Inducing Major Tenants When Developing Office BuildingsOnce a developer or landlord has purchased or has an option to purchase the land for an intended office building, it naturally wishes, subject to the necessary site plan approvals, to proceed with construction. However, no developer will proceed without significant pre-leasing commitments from one or more tenants with sound financial covenants which will occupy, in aggregate, a significant portion of the rentable area of the building. Assuming such a tenant can be found, how does the developer or landlord induce it to enter into a long-term unconditional commitment? In other words, what provisions are found in these major tenant leases which would not usually be found in a normal office tenant lease?
The Building. The location, size and quality of the building and the amenities in and around the building are of the utmost importance to a tenant. Design and specification input from the tenant to allow for its special requirements, which would not be available in existing buildings, is a key inducement.
Rent. The annual basic rent is important, but the total rent package (ie, basic rent, additional rent and utilities) is even more important. A new building should be less costly to operate so, in return for the higher basic rent per square foot normally associated with a new building, a lower additional rent per square foot may be offered. Some landlords will consider capping the amount of additional rent or certain segments of it by using formulas for escalation over the ensuing years. Some tenants will insist on more detailed reporting and may ultimately require the landlord to keep certain records that are subject to audit by the tenant or its accountants.
Prior Leases. A key concern for any tenant is whether, when it commences its occupancy, it will continue to have obligations under an existing lease in respect of the space it is vacating. Alternatively, a tenant's existing lease may expire before the completion of the new building. The landlord must deal with these concerns as a tenant will not want to pay rent for two spaces or, alternatively, risk having no space for the operation of its business. In addition, a tenant will not want to move into a partially constructed building as this could adversely affect the operation of its business.
Signage. There are many types of signage and signage rights that may benefit a tenant. The following are of key interest to a tenant:
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building naming rights;
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top of building signage exposure;
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podium signage;
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interior building signage exposure; and
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building directional signage.
Exclusivity with respect to any or all of these signage rights can also be important. In connection with discussions pertaining to signage, some tenants may seek to exclude business competitors from occupying the building or some parts of it.
Additional Space. If a tenant is committed to a building for a lengthy period of time, it will seek reasonably flexible expansion rights which the landlord may combine with expansion obligations. These space rights or obligations are usually expressed by way of rights of first refusal, rights of first offer, early expansion space and additional expansion space. A landlord must be careful not to inhibit the ongoing leasing programme for the building by granting extremely flexible expansion rights to its major tenants.
Early Termination Rights.In order to address potentially adverse changes in its business circumstances, a tenant will also seek limited or extensive rights of early termination. These will be met with great resistance by the developer or landlord, as they will inhibit its financing of the building.
Transfers. The tenant may seek assurances that, during the construction of the building and for some period of time thereafter, the developer or landlord with which it is negotiating will not assign the building to a third party without tenant approval. Similarly, the landlord may also be concerned about the identity of the tenant and its financial condition, and will seek to control the tenant's ability to transfer its rights, particularly when the tenant has building naming and top of building signage rights.
A major tenant lease which addresses all the key issues is likely to exceed 100 pages and will deal with the issues summarized here, as well as many other matters.
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