This is a transcript of an episode of the LeaseSmart Podcast.
Craig: This week, I’d like to talk about obsolete lease business models. What I mean by that is in the old days businesses moved a little slower. They knew more what their needs were and they could do longer-term leases in a more predictable fashion.
Today, with the speed of technology and change and everything that’s going on, I’m not sure that long term leasing, a fixed number of years with no flexibility, I’m not sure that works. In fact, I don’t think it does work. Even more so, I personally can’t think of a single industry that is not prime for major disruption. So I think all leases should have flexibility built into them to take care of that.
Now, obviously landlords, rightfully so, want the longest lease they can get and the best terms. They own the building/ you just pay the rent and that’s a good thing and that’s the way it used to be. I’m all for that, but it may not be practical these days.
What I would suggest is we try to find space where the landlord doesn’t have to sink a lot of money into your build out so that they can afford to give you some flexibility. There are a few ways to do this.
One way would be to have shorter term leases with options to renew. That would be the easiest thing. Or if the landlord really needs a longer term lease and that also what works for you, we can do a longer term lease but include what we would call Lease Termination or Kick Out Clause where after certain time frame, given a certain notice and certain penalties, we can get out of the lease. That can be important because of unexpected growth or the lack thereof. It could be that someone needs to buy your company or you want to buy someone else’s company. Things are changing rapidly one way or the other and you can’t stay in the space.
A Kick Out Clause can be a very good thing. We’ve put them into leases before not expecting we’d need them. And a few years later we were very glad they were in there. No one had any idea that a few years down the road this thing would have happened and now we need to kick out of that lease. By the way, landlords and their lenders get involved in this. The lenders are pretty concerned about the status of the tenants in the building and refinancing. It is somewhat of a hoop to jump through but it’s very doable.
If the Kick Out Clause doesn’t work, or to be used in addition to a Kick Out Clause may be an Expansion Clause. It would say, “We rented 10,000 square feet but if it turns out we need 15,000 or 20,000, then the landlord agrees to allow us to expand inside his building. If this is a big high rise with a bunch of spaces and you give the landlord enough notice, this is fairly doable. The landlord shouldn’t mind because you will move into a bigger space under an extended lease term so this is a good thing. Sometimes I’ve seen it where the probability is pretty high that we need more space so we might rent 10,000 square feet but we also might have the adjacent 5,000 square feet kept available for us. The landlord agrees that they will lease that to another tenant no longer than the date that we might need it so that we can have it if we want it. That would be another example of an Expansion Clause.
Then if the landlord cannot give us the space that we need in his building he allows us to terminate that lease and we go elsewhere because we have a business to run. Now, why would the landlord do this? It depends on the state of the landlord at the time. If the landlord has a big building with a lot of vacant space and you’re going to absorb a lot of it, in this case we were taking nearly a full floor, then they’ll bend over backwards to accommodate you. The landlord might be thinking that the chances that you’re really going to trigger this Expansion Clause are small.
Again, it depends on who put how much money into the space and is that space fairly functional for future tenants or not. So that would be another clause that would give you flexibility. There are a few other clauses but these would be the main options. The main point of the story is a modern lease, especially with fast-growing and high-tech companies, should have some flexibility built in. Even older companies, your industry maybe ripe for disruption, you might be pretty surprised here in a few years of something that comes along. I’m sure the taxi drivers were caught by surprise by Uber, etc. You know with artificial intelligence, virtual reality and robots, I personally cannot think of a single industry that is not ripe for some major disruption, so I’d start building flexibility into my leases.