ITRA Global News

Short-Term Lease Risks―Why It’s Important to Have More than a Month or Two of Term in Your Lease

August 22, 2023

Most headlines today concerning the office market say tenants are giving up space, causing vacancy rates to increase―especially in many downtown areas. The tenants in those buildings are enjoying extra attention from their landlords and experiencing improved leasing flexibility. Some tenants are going very short-term on their leases, even month to month, so they have maximum flexibility. However, tenants who get lulled into a sense of complacency may be in for a rude awakening and an unexpected change of address.  Let's talk about losing your office space to another tenant.   

Even though the focus has been on high vacancy rates and downsizing tenants, there are still companies on a growth track. They need to lease more space and may be trying to consolidate several office locations together, or some businesses may be moving from one city to another. That’s good news for landlords who are trying to fill empty space, but this can be unwelcome news to existing tenants on short-term leases that could be negatively impacted. 

Most tenants are not concerned about losing their space to another tenant because it is a pretty rare occurrence. However, the threat is always there. You might see empty office space in your building, but there is often a lot of deal-making behind the scenes that tenants are unaware of until it’s too late. When the landlord needs your space to make a deal with another larger or long-term tenant, at minimum, they will relocate your office within the building. They may also terminate your lease if your expiration date is just a month or two away.

So, what is better than a month-to-month lease? For protection, a tenant can sign a lease that is a year or two in length but also contains an option for the tenant to terminate the lease with a short notice period. For example, you could agree to a two-year lease term and have the ongoing right to terminate the lease with 60 days prior written notice. If your office market is soft, the landlord might agree to this. This type of lease right gives your company flexibility to leave the building with short notice but does not allow the landlord to terminate your lease on short notice. If the landlord tells you they are going to relocate your space to accommodate another tenant, you could exercise your termination option (or threaten to exercise it) if the proposed relocation office does not meet your approval.     

If your office is on a mostly vacant floor and your lease is month to month, you might want to consider signing a longer-term lease with a termination right to protect the space you have. Other lease concessions might also be available from your landlord on a two-year lease. For expert advice contact a local ITRA Global advisor to evaluate the situation based on your company’s specific needs and local market conditions.

All ITRA Global members exclusively represent tenants and provide principal-level expertise that is based on transparency, integrity, and trust. With members worldwide, ITRA Global is uniquely positioned to meet all your real estate advisory needs. Find an expert in your area here.

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Article submitted by Wayne Teig / ITRA Global Minneapolis-St. Paul, Minnesota USA

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