This is a transcript of an episode of the LeaseSmart Podcast.
Bradley: I know that you’re here in the battle every single day trying to help people with their leases. In the last few days, has something come up that makes sense for us to talk about so that everyone else doesn’t fall into the same trap?
Craig: Oh! Absolutely. There are dozens of them but one continues to pop up. There are clauses that no landlord lease has, that need to be added, and this one that I wanted to speak to today is what we call in the business a Kick Out Clause or a Lease Termination Clause. For obvious reasons the landlord doesn’t put that in their standard practice, but for expanding companies or in today’s modern world where companies fail fast, expand fast, or need flexibility, we need to put that in there.
For those of you who don’t know, here is what it is: If your business does so well that you need to expand, you can, under certain circumstances, cancel the lease. Most landlords want a 3 year lease minimum, maybe a 5 year and many are even wanting a 10 year lease terms. How many businesses know what they’re going to be doing in 3, 5 or 10 years. They may need to shrink or expand or do something different. So, this gives them the flexibility they need. Oddly enough, sometimes we put that clause in there not really thinking it’s important. We think we’re pretty stable and we won’t need it, but we ask for it anyway and get it. Then it’s surprising how many times a tenant will go back and say “Holy mackerel! I am glad that’s in there because things did change. Now, we can get out of this lease without suffering major damage.”
To make this fair for the landlord, we don’t mean that the tenant can cancel the lease at any time for no reason and at no cost. What we mean is in a given time frame, perhaps 3 years into a 5 year lease, you can give the landlord 6 months’ notice and pay unamortized tenant-improvement dollars or unamortized leasing fees or whatever damage the landlord’s going to suffer, you want to reimburse him or her for that. We can get pretty sophisticated. We can tie it to specific events, like not meeting sales figures or overall economy. We don’t want the landlord to think this is taken lightly, but we do want to structure it so the tenant has the flexibility to do what he or she needs to do with the business.
B: You know it’s fascinating because we’re actually going through something very similar. I’m managing an office and a staff in San Jose, and we just had our staff meeting yesterday that we do once a month. We’ve been adding enough employees that now we’re out of chairs in the conference room for our all-hands meetings. In the next 2 or 3 months, we’re going to find ourselves chalk-full. We’re going to have every space occupied and then in about another year, I’m going to have to be looking for a supplemental annex space where we could put 1 or 2 teams because we just plain don’t have the room, but the reality is we just signed the lease 9 months ago. So, we can’t get out of the lease this is really interesting and from a business owner stand point and a leader stand point, to be able to keep the team together really means efficiency and profitability. You’re not having to pay a two sets of utility, you’re having to deal with the communication back and forth. There are so many things. It’s amazing.
C: Yes, it is and it makes sense but people don’t think of it. The way I would handle your situation would have been to go to the landlord and say “Look, we may need to expand quickly, and if we do, could you allow us to expand in your building? If it’s a big enough building, and you have other spaces then we’ll continue to lease or maybe extend the lease but we’re going to move up to a bigger space and if you don’t have a bigger space then we have to leave and go some place else.” Then, we’ll have a set of circumstances and penalties, but either way you need to be able to thrive and make your business grow.
I look at it another way, I wonder what kind of drag in the economy this is for companies that could be opening up space and hiring employees and operating a business but they can’t make that commitment, because they don’t know how fast they’ll grow. Without building in the flexibility, they’re holding off doing anything, maybe for a long time. So I just think it’s better to get started build in the flexibility and move on with life.
B: Yeah that’s great. So, there are people who want to be able to have you get plugged into their lease negotiation, how do they do that?
C: The earlier the better. Landlords love to hear from us when we’re the one bringing the tenant to the table. When you start to look at space or when you’re just starting your business planning. Oddly enough you see all these business planning services and financing and this and that and the one thing they don’t cover is site selection or lease negotiation which could hurt if you don’t do it right. Give me a call: 800-962-2419 or find us at LeaseSmart.com and actually by the time, a lot of people listen to this there maybe lots of episodes and/or videos that they can watch to cover these subjects. We’re happy to help. We love to do it but you can also get a lot of information on your own if you want to spend the time.
B: Sounds good. I’m fascinated; every time I get to ask you questions, I learn something brand new. Thanks a lot.