Expansion Rights in Commercial Leases
Whether your business is just starting out or you have hopeful plans to expand existing operations, you may need more space before your lease ends. Ideally, you should plan at the time you sign the lease to take more space if you need it. That’s the function of an option to expand clause, also known as a “pure” option. It reserves other space owned by your landlord for your business, either in the same building or elsewhere. If you end up deciding that you don’t want the space, you’re not obligated to take it.
Unless the commercial real estate market is awash with vacancies, you won’t see an expansion option in your landlord’s lease. That’s because the clause ties up rental space. The landlord will have to make sure that whatever space is described by your option right is open and available at the time(s) that you may exercise your option. To do so, the landlord will have to either leave the space vacant or lease it to a tenant who will accept a lease term that ends when you might pick up the space, which will make the space difficult to rent and not as lucrative as a long-term lease.
Economics aside, sheer logistics may hamper your ability to press for an option to expand clause. If the landlord has a multitenant building, granting expansion options to more than a few tenants will -create an impossible confusion of off-limits space. Finally, if the space you want is -already leased out, the landlord will simply not be able to offer you an option on it.
In spite of these difficulties, however, you may be able to negotiate some expansion rights—perhaps to take over the space contiguous to your own if it becomes vacant. You’ll need to focus on:
- an accurate description of the space you may want to take over
- the new rent for the added space, and
- when you may exercise the option.
- See Secure a Good Expansion Rights Clause for tips on what to ask for when negotiating your expansion rights clause.
This article was excerpted from Negotiate the Best Lease for Your Business by Janet Portman