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What to do when your business outgrows your office space during the lease term?

Whether you are a start-up or an established and expanding business, moving offices multiple times can be a costly and time-consuming exercise, so it’s important to get it right and aim to do it as infrequently as possible.
Chris Chapman
Outgrowing Office Space

When planning on taking an office lease, it can be difficult to predict your business’s growth over the term of the lease. Whether you are a start-up or an established and expanding business, moving offices multiple times can be a costly and time-consuming exercise, so it’s important to get it right and aim to do it as infrequently as possible. To ensure you’re ready and able to account for the next growth phase of your business, here is a list of options for you to consider:

Serviced Offices:  

If you’re doubling or tripling in size every few months, or are just starting out with a small team looking to establish a track record, a business centre or executive suite might be the right short term fit. Businesses who occupy these suites pay a higher rate per/sqm, but there is flexibility in signing on at a monthly, quarterly or bi-annually basis. Another benefit is that you can quickly expand within the centre which can serve as an incubator for your business. Generally, all furniture, phones and kitchen/breakout areas are included, so setup is relatively hassle-free.

Serviced office providers don’t typically request any audited financial statements and require little-to-no money down in way of a bond/guarantee.

It might be worth paying for the convenience of flexibility to get your business through a short period of uncertainty, saving you a lot of trouble and over-commitment issues that may potentially arise down the track.

Sign a standard lease:

Signing a typical commercial lease is likely to be a more significant commitment for your business than taking space in a serviced office centre. This is on account of the duration (likely to be a minimum of 2yrs), and the lack of flexibility a landlord may have to grow you within the building, or to find a replacement tenant for your space.

Most building owners will do what they can to accommodate the growth of an internal tenant, but if, for whatever reason, they just cannot do it, you will be left with only a few options to cut or recover your costs on this space.

Some of these strategies are:

        A. Growing within the building or the building owner’s wider portfolio:

If you are bursting at the seams within the term of your lease and the landlord has a larger space for you (in your building or in another building within their portfolio), the landlord may be able to extend the first opportunity for their existing tenants to lease the larger space before it’s taken off the market. Of course, it’s always good to keep the owner in the loop with your current growth, because if they don’t know that you’re at capacity they won’t extend the offer to lease the space to you.

       B. Assign the Lease: 

If there is demand for it, you may be able to find another business to assign the lease to. Assigning means transferring the lease to a third party, who is then substituted as the tenant. Your lease agreement will likely have clauses in it related to assignment. Therefore, it is essential to consider those clauses before you commence any proposed assignment. Usually, a landlord cannot unreasonably prevent an assignment, however, they will need to be satisfied that the incoming business will be able to meet the lease’s obligations.

       C. Sublease your space:

Finding a subtenant is not always easy. But if you’re realistic about your expectations on rent and attain the right leasing advice – the business will find a new tenant. It’s worth noting that when subleasing your space, this is generally a cost recovery exercise and very rarely a money-making exercise. Most tenants who are looking to sub-lease take a loss at of 35% – 50% of the rent they pay to the landlord.

Negotiate a ‘Break Clause’ within your lease:

If your business is in an industry where staff numbers ebb and flow, it might be useful to negotiate a ‘break’ clause within your lease. There is some simple wording that can be requested within an initial Offer to Lease to put this clause up for discussion – ask your leasing agent for some clarity around this.

Not all Landlords will be open to break clauses but some will look to do this if it is fair and viable for the building. More often than not, there is a penalty for activating this clause because the landlord will want to account for the foregone rent and some expected downtime as the tenancy is taken back to the market. It is important to consider the effect of this break clause and how important it is that the business be able to break the lease at that time.

 

Caden regularly deal with tenants who have outgrown their office space during their lease term, if you’re in this position now, or have taken on some new projects within your business and want to assess your options, feel free to reach out to us.