Attract Advantageous Tenants with Unusual Concessions

Vacancy rates are still a struggle for shopping center and office building owners in some areas. Maybe your local economy isn’t robust and businesses aren’t interested in new office space, your projections for how much foot traffic your center will see were higher in theory than in reality, or other owners are offering better leasing packages than you are for the same types of space. If you find yourself in the position of having to actively draw in tenants, you can sweeten the deal for those that might be on the fence. Here’s how to negotiate some tenant-favorable lease terms that won’t require you to put yourself at a disadvantage.

Stay Competitive with Area Owners

The importance of trying to fill space with strong tenants, as opposed to tenants that are at risk for default can’t be stressed enough. Know that strong tenants are in demand, though. To stay competitive and maintain full occupancy in your buildings, consider three key concessions that give you an edge over other commercial property owners. Ask your attorney whether these are in your best interest, and ask about tailoring them to your leases, if your attorney thinks you have a shot at great tenants with these concessions.

Concession #1: Offer rent abatement. Rent abatement offers are one of the best negotiating tools and help get tenants locked into leases. The downside is that you’ll have to give the tenant free rent for a set amount of time. But think of it this way: If the space has been empty, you haven’t been collecting any rent, additional rent, or other charges and fees that a tenant would typically be responsible for. The risk is that a tenant that might take advantage of the free-rent months and then default. To avoid being burned, take a look at this properly drafted lease clause that can protect you:

Model Lease Language

1. Abatement Months. No Base Rent or Additional Rent shall be due for the following months (the “Abatement Months”) collectively: [insert months and years] (the “Rent Abatement”).

2. Conditional Rent Abatement. The Rent Abatement is conditioned upon Tenant’s not having committed a monetary Event of Default in excess of $[insert amt., e.g., one month’s rent] under this Lease.

3. Event of Default. If Tenant commits an Event of Default in excess of $[insert amt., e.g., one month’s rent] and fails to cure such Event of Default in a timely manner, then:

i. The entire Base Rent and Additional Rent otherwise due and payable for each of said Abatement Months shall be amortized equally over the Lease Term and the unamortized portion shall be reinstated and shall become due and payable; and

ii. All of the Rent Abatement that has not been used by Tenant as of the date of the occurrence of such Event of Default shall thereby automatically terminate and become null and void, and Tenant shall thereafter pay all Base Rent and Additional Rent when due under this Lease, without regard to the rental abatement provisions of this Lease, unless Tenant cures the Event of Default either before the first day of the next scheduled Abatement Month indicated in Paragraph a hereof, or within [insert #] days after the date of the occurrence of the Event of Default, whichever is later.

Concession #2: Waive security deposit. Another method of enticement often used by owners faced with vacancy challenges is offering to give a security deposit concession. The agreement allows tenants either to forgo paying the security deposit altogether or to pay less money than would typically be required if you didn’t need to compete for tenants. For this concession to be effective, however, you should negotiate this right as it’s presented in our Model Lease Clause: Put Limits on Security Deposit Concession for Tenant. The key point is that you retain the right to collect the security deposit if the tenant defaults.

Concession #3: Provide lease termination option. Giving a lease termination option that allows the tenant to end the lease before the term is usually a move of last resort for owners. But if you need a strong tenant for your property, that might sway the tenant to choose your space over another. Think about long-term potential for the tenant. Could it turn your center around? Offering a termination option isn’t all bad: Luckily, there’s a way to offer this option and still provide yourself with adequate protection. Your lease clause, like our Model Lease Clause: Give Tenant Termination Option without Getting Burned, should stipulate that, to exercise the option, the tenant must not be in default of the lease, must provide you with adequate notice, and must pay a termination fee.