Negotiating Tenant’s Lease ‘Exit Strategy’

Q I own a shopping center in a neighborhood that’s undergoing “urban gentrification,” but still has some rough areas where petty crimes take place. The lower rent and extra space I can offer to tenants is attractive, but many of them want to negotiate an early exit strategy in case the neighborhood doesn’t improve or worsens. How can I address their concerns while maximizing my control?

A Savvy commercial tenants will understand that although space in a slowly gentrifying neighborhood is a good deal, it has drawbacks, such as safety issues that could affect its merchandise, employees, or customers. Here are two common exit strategies that you should be prepared to negotiate:

Shorter lease term with extension option. If a tenant doesn’t want to lock itself into a long lease term, offer it a shorter-term lease—with the option to extend if there haven’t been any problems related to the neighborhood. Require it to give you more advance notice when exercising its extension option than you would for a tenant with a long-term lease. By giving the tenant a shorter-term lease, you’re opening yourself up to the hassle and expense of reletting the space sooner than you ordinarily would.

Also, if you give an option to extend, another one of your sticking points should be determining the amount of rent the tenant will pay during the extended term. The tenant will try to negotiate the extended rental rate during the initial term, but unless it’s absolutely necessary, hold off on limiting yourself to the same rent. Getting the ability to raise the rental rate could be a good trade-off for giving the tenant a short-term lease that only benefits it and has the potential to burn you. And if the neighborhood greatly improves during the tenant’s initial lease term, you want to be able to charge it higher rental rates that are commensurate with the desirable location.

Sublet and assignment rights. A tenant renting space in a questionable area may be more adamant about subletting and assignment terms. Most leases require the owner’s consent before a tenant may assign or sublet all or a part of its space. But as part of its exit strategy, the tenant could try to carve out a right to assign the space to another tenant that might not be as concerned about the neighborhood. While you might want to agree that you won’t “unreasonably withhold or delay” your consent, don’t grant too broad a sublet or assignment right. Remember that, although certain exit strategy terms are reasonable for the tenant to ask for, the entire lease shouldn’t be overly tenant-friendly. After all, the tenant is getting a deal that it wouldn’t be able to find elsewhere.