Not long ago, lease administrators would have given anything for lease renewal options. Businesses wanted long-term arrangements with the option to continue the relationship when the contract expired.
But whether you’re in retail or the corporate sector, for many companies, today’s world is changing too fast for long-term leases.
Why commit to a 10-year lease when your company is experimenting with a hybrid workplace model? Depending on what your virtual workforce looks like, you might only need a fraction of the space in a few years. In retail, the evolving role of brick-and-mortar stores and rapidly shifting demographics could change the best site characteristics for your locations.
Having a flexible relationship between lessee and lessor is far more valuable right now than having one that can continue in perpetuity. In negotiations, many companies are giving up other, traditionally favorable conditions like tenant improvement allowances or right to sublet to make the lease duration more flexible.
But what does this mean for your business? How does it work? A contract is a contract, right?
There are several ways that flexibility can come into play in your lease portfolio. And if you have the resources to analyze and explore your portfolio efficiently, you’ll find these opportunities faster than the competition.
How do break options and lease terminations work?
Lease negotiations are the best time to discuss break options and lease terminations. But if you missed that window, that doesn’t mean you can’t bring it up now.
Not every lease has built-in break options or predefined conditions for lease terminations. That doesn’t stop you from asking. It’s similar to lease renewals: they’re not always included in the contract, but it’s natural to have a conversation about it when the time comes. In fact, if no lease clause specifically discusses break options or termination, you should bring it up with your lessor.
If your lease does include clauses about your options, then you have to examine the specific language of these clauses. There are typically specific conditions that must be met in order for you to exercise the clause.
For a retailer, early termination may depend on your location’s performance. For example, you might negotiate in advance that if your location generates less than $1 million in sales, you’ll have the option to end the lease early. Then a sudden, massive decline in foot traffic won’t leave you stuck paying for a location that simply isn’t worth it.
Or how about the corporate side? With large office buildings, companies are often looking for arrangements that allow them to expand and contract the square footage they need—especially if they’re fine-tuning their work from home policy.
Break options and lease terminations should be approached on a case-by-case basis. Every lease is different. Every lessor is different. And whether it leaves both parties happy ultimately depends on the unique circumstances surrounding the lease.
Why are lessors willing to break leases early?
Early lease terminations create the opportunity for lessors to earn more money. When a lessee exercises a break option, they usually have to pay a steep fee to end the lease agreement. If the lessor finds a new tenant quickly, their assets make more money in the same time frame. But they have to calculate the risk versus the reward.
The longer it takes to find a new tenant, the more the lessor’s costs eat into the potential gain from the early termination fees. Lessors also must consider their relationship with the lessee. They could have dozens of leases with the same tenant, and their decision with one lease could easily impact their other properties. Deny a tenant the options they want, and they may not sign. Give them greater flexibility, and the lessor may have to find 50 new tenants to rent much earlier than expected.
For both parties, it’s crucial to have quick access to all pertinent lease information, and the organization needed to see the relationships between leases.
Are you equipped to take advantage of lease flexibility?
Right now, everyone wants flexibility. But at the start of the pandemic, there was a window where very few were thinking about this, and the first companies who recognized the opportunity found themselves at the front of the line. With the right systems in place, you can react quickly to changing circumstances and capitalize on opportunities as they arise.
Today’s businesses need to ask themselves:
- Do we have the tools to assess our portfolio and identify these options?
- If we don’t have these options, how can we retrofit flexibility?
- Do we have other leases with this same landlord?
- How has this landlord behaved with other leases?
Your lease administration department can wade through documents to find these options for each lease. But with lease administration software like Tango Lease, you can speed up the process and make your portfolio easier to navigate. Tango Lease helps you to quickly identify break options and termination clauses so that your team always knows what’s possible. And with better organization, you’ll automatically see the connections between separate leases, so you can bring greater context into your negotiations.
Want to see how Tango Lease helps you discover and exercise the flexibility your organization needs?