Knowledge Management for Leases: The Option to Expand

For this week’s Guest Post Friday here at Construction Law Musings, we welcome Jason Mark Anderman.  Jason is President of WhichDraft, designed to help small businesses, freelancers, and entrepreneurs easily and affordably create the kinds of legal documents they use in their businesses every day via a simple Q&A interface that makes it easy to quickly create sophisticated legal documents, like Confidentiality, Consulting, Software Development and Commercial Lease Agreements.

Today I want to share with you how to use a knowledge management strategy to massively improve your negotiating expertise and ability when it comes to a common commercial lease provision: the option to expand. For the purposes of this post, let’s consider this provision from the perspective of a commercial tenant.

Key Negotiating Points. First you will want to determine your key negotiating points. Excluding rent increase and construction issues, I’d recommend that you first brainstorm what positions the lessor will likely take and what you would likely to take on these key negotiating points from your perspective as the tenant on the property.

Conditions: It’s a good idea to start off thinking about all of the conditions a lessor will usually want you, the tenant, to meet before exercising an option to expand the leased premises. Here are the conditions a lessor will normally push for:

Þ Not In Default. Typically, lessors do not want a tenant to be in default when they exercise an option to expand.

Þ Continuous Possession Of X% Space. Lessors often want only a reliable tenant to take over additional space, so being in continuous possession gives them more confidence, especially if that possession involves a substantial percentage of a building that the leased premises might exist within.

Þ Continuous Possession For X Time Period. Similarly, a lessor may also ask for the tenant to meet the condition of being in continuous possession of the leased premises for a certain amount of time.

Amount of Space: It would be a good idea to think about the minimum and maximum square footage you want to have the option to expand into, as well as the height for the expanded leased premises.

Þ Minimum Square Footage.

Þ Maximum Square Footage.

Þ Height.

Option Frequency: A savvy negotiator also considers the frequency that she can call on this option. A lucky tenant might see a lessor miss this issue so the lease ends up silent as to how often you can expand. Savvier lessors might push back hard on this point and limit the number of times the option to expand can be exercised, even restricting the number of times to once annually or only once during the entire term of the lease.

Þ Silent.

Þ Once Annually.

Þ Once During the Term.

Negotiating Strategy: Now that you determined your key negotiating points, you want to prepare your negotiating strategy within a chart that clearly states the different negotiating permutations for each point so you can quickly and easily assess your and the lessor’s positions. For each point, determine the ideal result you want, what one needs or can live with conceding on, and your walk points (or BATNAs) for you and the lessor. This will allow you to maximize your negotiating leverage.

“BATNA” means “Best Alternative to a Negotiated Agreement” which is, essentially, what you would do if you can’t reach an agreement with the lessor. Too often, tenants fail to determine their BATNAs, which allows a strong lessor negotiator to increase its bargaining power against you. If you are not willing to walk away from negotiating and make that honestly clear to the other side, then the lessor is emboldened to push hard for increasing concessions from you in the lease agreement.

You are likely, then, to end up caught between two bad options: (1) a one-sided lease agreement not in your favor, or (2) the fear of not concluding the lease with no alternative leased premises for your business. The solution is to do your homework and determine what other leasing alternatives exist before you start negotiations.

Here is an example of a negotiation strategy chart you might use to negotiate the option to expand provision in a commercial lease:

 

Example: Negotiation Strategy Chart

 

Key Negotiating Points	Wants	Needs / Live With	Walk Points/BATNAs
Conditions	Tenant:Original square footage for 3 months	Tenant:No defaultOriginal square footage plus previous expansions for 1 year	Tenant:For 2 years
	Landlord:No defaultOriginal square footage plus previous expansions for 2 years	Landlord:No defaultOriginal square footage plus previous expansions for 1 year	Landlord:Silent on defaultFor 3 months
Amount of Space	Tenant:50,000 sq. ft.	Tenant:25,000 sq. ft.	Tenant:15,000 sq. ft.
	Landlord:10,000 sq. ft.	Landlord:20,000 sq. ft.	Landlord:40,000 sq. ft.
Option Frequency	Tenant:Silent	Tenant:Once Annually	Tenant:Once During the Term
	Landlord:Once During the Term	Landlord:Once Annually	Landlord:Silent

Hopefully, this approach will allow you to excel at negotiating, and is highly recommended for all kinds of contract discussions to make sure you reach agreement on a deal that best meets the needs of you (or your client) successfully.

As always, Jason and I welcome your comments below.  Please subscribe to keep up with this and other Guest Post Fridays at Construction Law Musings.