Cover Seven Points When Leasing Temporary Space to Long-Term Tenant

By Nathaniel Hoffman, Esq.

Occasionally, a prospective tenant of your office building or shopping center may need to move before its new space would be ready for occupancy. The tenant’s existing lease may be expiring before the date that you’re able to deliver the new space, and the tenant may be unable to hold over in its current location because it’s facing a significant holdover rent or consequential damages for failure to vacate on a timely basis. Or you may be unable to deliver the space by the date the prospective tenant needs possession because your existing tenant is holding over or you don’t have sufficient time to complete the buildout the new tenant requires.

     In such cases, if you have vacant space in your building that can accommodate the new tenant during this interim period, your offer to give the tenant temporary space until its new premises are available can save the deal. To protect your interests in this situation, negotiate a provision like our Model Lease Clause: Set Terms of Temporary Occupancy, and include it as a part of your lease with the tenant.

What Clause Should Say

Your clause, like ours, should cover the following seven points:

     Define the temporary space. A temporary occupancy provision is intended to be inserted into a new lease that you’re negotiating with your prospective tenant, so it contains references to other terms that are defined elsewhere in the lease. The introductory paragraph should grant the tenant the right to occupy certain space that’s defined as “Temporary Premises” and shown on a floor plan or site plan attached to the lease. It also should set forth the date, known as the “occupancy date,” on which such space will be available for the tenant’s use [Clause, Intro.]. The occupancy date will be prior to the formal commencement date of the lease.

     State condition of temporary premises. Make it clear to the tenant that you’re furnishing the temporary premises in their current “as is” condition and that you have no obligation to repair, remodel, or improve such space in any way for the tenant’s use [Clause, par. a]. Since it’s intended that the occupancy will be for only a few days, weeks, or at most, months, neither party will want to spend any significant sums to prepare the space for the tenant’s use.

     Specify application of other lease terms. State that once you deliver possession of the temporary premises to the tenant, those premises are a part of the premises covered under the lease, and all of the terms of the lease will be applicable from that date [Clause, par. b]. Accordingly, you won’t need to restate those provisions that specifically apply to the occupancy of the temporary premises. Especially important are the provisions relating to insurance, indemnification, and default clauses. And prior to delivering the temporary space to the tenant, you’ll want to make sure that you receive evidence of insurance from the tenant in the form and manner set forth in the lease.

     If there are any provisions of the lease that don’t apply during the temporary occupancy, specifically mention them in this section. In our Model Clause, the tenant has no obligation to pay Base Rent or Additional Rent (CAM, taxes, insurance, etc.) during its occupancy, but there may be circumstances where it would be appropriate for the tenant to be responsible for payment of some or all of such charges, in which case you should modify your provision accordingly.

     List charges tenant should pay. Even when you’re providing the temporary premises to your new tenant as an accommodation without the payment of rent, it’s appropriate for the tenant to pay you for utilities and services that you’re providing in connection with its use. Require your tenant to pay you for the direct costs you incur as a result of the tenant’s occupancy, including signage, keys, wiring, electricity, and janitorial services [Clause, par. c]. Your building or center may provide other services that should be inserted in this list, such as the cost of operators needed for the use of freight elevators. A tenant may need clarification on what charges it will be expected to pay for.

     Establish your right to lease temporary premises. You certainly don’t want to lose your ability to continue to market the temporary premises during the temporary occupancy. To do this, retain the right to enter the temporary premises at any time to show the space to prospective tenants [Clause, par. d]. You can also provide that if you find a new tenant for that space, you can relocate your tenant to other comparable premises in the same building or another building in the center. You’ll have to evaluate whether a relocation is feasible under the circumstances, and be prepared for the tenant’s objection that it shouldn’t be required to move again before its permanent location is ready.

     Address relocation of tenant to permanent premises. Require the tenant to vacate the temporary premises and move into the permanent premises within a short time after the formal commencement date of the lease when you have delivered possession of the permanent premises to the tenant in the required condition [Clause, par. e].

     State that the tenant must move all of its furniture, trade fixtures, equipment, and personal property at its sole cost and surrender possession of the temporary premises to you in the condition required in the surrender clause of the lease. That clause should provide that upon termination of the lease, the premises must be broom clean and in at least as good condition as when delivered to the tenant, ordinary wear and tear excepted.

Practical Pointer: For a short time, the tenant will have possession of both the temporary premises and the permanent premises. You may want to document the date that the tenant has properly vacated and surrendered the temporary premises so that there is no misunderstanding between you.

     Address failure to vacate temporary premises. If your tenant fails to move out and surrender the temporary space in a timely manner, you may be unable to begin any work necessary to accommodate a new tenant of the space or to use the space for other purposes. So set forth the penalties that will give your tenant an incentive to avoid such a delay [Clause, par. f]. These include the requirement that the tenant pay a fixed sum for each day or partial day that the tenant delays in surrendering possession. You should also retain your right to enforce all of your remedies under the lease and the right to recover consequential damages resulting from the tenant’s breach.

Nathaniel Hoffman, Esq. is an attorney in the Milwaukee office of Whyte Hirschboeck Dudek S.C., where he has been a member of the Real Estate Practice Group since 2005. Hoffman focuses his practice in all aspects of real estate transactions for both landlords and tenants.