The leasing market today is tough, no questions about that. Both tenants and landlords continue to seek ways to achieve optimum value and position in lease negotiations. Tenants want to use the current market conditions to lock in favourable rates and lease terms. Landlords want to fill their properties and do so without handicapping the future value of their investment.

One technique I’ve used on behalf of landlords is the “Changed Conditions” clause. This clause recognizes a number of things; first of which is that all business is cyclical. The second is that the lease is executory in nature over the term, generally meaning that it is not fixed at a point in time when the negotiation occurs.

The essence of the Changed Conditions clause is that the rent paid by the tenant will adjust at the time of some pre-negotiated meaningful event. Your first instinct in reading that sentence is that this clause doesn’t work in today’s environment. In fact, tenants use the concept all the time under the name of a co-tenancy clause. Tenants want downside protection. The landlord wants upside protection. The Changed Conditions clause is the corollary to the co-tenancy clause.

The clause can be included in the master lease form or inserted on a case by case basis, such as when a tenant asks for a co-tenancy clause.

One of the keys to the success of the clause is to tie it to a realistic and meaningful event that is expected to occur. These events can include:

• Renovation or rehab
• Expansion of the property
• Addition of a major or anchor tenant
• A significant increase in the average sales of the property, indicating a stronger property
• Attainment of LEED or other sustainable certification (this is particularly useful in office buildings)
• Addition of infrastructure positively affecting the property, such as a major transit stop or road realignment
• Or a combination of any or all of these.

There are specifics that need to be considered concerning each of the events noted and these should be included in the clause wording. Another consideration is the determination of what occurs to the rent when the event happens and the clause is triggered. In each of these, there are very specific business related tactics and concepts that should be included. I can assist you with those. However, since I am not a lawyer nor am I offering legal advice, you should consult with your legal advisors in crafting the concepts into the lease.

Naturally, tenants in a strong negotiating position will want to remove this clause. As in all clauses, the landlord must decide for themselves how to deal with the particulars of each negotiation. The objective however, is to negotiate terms based upon today’s reality – providing comfort to the tenant; but acknowledge that a significant event, such as those above, may occur and be beneficial to the tenant during the term of the lease.

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© 2011  Peter D. Morris SCLS, SCSM, SCMD

              Greenstead Group LLC

              pmorris@beyond-the-building.com