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Lease Strategies

Product Overview

This expanded LARG contains the following reference materials:

12 of the Most Expensive Leasing Mistakes A Landlord Can Make. Topics covered include: Limiting Tenant Claims Against Unrelated Landlord Assets, Using Fair Market Rental Renewal Options, Site Plan Disclaimers, Habitual Tenant Default Clauses (and much more)

Number of Single Spaced Pages: 24





Item 12

If you must give the tenant an option to expand, make sure the clause is carefully drafted so that you won't lose control over the space subject to the option prior to its exercise.

The landlord needs to exercise great care when it gives a tenant an option to lease additional space in a property in which it is already a tenant. Frequently, such clauses are not carefully drafted, creating surprises for the parties at the time of exercise. Important issues to be covered in dealing with a tenant's right to expand include the following:

  • When and how must the option or preferential right be exercised and under what conditions?
  • Who improves the expansion space, e.g., it is “as-is” (as in the clause that follows) or is it to be improved to “building standard” or to the standard of the original space leased by the tenant?
  • What is the rent and when does it start (e.g., is the tenant allowed a grace period in which to make improvements if the tenant is doing the improvements to the space?)
  • How is the expansion space defined in the lease (e.g., by reference to a specific floor or floors in the building as in the first clause, or by use of a lease exhibit showing the expansion space as in the second clause?)
  • Who is responsible for the installation of any needed entrances or corridors if the expansion space is less than an entire floor?
  • Can the tenant expand along the window line (i.e., along the perimeter of the space) without taking the interior space (which will be virtually unleasable)?

Usually, as is the case here, the clause for expansion space will provide that all other provisions of the lease will apply to the expansion space once it is occupied by the tenant. Landlords should take care that the indemnity provisions of the lease apply to the tenant and the expansion space as soon as it is delivered to the tenant, especially if the tenant is doing its own demolition and leasehold improvements.

Finally, depending upon the law of the jurisdiction in which the building is located, the landlord may be well advised to provide specifically that the option or any preferential right to expand may not be separately assigned by the tenant to a third party, unless the entire lease is transferred in accordance with the lease's assignment clause. While the assignment of the option or preferential right for expansion space to third party without an assignment of the entire lease may be less troublesome for landlord if the lease calls for fair market rental for the expansion space, few landlords want the loss of control over who occupies the property that such an assignment would entail.


Pro-Landlord Option to Lease Expansion Space

Sample Clause

The Tenant shall have an option (the “option”) to lease the fourth floor of the Building (as such floor may be renumbered by the Landlord from time to time) upon the following terms and provisions:

A. Such option may be exercised in its entirety only and only as to such entire floor. The Tenant shall exercise the option by delivering to the Landlord, prior to the fifth anniversary date of the Commencement Date, written Notice of the Tenant's election so to exercise the option.

B. The option may not be exercised, and if exercised, the option shall be deemed canceled and shall be of no force or effect, if at the time of such exercise and/or at the time the Tenant's tenancy of the floor covered by such option is otherwise to commence, the Tenant is then in default under this Lease or this Lease is not then in full force and effect.

C. Upon exercise of the option by the Tenant, the Landlord shall deliver possession of the floor covered by the option in such floor's then “as is” condition in the broadest sense of the term, no sooner than six months and no later than twelve months following the fifth anniversary date of the Commencement Date. The Tenant, at its sole cost, shall be responsible for all demolition and improvement work therein, which shall be subject to Landlord's approval pursuant to Section 25 hereof.

D. If the Tenant exercises such option, references herein to the Leased Premises shall, effective upon the date that the Landlord delivers to the Tenant possession of the floor in question, be deemed to include the additional floor covered by the option, unless the context clearly implies to the contrary, and effective and commencing on such date the Tenant shall lease and occupy such floor upon all of the same terms, covenants and conditions contained in this Lease. The Monthly Minimum Rent for such floor shall be the then prevailing Fair Market Rental as defined in Section 5 hereof for such floor as of such date (determined on a square foot basis for the floor as to which rent is being determined).

E. If the Tenant fails to exercise its option as provided in and in strict accordance with the terms of this Section, such option shall lapse and be of no further force or effect and the Landlord may lease the floor in question to any party or parties upon any terms.


End of Excerpt