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This LARG contains the following article:

A Dozen Ways the Tenant Can Cut Occupancy Costs Now.

Number of Single Spaced Pages: 12





This LARG focuses on twelve practical ways the tenant can reduce its occupancy costs. When the markets soften up out there and there is lots of vacant space, tenants--whether they are of the office, retail or industrial variety--can take advantage of it to reduce costs for leased space.

A Dozen Ways the Tenant Can Cut Occupancy Costs When Markets Are Soft

#1: Renegotiate the Above Market Rent in Your Existing Leases If the Market is Soft

There is no rule carved in stone that requires a tenant to wait until the end of its lease term to renegotiate rentals which are above the current market rate, particularly if the tenant's location is awash with vacant space. But what will make the landlord listen to the tenant's rent reduction proposals?

Landlords know the tenant will likely walk after the initial term of the lease if rentals are not adjusted to the reflect the market. And in many cases, the landlords trade a rent reduction for a promise by the tenant to remain in the premises for some additional period beyond the original term.

The cost of losing a good tenant is high for a landlord in a market with high vacancy rates. In addition to the marketing costs expended to attract a replacement tenant, the landlord will be obliged to pay, at a minimum:

  • legal fees associated with drafting and negotiation of the new lease;
  • cash for improvements to the premises for the new tenant; and
  • a brokerage commission for the broker that procured the replacement tenant.

Even if the tenant has difficulty negotiating reductions to minimum rent under its existing lease, it still can seek concessions in other areas of the lease. For example, the tenant could negotiate for:

  • An increased expense stop for the remainder of the term and for any renewal options—often the tenant can use expense stop data taken from offers from competing landlords as a starting point for negotiations.
  • Additional improvement allowances to remodel or refurbish the premises during the middle of the term.
  • Reduced charges for parking, health club or fitness facility charges.
  • Additional renewal options with fixed or fair market rentals.

#2: Negotiate to Exclude Asbestos and Hazardous Materials Costs From Permissible Operating or CAM Costs

Many commercial tenants now include standard language dealing with asbestos and other hazardous materials (sometimes referred to as "Hazmat" in technospeak) found in the complex containing their premises. Such language is usually drafted to protect the tenant in the event such substances are discovered, and the clause normally dictates the actions the landlord must take to deal with the situation.

Hazmat clauses often contain warranties by the landlord that such substances do not exist in the building or complex, covenants that the landlord will comply with all orders issued by public authorities with regard to the substances, and indemnities running from the landlord to the tenant for any losses or costs which result from such substances.

However, in many cases, pro-tenant asbestos and hazmat clauses do not specifically prohibit the landlord from including any costs associated with such substances as an operating or CAM cost, whether as a capital cost required by law, or as some other permissible cost. The tenant should add express prohibitions to its asbestos and hazmat language to make sure that the landlord cannot pass such costs through as an operating or CAM cost.

And the language added by the tenant should be comprehensive. It must be broad enough to exclude all costs related to the discovery and ultimate action taken with regard to the substances, including any costs of clean-up, consulting fees, legal fees, transport costs, dumping and disposal fees, costs of permits, penalties, fines, and the like.

#3: Adopt a Comprehensive Strategy to Reduce Energy Costs, and Use a Utility Rider in All New Leases

Twenty years ago, utilities were rarely a problem for commercial tenants. Municipal or public providers furnished necessary services, which were plentiful and cheap. Hook-up charges were non-existent or minimal. Then came the energy crisis. Utility costs soared. Many landlords and tenants faced genuine shortages of utilities caused by short supplies of heating oil. The government imposed temperature control mandates for public buildings. Utilities got complicated and expensive.

In today's world, utilities are one of the most expensive elements of the landlord's common area costs. Commercial building managers now devote far more management attention to utilities and to the containment of utility costs than ever before. Increasingly, landlords are stepping into the shoes of the utility, and are requiring their tenants to purchase energy and utilities (especially electricity and energy for heating, ventilating and air conditioning, or HVAC) directly from them. Providing energy gives cash hungry landlords the opportunity to make utilities and energy a new profit center, and to collect a monthly energy charges from tenants as a component of their rent.


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