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What lease clauses can you negotiate to reduce occupancy costs?

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Occupancy costs are one of the major expenses for any business that leases office space. They include rent, utilities, maintenance, taxes, insurance, and other fees that the landlord charges. Reducing these costs can have a significant impact on your bottom line, especially in times of economic uncertainty or changing business needs. One of the ways you can lower your occupancy costs is by negotiating favorable lease clauses with your landlord. In this article, we will discuss some of the common lease clauses that you can use to your advantage and how to approach them with your landlord.

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Michael Marsh, JD, MBA, CCIM

Associate Vice President at Colliers International

1 Rent abatement

Rent abatement is a clause that allows you to pay less or no rent for a certain period of time, usually at the beginning of the lease term or after a major event that disrupts your business, such as a fire, flood, or pandemic. Rent abatement can help you save money, ease your cash flow, and recover from losses. However, you should be aware that rent abatement may come with trade-offs, such as a longer lease term, higher rent escalation, or lower tenant improvement allowance. You should also make sure that the rent abatement clause specifies the conditions, duration, and amount of rent reduction.

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Michael Marsh, JD, MBA, CCIM

Associate Vice President at Colliers International
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Rent abatement may be offered as a landlord concession in some cases. It may take different forms such as all upfront, spread out through out the term, or half rent for a period of time. The cash outlays on the owner's part as well as the demand for the property will dictate whether or not this type of concession is offered.

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2 Sublease and assignment

Sublease and assignment are clauses that allow you to transfer your lease rights and obligations to another party, either partially or entirely. Subleasing means that you rent out a portion of your space to another tenant, while assignment means that you give up your entire space to another tenant. Both options can help you reduce your occupancy costs if you have excess or unused space, or if you need to relocate or downsize your business. However, you should be aware that sublease and assignment clauses usually require the landlord's consent, which may not be easy to obtain or may come with fees or restrictions. You should also make sure that the sublease and assignment clauses protect you from any liability or claims arising from the subtenant or assignee.

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Michael Marsh, JD, MBA, CCIM

Associate Vice President at Colliers International
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One of the most critical pieces of getting a sublease approved is the landlord's approval. Typically it is recommended to include clauses such as "landlord shall not unreasonably withhold approval", and "landlord shall have 7 businesses days to approve". For smaller owner's they can typically approve a deal quickly but for major REITs they will need additional time to have it approved at various levels.

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3 Termination and renewal

Termination and renewal are clauses that allow you to end or extend your lease before or after the expiration date. Termination means that you have the right to cancel your lease under certain conditions, such as a change in your business needs, a relocation, or a breach by the landlord. Renewal means that you have the option to continue your lease for another term, usually at a predetermined rent or based on market rates. Both options can help you reduce your occupancy costs by giving you flexibility and control over your lease duration. However, you should be aware that termination and renewal clauses may come with penalties, fees, or notice periods. You should also make sure that the termination and renewal clauses are clear and enforceable.

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4 Operating expenses and taxes

Operating expenses and taxes are clauses that determine how much you have to pay for the landlord's costs of maintaining and operating the building, such as utilities, repairs, security, insurance, and property taxes. Depending on the type of lease you have, you may pay a fixed amount, a percentage of the total costs, or a base amount plus any increases. Operating expenses and taxes can significantly affect your occupancy costs, especially if they increase over time or are not properly audited. You can negotiate to reduce your share of these costs by limiting the types and amounts of expenses and taxes that are passed through to you, capping the annual increases, or excluding any capital improvements or extraordinary expenses.

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Michael Marsh, JD, MBA, CCIM

Associate Vice President at Colliers International
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Right now the biggest item to be negotiated in the operating expense section of an LOI or lease is the cap on controllable expenses. Given the rapid rise in costs over the past several years landlords are turning to higher caps or tying increases to the CPI.

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5 Tenant improvement allowance

Tenant improvement allowance is a clause that specifies how much the landlord will contribute to the costs of renovating or customizing your space to suit your needs and preferences. Tenant improvement allowance can help you reduce your occupancy costs by saving you money on construction, design, and furniture. However, you should be aware that tenant improvement allowance may come with strings attached, such as a higher rent, a longer lease term, or a repayment obligation if you terminate the lease early. You should also make sure that the tenant improvement allowance clause covers the scope, budget, and timeline of the project, as well as the ownership and depreciation of the improvements.

Negotiating lease clauses to reduce your occupancy costs is not a simple or straightforward process. It requires careful planning, research, and communication with your landlord and your advisors. You should also be prepared to compromise and balance your short-term and long-term goals. By understanding and leveraging the lease clauses discussed in this article, you can achieve a more favorable and cost-effective lease for your business.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Michael Marsh, JD, MBA, CCIM

Associate Vice President at Colliers International
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For new companies, owners typically require enhanced security deposits or personal guarantees. An enhanced security deposit could be the value of several months of rent. In some cases, it is possible to get a "burn-off" clause on the guarantee or enhanced security for non-default.

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What lease clauses can you negotiate to reduce occupancy costs?

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2

3

4

5

6

1 Rent abatement

2 Sublease and assignment

3 Termination and renewal

4 Operating expenses and taxes

5 Tenant improvement allowance

6 Here’s what else to consider

Corporate Real Estate

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What lease clauses can you negotiate to reduce occupancy costs?

1

2

3

4

5

6

1 Rent abatement

2 Sublease and assignment

3 Termination and renewal

4 Operating expenses and taxes

5 Tenant improvement allowance

6 Here’s what else to consider

Corporate Real Estate

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