How to Choose a Lease Commencement Date

Setting a workable commencement date for a lease to begin is one of the most important aspects of lease negotiations. But it often isn’t thought through by either owners or tenants. As with many overlooked parts of a lease deal, it takes a back seat to big ticket items like cotenancy clauses, renewal options, and use provisions. However, so many things depend on when the lease begins, you need to make an informed decision about how you should set a lease commencement date.

Crucial items—like the tenant’s obligation to pay rent and other charges; the tenant’s obligation to pay operating expenses/CAM costs; the date the tenant must open for business; the success of a new shopping center’s grand opening (or a renovated center’s reopening); the lease’s expiration date and the commencement of any renewal period; and your ability to attract other tenants—are all riding on your lease commencement date.

It’s important to know that you can use several different methods to set the lease commencement date. But the method you choose will depend on several factors, such as whether the space is in a new or existing building, a shopping center or office building, or a single tenant or multi-tenant building.

Here are your options and an explanation of the benefits and possible pitfalls of each one so you can use a lease commencement date that suits your and the tenant’s needs and get the relationship off to a healthy start. 

Understand Motivation on Each Side of Deal

Getting some perspective on your primary goal–and the tenant’s primary goal—for the lease commencement date will make it easier to pick a method that you can both be happy with:

Owner’s primary goal. Whether your building is new or existing, your primary goal is to make the space productive—that is, profitable—as soon as possible. This means giving the space to the tenant and starting to collect rent as soon as possible. So you want to set the lease commencement date to minimize the time the space stays tenantless.

Typically, the tenant doesn’t start paying rent and other operating expenses until it gets the space. So a delayed lease commencement date postpones the tenant’s obligation to pay—and you lose out on valuable income.

Setting the right lease commencement date is particularly critical in new retail construction. But that’s when it’s most difficult to specify a commencement date. Construction may be ahead of—or behind—schedule. So you may have to move up or delay the commencement date. You don’t want the space to be ready, but sitting idle and costing you money, or not ready when it’s supposed to be.

Tenant’s primary goal. After signing a lease, a tenant wants to know as precisely as possible when the space will be ready for it to move in. This is important to it for several reasons. First, the tenant must make plans for its move-in—including giving up its old space, if applicable. Second, it may have to do buildout work to the space, which it will need to factor into its schedule. And third, if the tenant is a retailer, it may have to order seasonal merchandise for the opening. If the commencement date arrives before the tenant is ready to open for business, its losses could be big. It could be forced to pay rent and other lease costs even though it can’t move into—and open—the space. Plus, a retail tenant with an obligation in the lease to open and/or continuously operate may be in violation of the lease.

Weigh Five Date-Setting Options

Here are five common methods you can use to set the lease commencement date. Each method has its pros and cons for both you and the tenant. And each method may be better suited to one situation than another. In the end, the methods you use still depend on your particular situation, plus the tenant’s negotiating clout.

Method #1: Exact date. You can pick up an exact date, say, April 1, 2017, as the lease commencement date.

> Pros. This may be the easiest way to set a commencement date because all you must do is plug the date into the lease. It’s also the clearest way to set the commencement date. It leaves no room for dispute over when the lease begins. And it lets both you and the tenant plan easily.

> Cons. Choosing an exact date that works for you is easier said than done. Many things can happen to prevent you from giving the tenant possession on an exact date. And, typically, a tenant will insist on some remedy in the lease if you can’t deliver the space to it by the lease commencement date. You could even lose the tenant. So use this method only in an existing building where you’re relatively certain you can deliver the space on the given date.

And if you do use this method, try in the lease to limit your liability if you can’t give the tenant possession on the commencement date. You can agree to set damages—or a rent abatement—for each day you delay in delivering the space. Ask your attorney about using the following language to accomplish this:

Model Lease Language

Unless this Lease shall be sooner terminated or extended as provided herein, the term of this Lease shall be for [insert #, e.g., 10] years, commencing on [insert date, e.g., April 1, 2017] (Commencement Date) and ending on [insert date, e.g., March 31, 2027] (Expiration Date), both dates inclusive.

Method #2: Space is “substantially completed.” If you’re responsible for building out the tenant’s space before the tenant moves in, the lease commencement date can be the date when the space is ready for the tenant. To do this, say that the commencement date will be the date when the buildout work you’re doing is “substantially completed”; that is, all the work is finished except for punchlist (minor) items that won’t have a big effect on the tenant’s ability to use the space. In the lease, say that your architect, not the tenant, will certify when the work is substantially completed. Also, add that if the tenant takes possession of the space and starts operating its business before your buildout work is substantially completed, the lease begins at the time the tenant starts operating. And set an outside date on which the lease will begin. Otherwise, the tenant could claim that the lease is unenforceable.

> Pros. This method gives you almost complete control over the commencement date. The lease begins when you finish the work. So, presumably, it could begin before the tenant is ready to move in.

> Cons. Even if your architect is the judge of whether the work is substantially completed, you still may face problems with the tenant. Tenants often complain that a substantially completed space really isn’t usable.

Model Lease Language

a. The Lease Term shall commence on the earliest of: (i) the date when the Premises shall have been substantially completed; (ii) [insert date]; or (iii) if Tenant shall have taken Possession of the Premises and commenced Tenant’s normal business operations therein prior to the time when all of the foregoing shall have occurred, the date Tenant has commenced normal business operations.

b. The Premises shall be deemed to have been substantially completed when Landlord’s architect shall have certified in writing that Landlord’s Work (as defined in [insert clause #]) is entirely completed except for minor punchlist items, the completion of which shall not materially interfere with Tenant’s use of the Premises. Nothwithstanding the foregoing, Landlord has not made any representations or warranties as to the suitability or fitness of the Premises for the conduct of Tenant’s business or for any other purpose.

Practical Pointer: You could also say that the work will be deemed substantially completed when a “certificate of occupancy (temporary or final) has been issued that permits Tenant to enter into occupancy of the Premises.”

Method #3: After delivery of possession. If the tenant is doing its own buildout work, you may choose to set the lease commencement as a specific number of days after you’ve “delivered possession” of the space to the tenant. This gives the tenant time to build out the space before its lease obligations begin.

> Pros. This takes the pressure off you to deliver the space to the tenant by a set date. And it gives the tenant some time to fix up the space without the burden of paying rent and fulfilling other lease obligations. Most owners don’t object to this method. It’s a reasonable compromise for both parties when the tenant is doing the buildout.

> Cons. This means the tenant has possession of the space—and is doing work in it—but the lease isn’t in force yet. That can be extremely dangerous for you if the tenant causes property or personal damage. Your lease protections won’t apply. And if a percentage rent tenant opens for business, you’ll lose out on rent. So make sure you get the tenant to sign some sort of indemnity agreement (also called an “early occupancy” agreement) that offers you certain protections.

Model Lease Language

This Lease shall commence [insert #, e.g., 60] days after Landlord shall deliver to Tenant possession, free of all existing tenancies, of the Premises.

Practical Pointer: Expect a savvy tenant to demand that you agree to use your best efforts to deliver the space to it by a certain date. If you must accept this in concept, don’t agree to “best efforts”—it’s too tough a standard. Instead, agree to use “reasonable efforts.”

Method #4: After current tenant vacates. If neither you nor the tenant plan to do any buildout work to the space, you may want to set the commencement date at a certain number of days after the current tenant moves out of the space. But also set an outside date by which the lease will begin.

> Pros. This is an ideal date-setting method for an owner. It gives you flexibility if you can’t get a holdover tenant out of the space in time.

> Cons. A savvy tenant won’t go for this method, unless the outside date isn’t too distant.

Model Lease Language

The term of this Lease shall commence on the date that shall be the earlier of: (1) [insert date]; or (2) the date that is [insert #] days immediately following the date on which the present occupant surrenders possession of the Premises to Landlord.

Method #5: Grand opening. When negotiating with a retail tenant for a newly built or newly renovated shopping center, you may want to throw a grand opening or reopening. You’ll want to make sure the lease begins by the grand opening date—and typically you’ll go one step further and require (elsewhere in the lease) that the tenant be open by the grand opening. To do this, say that the lease will begin on the earliest of:

• The grand opening date;
• The date the tenant opens for business;
• The date the tenant finishes its buildout work (if it’s doing the work itself); or
• Some outside date.

Just make sure you add that the tenant can’t open for business before the grand opening date unless you give it your prior written consent. Its earlier opening could detract from your grand opening.

> Pros. This commencement date gives the tenant a strong incentive to open on the grand opening date. A grand opening may fizzle if your center isn’t up and running.

> Cons. A savvy tenant won’t accept this unless it gets certain protections in return. For example, expect the tenant to demand that a substantial portion of the center and the building in which the space is located will be substantially completed. Plus, the tenant will want to be sure that there’s sufficient parking.

Model Lease Language

The term of this Lease shall commence on the date (“Lease Commencement Date”) that is the earliest of:

a. The opening by Tenant to the public of its business in any part of the Premises (such opening not to precede the grand opening of the Center unless Landlord gives it prior written consent thereto);

b. The grand opening date designated by Landlord;

c. Tenant’s substantial completion of Tenant’s Work; or

d. [insert date].