may provide coverage that will permit the owner to offer rent abatement. Items inside the business are usually covered by the business owner / leasee’s liability or renter insurance.

This all sounds straightforward but problems can arise when landlords include an addendum to the lease’s abatement provision that says if the tenant or tenant’s employee caused the damage, the abatement is nullified and rent must continue to be paid on-time. With this type of addendum, landlords can double-dip by continuing to get rent from you while still collecting from their insurance company.

This portion of a commercial lease requires sitting down with your tenant representative and possibly your attorney. Be sure the lease does not put undue liability on your business.

Insurance Clauses:

Perhaps the least understood points in a commercial lease are the provisions regarding insurance. Often, at least to an extent, the tenant may be self-insured. This fact, when found out the hard way, can be financially bankrupting. The Chairman of the ITRA, Dr. Ronald R. Pollina, explains that corporate tenants should consider these questions when negotiating or reviewing leases:

  • What is your risk exposure in the event of liability or injury?
  • If your leased space can’t be used because of injury, loss of utilities, or casualty, are you still obligated to pay rent?
  • Are you or the landlord responsible for the cost of relocation in the event of a business interruption?

Keep in mind that most leases are designed to protect the landlord from losses. You can expect to carry property damage insurance, liability to third parties, bodily injury, and business interruption insurance.

There are many more insurance considerations and these should be discussed with your tenant representative and insurance agent. Protect your business in as many ways as practical and affordable so you don’t get stuck having to spend money over something that could have been avoided through wise lease negotiations. 

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Office Leasing Tips , Office Space , Office Space Negotiations