§ 21.02 Right to Acquire or Dispose of Space
| Jurisdiction | United States |
| Publication year | 2022 |
§ 21.02 Right to Acquire or Dispose of Space
[1]—Reacting to Business Cycles and Normal Growth
For many tenants, a basic premise in long- range planning when entering into an office lease is to acquire the necessary space to accommodate its present needs, as well as some excess space for normal expansion. While the tenant may anticipate its expansion needs, it also needs to provide in its lease for flexible rights to downsize the premises by assignment or subleasing1 in order to moderate the economic impacts of business cycles.2 With regard to the right for a tenant to downsize its premises through assignment or sublease, the leverage of the landlord and the tenant will depend a great deal on the circumstances under which the tenant acquired its space.
[2]—Excess Space
A tenant acquires expansion space typically under three scenarios: (1) the tenant may take excess space at the time of its lease in anticipation of its future requirements; (2) the landlord may induce the tenant to take excess space at the time of its initial lease; and (3) the tenant may acquire additional space after the lease is signed, either directly from the landlord or under a sublease or assignment from another tenant. The rights of the tenant to sublease this excess space at a later time may vary according to which situation the tenant falls into.
[a]—Space Acquired for Future Expansion
The first situation should be rather straightforward. The tenant will generally be in a favorable position and the landlord should be happy to be leasing more space than the tenant needs for its immediate operations. The tenant may be able to negotiate for favorable transfer rights under its lease. The second and third situations, however, are more complex.
[b]—Right to Sublease Excess Space Acquired at Landlord's Initiative
A landlord may have a tenant who would only like three-quarters of a floor, but the landlord might like to induce the tenant to take more space in order to ease the landlord's needs to lease its vacant space. In taking three-quarters of a floor, the tenant may have already factored in a quarter of that for expansion space. By taking additional space at landlord's inducement, the tenant is in effect, almost doing the landlord a favor! Therefore, the tenant should be in a good negotiating position with regard to securing liberal transfer rights under its lease.
The tenant taking excess space at the inducement of the landlord should be allowed to market that space, deal with it as it sees fit and not have to account to the landlord for anything other than its appropriate use. When negotiating its transfer and use clauses, at least as they affect the excess space, this type of tenant should refuse to agree to the following limitations on its rights: (1) seeking the approval of the landlord with respect to the form of the sublease or of the sublessee; (2) any calculation of profit sharing of the sublet rentals with the landlord; (3) any right of the landlord to recapture the proposed space; (4) a restriction on any right of the tenant to subdivide the premises and do necessary resulting alterations; and (5) a restriction on any right of the tenant to offer the premises through advertisements and otherwise compete with the landlord.3 Essentially, when the tenant takes excess space, relieving the landlord from the burden of marketing, subdividing and otherwise dealing with smaller, irregular space, the right to sublease should be unfettered. Moreover, the landlord should promote and assist the tenant in its quest for a subtenant.
Landlords, for their part, argue that they should have the right to review the creditworthiness of the subtenant. In the future, the subtenant might be the entity to which the landlord looks for payment of the rentals for the premises.4 With regard to excess space taken at the landlord's inducement, this argument does not apply, however. It is axiomatic that the subleasing of the premises cannot confer any greater rights to the subtenant than those held by the tenant.5 Further, the uses, obligations and responsibilities are the same for a subtenant as for the tenant. The landlord should have no right to review the transaction, the essential terms or the sublease document.
Regulation of the numbers of tenancies within the demised premises, the regularity of the dimensions of the premises and the duration of the time and overall amount of the excess space the tenant proposes to sublease are valid interests of the landlord, but should be determined initially, in the lease and not revisited throughout the term. In the event the landlord places a limitation on the number of subleases, their duration or the amount of space that can be sublet, the tenant should have the right to replace subleases that are prematurely terminated due to default by the subtenant or otherwise. These rights should be unfettered in the same manner as the right to sublease the excess space initially.
[c]—Transferring Excess Space Acquired During the Lease Term
The tenant may decide to take excess space from time to time during its lease term. Then, when the market or business cycles require, the tenant may wish to transfer this excess space through a sublease. In order to be able to do so without hindrance, the tenant must protect its position in the language of its lease document.
The tenant should be allowed to sublease this type of excess space in a reasonable manner. However, when the tenant is the one who initiated the leasing of excess space from the landlord, he or she probably will not have as strong a bargaining position as it would have if the landlord induced it to take the excess space. In this type of situation, a landlord may have more of an interest in the nature of the subtenant, its creditworthiness, its type of operations, its characteristics and its operating methods. In addition, the landlord has a greater interest in minimizing the impact of competition resulting from the availability of a previously committed space prior to the end of the tenant's lease term.
A tenant can expect a landlord to want to have a reasonable right to approve its selection of subtenants and to...
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