By Matthew Kertz, Esq.
Everyone knows the most critical factor in the determination of cost of rentable square footage of leased space and the value of land is “location, location, location.” COVID has not changed this truism, but perhaps has rarified the implications. On the whole, in my practice I’ve seen prospective tenants seeking less space of better quality, and ways to reduce long-term risk. While these trends appear simple and straightforward, the implications of these guiding principles are forcing the re-examination of lease provisions that were once relatively static, and I believe we’ll see the full impact of this new normal after pre-COVID negotiated lease terms expire. But how did we get here, and how are landlords and tenants addressing this today?
The monthly demands of leased property for commercial tenants — both in terms of the base rent paid and utility and upkeep expenses — is often the largest expenditure on a company’s balance sheet. Before COVID, these costs were seen as part of the necessary reality of doing business, critical for corporate visibility and managing the workforce, but now these costs are being called into question across the board.
At the advent of COVID, a fair amount of leased space could not be fully utilized during government-mandated closures while rent (arguably) continued to accrue. During this time there was often a workout between landlord and tenant addressing the several months the space could not be physically used — but this necessarily only addressed an emergency situation for a very limited duration of time. Thereafter, and continuing to the present day, the trend of employees working from home, or employers otherwise providing employees more flexibility for time in and out the office has emerged as a driving employment consideration and has filtered into the great majority of conversations involving the work/life balance.
This trend of working from home is developing side-by-side with another related trend, the “hoteling” system of sharing desks and offices, which eschews permanent desk and office assignments and instead provides space to employees on an as-needed basis, where each employee is assigned a desk or office as they arrive for the day. When used effectively, and when combined with a flexible working schedule where employees come into the office only a few times a week, this can drastically reduce the amount of space needed in an office environment.
To complete this trendy troika, employers are looking for ways to entice employees into the office. Where pre-COVID office life was considered just another necessary reality of the working world, now employers are starting to justify why they are requiring employees to return to work, and showcasing the working environment and office amenities being offered to lure employees back. This translates to higher-quality leased space, space with top-end HVAC air filtration systems, and/or a coffee bar and gym, or the like.
Taken together, and coupled with a tenant reluctance to shoulder any more lease-related risk than necessary, these trends suggest that parts of the model office lease require re-examination and revising. Once relatively rare, it is becoming more common to negotiate an early termination option, or consider higher rent for shorter term, which equates to less exposure for tenants in the long run. With the specter of COVID still looming in the daily considerations of the workplace, both landlord and tenant should consider scrutinizing use and occupancy provisions — especially in a large office building, a setting with considerable shared common areas or where landlord controls access to space — as well as the now often referred to force majeure clause, and the insurance, assignment and subletting and surrender provisions should be closely reviewed with the understanding that they may need to be referred to during and at the conclusion of the term.
Matthew Kertz is a partner at Genova Burns, LLC and the chair of the firm’s Commercial Leasing Practice Group.
