Five Things to Remember When Negotiating “opting out” Clauses

Published on Wednesday, 11 September 2013 09:34:45    Written by Marc
In the many years I spent head of the Real Estate division of a large company, I was called upon to negotiate all types of leases. Whether it is office, commercial or industrial leases, I never gave much thought to integrating opting out clauses. If a business unit needed a lease for an office space, I mostly focused on the length of time that was. Over the past few years; though, probably since the end of 2008, I have begun to notice a trend in negotiating opting out clauses in our leases. I became aware of this tendency as this request kept coming within the company as well as from other outside sources. A few things are probably at the origin of this trend:

IMG_0013Economic concerns, companies seem more nervous about committing to long term deals and there is a desire to remain more flexible in these unsure times. With this in mind, the following is a non-exhaustive list of things companies and organizations should look out for when adding an opting out clause in a lease. I welcome you all to suggest or propose other things that can be added to this list.

  • Penalties: Opting out clauses nearly always come with some kind of penalty, so try to reduce them to a minimum. Penalties come in many forms such as reimbursement of tenant inducements provided initially by the landlord, the balance of the rent left to pay after the opting out clause is exercised (with or without giving you the possibility to remain in the space during that time) or simply a penalty paid in cash.
  • Restoration clauses: Take a close look to see if the landlord imposes different restoration clauses because of the opting out clause. In some cases, a landlord might want the tenant to restore something, which he/she would not have been required to do if the opting out clause had not been triggered.

  • Advanced Notice to give landlord: Be sure to verify the required notices you have to give the landlord before opting out of your contract. In addition, make sure that it makes sense for your business to do so. For example, if you can opt out of your lease after three years on a five year lease but need to give a 12 month notice to the landlord, then you really only have 24 months make your decision. You might try to reduce the notice to a shorter period to give you more time and flexibility. Also, look closely at the clause that mentions how the tenant must give notice to the landlord. If it states that the landlord must receive a certified letter by a certain date, do not assume that he will be ok with a standard letter or an email within a few days of the delays. Provide exactly what the clause states and in doubt, registered letters are most probably the best way to go to avoid bad surprises.

  • Length of the lease?: If you think there’s a good chance you may stay there and exercise your option to extend the lease, you might consider signing a longer lease than needed but with at a better price (longer leases can often give you the bargaining chips to reduce rent rates), then put aside the funds from the generated savings to pay for the penalty should you exercise the opting out. For example, if you think that maybe after five years you will need to move, but that there is a good chance that you might remain at the site for the next 10 years, instead of getting a five year lease, go out and negotiate a better rate on a 10 year lease, add an after five years and keep the savings as a fund to pay for the opting out clause should you ever exercise it. You might not save much in the end if you do exercise the opting out clause, but should you happen to remain at the site the full 10 years, you will have paid a lower rent overall.

  • Are you fully amortized? Remember that if you do exercise an opting out clause and relocate to another site, you may still have items that are not yet fully amortized. For example, if you entered a 10-year lease, did some tenant fit-ups, and decided to amortize the construction cost over the full term of your lease, if you exercise an opting out at any time before the full 10 years, you will have a portion of your fit-ups that remain too amortized.