Advice to Growing Companies on Lease Flexibility

 

This article was updated on 12 February, 2020

There are many potential reasons why a growing company would require more flexibility in a lease agreement, and it would be best to explore these strategies with your broker. In most cases, tenants seek increased flexibility to align property lease strategy with business strategy. Flexibility in a lease agreement for commercial or industrial property can be achieved in various ways, best planned for during initial negotiations with the landlord. A more in-depth understanding of the lease factors specific to your business will assist your broker to negotiate a lease that is best suited to your business strategy.

Here are some of the aspects of lease flexibility for growing businesses to consider:

1. Be strategic and have more control over your lease

Your lease agreement is one of the most strategic business decisions you have to make and needs to be treated as such. Be objective with your broker about fundamental strategic elements of your business such as your anticipated growth over a 5 year period, competitive industry forces and future revenue projections. This will assist your broker to negotiate a lease that is better suited to your business plan. For example, if you anticipate that your staff compliment will grow threefold in 2-3 years, it will significantly influence the dynamics of the lease. Other unique factors may include the lease terms of neighbouring tenants and if there exists opportunities for you to expand in the existing property. Exploring these options in advance will avoid the scenario where you potentially have to relocate at a significant cost to expand your business.

2. Planning your exit strategy

If your company operates in a high-growth or dynamic industry, your broker can advise on property solutions where the premises are fitted out which can save installation costs for both parties and get the business operational sooner. This avoids the scenario where you potentially over-invest in a space for a short term and also assists the landlord by knowing that the property will not have to be reconverted again in 3 years’ time. Furthermore, planning this well will assist both the broker and landlord to plan an exit strategy for your company and your potential next property solution. Your relationship with your broker and landlord is therefore vital for in planning an exit strategy and the appropriate flexibility so both parties incur as little financial risk as possible.

3. Sub-let strategy

If your business environment changes and you foresee potential implications for your current lease agreement,  it is important to inform your broker well in advance. Typically, a brokerage firm represents a variety of other tenants and companies and would be able to start investigating possible sub-let solutions if you outgrow your premises. This entails finding another suitable tenant for the remainder of your lease term. It is worth bearing in mind that the landlord will avoid an empty space at all costs and will pass down risk to the tenant because of the significant costs related to vacant premises and new tenant installations.

Notwithstanding the above, it is important to remember that every tenant, landlord, business, commercial property and lease agreement have unique circumstances. Therefore, it is always best to discuss the relevant context with your broker first before taking action.

For Advice and a free Rental Analysis Contact us (Cape Town, South Africa)

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