Bordwin: Renegotiate lease when downsizing or closing your office
By: Opinion, Matthew Bordwin
November 15, 2021
Even though optimism was in the air, the fact is Labor Day reopening plans were put on hold for many companies due to the rise in the Delta variant of coronavirus. With the office market recovery now delayed even further, more tenants are rethinking their leases or, as in many cases, are competing with their landlords by sub-letting their space, according to a report in The Wall Street Journal. As companies decide to downsize to reduce operating costs, the big question is: How do I get out of my lease?
Answer: Carefully, and with the right professional advice.
Industries that were significantly affected by COVID, including retail, tourism and hospitality, will need less corporate space. It’s important to have the right real estate exit strategy from the start.
• Don’t negotiate on your own – it’s likely not your forte. Speak with an expert to help preserve the relationship you have with your landlord and get the best possible outcome. If you’re seeking to renegotiate or terminate a lease early, having the right plan and team in place at the start is critical.
• Understand that you’re not just negotiating with the landlord, but also with investors and owners who hold the equity, and lenders and creditors who control the debt.
• Know there is a symbiotic relationship with landlords and tenants; they need each other. Landlords have their own expenses to pay, and having tenants is their business. Tenants need space in order to conduct their businesses. From the perspective of tenants looking to reduce space or term or to terminate the lease, it’s the job of landlord to say no. So, everything is open for negotiation.
• We believe you have to have the right approach. So, we consider, “What can we say to a landlord to convince him that it is in his best interest to work with us?” You can’t force someone to negotiate with you, but you can convince them that they should talk to you.
• Less money is better than no money from a landlord’s point of view. If you break a lease, they may have the right to sue, but the legal costs may not be worth it in the end. Use this to your advantage when negotiating.
• In other situations, a tenant may have an option notice date or lease expiration date approaching and that fact may allow a tenant to restructure their lease by agreeing to add term.
Research from Upwork projects that more than 20 percent of the American workforce will be working online through at least 2025. And an analysis from McKinsey Global Institute estimates that “more than 20 percent of the workforce could work remotely three to five days a week as effectively as they could if working from an office. If remote work took hold at that level, that would mean three to four times as many people working from home than before the pandemic.”
The impact is being felt. In the second quarter of 2021, vacant office space in midtown Manhattan reached a record 47.4 million square feet, or 19 percent of total space, according to Cushman & Wakefield. Between the end of 2019 and 2021, office vacancy rates across all sectors and regions jumped from 9 to 16.4 percent, based on data published by Statista Research.
We expect these numbers to continue to grow. Unfortunately for many companies, this means breaking or renegotiating the terms of their lease. But there’s a right way to go about it and a wrong way.
Matthew Bordwin is a principal and co-president of Melville-based Keen-Summit Capital Partners, a real estate brokerage and investment banking firm, specializing in special situations, restructurings, bankruptcies and receiverships.