LEASE AGREEMENT REFERENCE GUIDE 830: STRATEGIES FOR ANTI-ROLLOVER AND ANTI-TAKEOVER CLAUSES $24.95
STRATEGIES FOR ANTI-ROLLOVER AND ANTI-TAKEOVER CLAUSES
This LARG looks at strategies and clauses designed to thwart rollovers (when a tenant fails to renew an existing lease and vacates) and takeovers (when a competing third party landlord assumes the financial obligations of a tenant's lease to induce it to move from its existing premises to new space). The first part discusses some specific contractual provisions the landlord might consider to frustrate rollovers and takeovers. The Lease Clause Critique contains several pro-landlord clauses drafted to make takeovers more difficult, and to make rollovers more unlikely.
Thoughts About Frustrating Rollovers and Takeovers
Some years back, the Wall Street Journal ran a front page article about "rollover risk" and what it means for the owners of office buildings across America. To illustrate the problem, the story cited 1 Brickell Square, a Miami office building owned by Equitable Life. Although that building is now more than 90% leased, the real problems for the owner may begin to surface as the leases in the building expire, permitting the tenants to move out to snap up sweet deals offered by competing landlords. The financial community refers to this threat as "rollover risk"--it is a major problem for landlords and their lenders in a market with a 26% percent vacancy rate (like Miami).
Of course, such problems may start long before the respective leases are up for renewal. Credit tenants do not have to wait for their leases to expire to move to new space. Depending upon the economics of a proposed deal for new space, many aggressive landlords are only too happy to assume the obligations of the tenant's old lease to induce it to move into their new space.
Such takeover deals (so called because the new landlord "takes over" or assumes the financial obligations of the tenant under the old lease) will continue to stalk good tenants in markets with high vacancy rates until such markets regain some sort of supply and demand equilibrium
The WSJ article focused primarily upon the rollover risk to the owners of buildings with existing financing, and to their lenders. Mortgages made several years ago were based upon (i.e., secured by) the leases negotiated for the particular property. As those leases come up for renewal in markets with high vacancy rates, the tenants will either make new deals for other space and vacate their former premises, or will negotiate much cheaper rent which reflects the current market for office space.
And, it is highly likely that the cash flow for such properties will decline and may become inadequate to pay scheduled debt service which was the product of rosier cash flow projections. That generates a workout problem for the owner and its lender, and maybe a story for the WSJ.
The Art of the Possible
But what about deals that are being done today? What can an office landlord do to frustrate both rollovers and takeovers of existing leases for their properties? As much as they would like, landlords are not in a position to wave a wand and summon the return of tighter market conditions.
Today's weak markets make for intense competition among lessors of space and make for very independent tenants. Such conditions have stimulated a spate of articles in industry journals about the art of retaining tenants, the importance of quality of service by the landlord, strong personal relationships between the landlord and the tenant, the need to meet the tenant's organizational requirements for space, and the like.
These issues are important to the task of retaining tenants. But to fight rollovers in markets with high vacancies, the landlord ultimately needs to provide a financial incentive for the tenant to remain in its present space when its lease comes up for renewal. With regard to takeovers, the landlord needs lease provisions which give it enough contractual leverage to have the chance to deter a takeover when one rears its head. How can that be done when the lease is negotiated?
Fighting Rollovers and Takeovers
The provisions cited below cannot work magic, or make wholesale changes to imbalances between supply and demand in the particular office market involved. However, they may affect the economics of an individual deal enough to obtain a favorable outcome for the landlord. Some specific suggestions which should help the landlord deter takeovers and prevent rollovers include the following: