Maintaining and Securing “Occupancy Protection”

Maintaining and Securing “Occupancy Protection”

What is “occupancy protection?” In the language of commercial real estate, occupancy protection is the ability for a tenant to remain in place after its lease expires. It’s a fixed right that no matter what, at the end of the day, a tenant can fall back on and use to renew its lease.

In our work with a hedge fund client, maintaining and securing future occupancy protection was at the center of our strategy. In its current lease, our client had a renewal right that would allow it to extend for 5 years at fair market value (“FMV”), a common term in commercial real estate leases describing the way in which the rent on future space is priced.

Our client’s fixed renewal right was particularly important when looking at the Building’s tenancy overall. Despite the Building being 95% occupied, its anchor tenant has a lease expiring in the next few years. Thus, we stressed the importance of the renewal right to our client because if our client didn’t 1) exercise its renewal right, or 2) negotiate a new lease amendment in advance of the notice date, there would be no guarantee that it could stay at the Building when its lease expired.

While our client’s renewal right provided it with occupancy protection, it was limited in that the rent would be at FMV, the term 5 years and there would be no future renewal right (i.e. no future occupancy protection.) Thus, we advised our client to renew its lease outside of its renewal option, but still before the notice date (strategy #2 above.) Ultimately, we were able to negotiate a 7-year lease extension at a negotiated rent with a valuable concession package (i.e. free rent and tenant improvement allowance). Additionally, in this lease amendment we were able to negotiate, once again, a fixed renewal right for our client, something that would not have been possible had we renewed our lease via the renewal right.

While ownership will look to renew the Building’s anchor tenant in the coming months/years, they will not be able to offer our client’s floor to the anchor tenant as part of its package. Through this new lease amendment fully executed before the renewal option notice date, our client remains in control of its future destiny.

**client’s name and building not mentioned due to confidentiality.