An expansion option is a tenant’s fixed right (but not obligation) to expand the Premises at a future date. Anchor tenants and other large space users may negotiate a series of expansion options to accommodate planned growth over the term of a lease.
However, Landlords are reluctant to encumber their buildings with expansion options. Vacant space encumbered by a tenant’s expansion space will usually have to be leased to interim tenants at a discount or simply held in inventory by the landlord, awaiting the anchor tenant’s decision as to whether or not it will exercise its option.
Checklist for negotiating an option to expand
- Do you have the right to expand the Premises periodically through the lease term? When will desired spaces in the building become available?
- Is the landlord to deliver the expansion space on a fixed date or within a specified window of time?
- How much prior notice in advance of the option exercise date are you required to provide the landlord? Are you limited as to how early you give notice? Is the landlord required to give you a ″reminder notice″ if you’ve failed to timely provide notice to the landlord?
- May you exercise your Expansion Option at any time prior to the option exercise date if the expansion space is unleased?
- Size of expansion premises fixed or variable within a specified size range? Are pro rata parking privileges increased accordingly?
- Specific space for expansion identified? If so, will the location of the expansion space provide you direct access to the elevator lobby and/or allow you to extend your internal staircase?
- Rent for the expansion space at __% of prevailing ″market rate″ or at then current lease rate?
- If at ″market rate″ and the landlord and you are unable to agree upon the prevailing ″market rate″, is the dispute submitted to expedited arbitration or do you have the right to rescind your exercise of the expansion option? Or is the rent (including any free rent period) for the expansion space to be determined before the expansion option is exercised?
- If the rent for the expansion space is the then current lease rate for the Initial Premises, are concessions and construction allowance received for the Initial Premises to be prorated for the expansion premises or is the expansion space to be delivered ″turn-key″?
- If the rent for the expansion space is at the prevailing ″market rate″ (or a __% thereof), are ″market″ concessions and construction allowances to be provided to you? Or is the expansion construction allowance a function of the allowance received for the initial Premises, as escalated by subsequent increases in a construction cost index?
- Is there a per day penalty if the landlord fails to deliver the expansion space by the required delivery date? May you elect to rescind your exercise of the expansion option if the landlord fail to deliver on time?
- In what condition is the expansion space to be delivered to you? ″Vacant and ready for commencement of construction of Tenant Improvements″ or ″Substantially Completed″?
- If the tenant improvements for the expansion space are to be constructed by you, is rent for such expansion space abated in full for __ months following the delivery of the space to you?
- If the tenant improvements for the expansion space are to be constructed by the landlord, is rent for such expansion space abated in full for __ days following the delivery of the space to you in order for you to install your furniture, fixtures, and equipment?
- Is the lease term for the expansion space coterminous with the lease term of the Initial Premises? Does your right to sublease also apply to the expansion space?
- Does your failure to exercise a prior Expansion Option not affect your right to exercise subsequent Expansion Options? If your right is unaffected and if specific space was identified for each Expansion Option, does the space associated with the prior unexercised option become the next expansion space?
- So long as you continue to lease at least __% of the original Premises, do you retain your Expansion Options despite having previously sublet/assigned a portion of the Premises?
- If you exercise a ROFO or ROFR with respect to any future expansion space for a lease term coterminous with the lease term of the Initial Premises, may you subsequently exercise the Expansion Option associated with such space for other space in the building?
- So long as there is no material ″Tenant Default″ that has occurred and continued beyond any applicable notice and grace period, do you retain your Expansion Option?
- Has the landlord granted other rights to other tenants that will be superior to your expansion right?
- May an assignee or subtenant exercise the Expansion Options or are they personal to you?
Blackacre Advisors LLC
DISCLAIMER. Our writings are from a real estate transaction perspective and for informational purposes only. Nothing herein shall be considered legal, accounting, tax, or architectural advice. Please consult with the appropriate professional(s).