Options for Reducing Office Space in Extraordinary Times.
In our Navigating Uncertainty session Reducing Office Space in Extraordinary Times, Thejo Kote, Airbase Founder/CEO, was joined by Katherine Murphy, Partner at Goodwin Procter law firm’s real estate practice, and Roy Hirshland, CEO and Co-founder of tenant representation firm T3 Advisors. Our experts set the stage by pointing out that most office leases are “hell or high water” agreements. This means that office leases are airtight obligations compelling lessees to pay the contracted rent, for the full term of the agreement, no matter what may happen. This rigidity has been driven by lenders to commercial real estate owners, insisting that tenants are locked in so that cash flows necessary for debt repayment are secure.
Both experts urged attendees to review the terms of their lease agreements to see if there are provisions that could offer options for a path forward. In general, however, they did not expect that the language would allow for an early termination of a lease. It was noted that there has been discussion in the legal community as to whether or not the force majeure clause would apply to the COVID-19 pandemic for a variety of contracts, but the emerging consensus is that it does not. Some have questioned whether the shelter-in-place rule provides recourse to the government for some kind of relief on rent.
In general, our panelists concluded that the only way to “walk away” from a lease is through the bankruptcy courts. However, breaking a lease isn’t the only course of action that companies have when considering how to reduce the cost of office space. Since landlords prefer to have healthy, long-term tenants, and to avoid litigation, they are generally open to possible negotiation on other terms.
At the time of our session, it was noted that some landlords are still assessing the extent of the damage from the economic shock before deciding on a negotiating stance. Our experts suggested starting by understanding who your landlord is – a REIT, Opportunity Fund, local family, or co-working space – each of whom will have different attitudes and latitudes when it comes to negotiating changes.
They recommended that businesses look for creative solutions such as agreeing to extend the lease for an additional few years in exchange for a lower rent. Other advice included determining if you are a “strong tenant” – either economically healthy, or significant in terms of square footage, or associated with a group of businesses in your investors’ portfolio that might also have the same landlord – to give yourself more leverage. Since landlords are not expected to give up something for nothing, it was suggested that you approach them with an offer that has value for them, like extending the term of the lease. Other things you might proffer especially if short term cash flow is a problem are, to burn down the security deposit for, say, the next 3 months, profit-sharing arrangements, or an equity stake in your company.
The panelists gave helpful guidance on sublease options and advised that businesses should check the language in their lease agreements about subletting before taking action. Depending on the terms of your lease, the landlord will most likely have to provide a consent agreement in order to sublet the space. In general, they would expect that the landlord would be open to providing this type of consent.
Landlords are interested in making sure that their tenants stay healthy and prosperous, and remain as tenants for as long as possible. Our panelists expressed an urgency for open, honest, early communication with your landlord. Whether your rent is overly burdensome or not, now is a good time to negotiate for some additional value from your landlord, whether that is an upgrade to the space – especially health and safety upgrades – or that nice sign on the building displaying your company’s name.
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Airbase offers a one-platform solution to provide visibility and control over non-payroll spend. Close faster. Empower employees. Control spend.
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