We’ve all taken a few steps forward, professionally, in terms of doing more with less as a result of the COVID-19 pandemic. Work travel? Zoom. Physical office? Home. Commute? Maybe up some stairs. Parking? My own garage. Coffee machine? It’s in my cupboard. But what happens when we return fully from the confines of the pandemic, and what does our professional world look like? In particular for our purposes today, what happens when we need less physical space than was previously, um, employed? It’s one thing if you need less space AND you happen to be one of those businesses with a concluding such that your position is “wide open” to negotiate. But what if you need less space AND you’re in the middle or, worse, the outset of a lease term? What are your options?
In this article, we run down in Socratic fashion a series of options to think through as the commercial tenant looking to downsize its leased space in our post-COVID economic world.
The first, and usually most desirable, option is to renegotiate the current lease to address the size. This requires landlord agreement, of course, such that we’d need to think about the landlord’s “carrot”, first. Will the landlord accept an extension of the lease term, in exchange for smaller space and less monthly rent? What about shrinking the space without a term extension, but paying a higher price-per-square-foot such that you are paying less, over all, but there is a per square foot rental increase to the landlord, and the landlord now has more, free space to lease to another? We could also think about our “stick” for the landlord, too, which we address in options three through six, below.
A second, and still desirable, option is to sublease the portion of your space to another entity, reducing your space and your cost. The initial hurdles here are to make sure your lease allows a sublease – whether with or without landlord approval – and to consider whether you are to remain “on the hook” for the full lease amounts. To the former point, “approval shall not be unreasonably withheld” is a favorable standard in North Carolina for the sublessor-tenant; to the latter point, most landlords accepting a subtenant will require that you, as tenant, remain liable for the full rental amount and will want nothing to do with the subtenant, such that the subtenant is, basically, your tenant, alone. Also, ideally, the sublease is a dollar-for-dollar match of your price per square foot because you’ll “net zero” and because many good leases will require you to account to the landlord for any amounts paid over the parent lease rate.
A third and, well, more difficult option is to shrink your space unilaterally, notice the surrender of that portion and tender proportionately less rent to landlord, and see if the landlord accepts that surrender and lesser amount as a ratification. Or perhaps as an accord and satisfaction. As in any effort, you’ll need to look closely at your lease terms to determine if there are enforceable provisions regarding acceptance of less rents as , or waiver.
A fourth option? Well, is there a way out of your current lease? Is the lease void (perhaps there are public policy issues), or even voidable (maybe there are some misrepresentations about the space)? Perhaps the lease is missing material provisions, or is otherwise deficient in some significant regard, such as naming the wrong property or contract parties? Are there provisions allowing relief, such as very, very clear (and favorable) force majeure clauses or unilateral lease modification clauses? Man, “force majeure” is the word of the year, huh?
A fifth option could be to terminate the lease. Are there lease defaults, preferably incurable, on the part of the landlord?
A sixth option, plunging the more aggressive depths of options, might be to walk away from the space and the lease. What are the risks? What is the party alignment, and is there a guaranty? One thing to look for is the mitigation obligation (read: to re-let your space) on the part of the landlord, which can be waived in commercial leases in North Carolina. And, even if the obligation isn’t waived, I wouldn’t “bank on” mitigation as your saving grace; if you need less space, what makes you think there are other clamoring for space such that re-letting will pan out?
These options are not exclusive of one another, nor are they linear in their application. But they are options to consider and discuss before the need to act is emergent, and opportunities dwindle.
In the end, good counsel will help a commercial tenant conduct its S.W.O.T. analysis and find the most suitable solution(s).