How Should Tenants Approach Early Occupancy?
Key Concepts
Early occupancy is a benefit to the tenant, allowing them to access part or all a space they have leased prior to lease commencement.
There is no standard structure for how early occupancy is handled in a lease, although there are several common business points in most early occupancy lease clauses.
Tenants should be aware of whether a space they want to lease is occupied and what improvements the landlord is planning on making prior to lease commencement. Those two elements determine most of the risk to early occupancy.
Three strategies for addressing any risk to early occupancy include a) eliminating occupied spaces and spaces with planned landlord improvements, b) not relying on early occupancy to meet financial or operational timelines and c) negotiating a mutually acceptable timeline in the lease if early occupancy is required to meet operational requirements.
What is Early Occupancy
Early occupancy is a period, prior to the lease commencing, when a tenant can access part or all a space they have leased. It is synonymous with early possession but different than rent abatement. Rent abatement is base rent that is not charged following the lease commencement.
The purpose of early occupancy is generally to allow a tenant to install their furniture, fixtures, and equipment, often shortened to FF&E, before the lease commencement. There is no limit to the ways early occupancy can be structured between a tenant and landlord in a lease, however, some of the most common business points include1:
Efficacy of the Lease: The lease is in full force and effect during any early occupancy period. For example, concerns about insurance and liability during periods of early occupancy are addressed as they would be during the lease term.
Requirements to Gain Access: Tenant’s right to access or take possession of the space or a part of the space can be contingent on the landlord’s consent, which is often subject to receipt of monies due upon execution and any required certificates of insurance.
No Impact to Lease Dates: Delays in access during early occupancy will not impact the expiration date. The tenant or landlord cannot typically extend the lease based on when early occupancy was provided.
Charges Due: Tenant either pays or does not pay charges such as base rent, operating expenses, and utilities during early occupancy. It is rare for a tenant to be charged base rent during periods of early occupancy unless they commence operations.
Permitted Scope of Action: What is the tenant allowed to perform and when are they allowed to perform it. Unfortunately, this is often left for the tenant and landlord to determine during the early occupancy period rather than defined in the lease.
A landlord agrees to early occupancy to incentivize a tenant to sign a lease, called a tenant inducement. Other tenant inducements include base rent abatement, options, tenant improvements, and other rights that can be exercised by the tenant. Early occupancy is a tenant inducement because it provides the tenant an opportunity to perform actions prior to the lease term. This can be significant monetarily and operationally for the tenant.
The ability of the tenant to prepare their operations during early occupancy and not being charged for base rent, operating expenses, and/or utilities has obvious financial advantages. Their first year Profit and Loss Statement can look considerably better when their rent commences at the same time or after they are producing revenue.
In addition, early occupancy can help the tenant meet operational requirements. Manufacturers, for example, can start to receive and install machinery to meet certain production deadlines which may not be met without early occupancy.
How Tenants Should Approach Early Occupancy
Despite the benefits, tenants should approach early occupancy with situational awareness and caution. When relied upon for financial or operation benefits, early occupancy can create challenges for tenants unless they understand the risks and address their specific requirements in the lease.
There are generally two situations that create most of the challenges for tenants before and during periods of early occupancy. First, when a space is occupied by a tenant at lease execution, they may retain possession of the space past the expiration of their lease. This retained possession is called holdover, and it can prevent the landlord from gaining possession of the space in time to provide early occupancy.
Second, when a landlord is improving a space prior to lease commencement, they will have a concern about delaying any such work by providing early occupancy. Since lease commencement is often contingent upon completion of landlord work, any delays also usually delay the commencement of rent which is unfavorable to the landlord.
Both situations are exacerbated when they are paired together, usually leading to a situation where the early occupancy period expires without the tenant gaining access. For this reason, many landlords will not agree to early occupancy for occupied properties to avoid a rocky start to the lease for both parties.
Strategies for Early Occupancy
Tenants should consider three core strategies for addressing these two main risks to early occupancy, outlined as follows:
Strategy #1
Eliminate spaces under consideration where early occupancy is at risk. This means considering the lease of only vacant and refurbished spaces, although it may be possible for a tenant to lease a vacant space and perform any required refurbishment. This approach also removes risk of delay in commencement. This approach may be challenging in a market with few vacant and refurbished spaces available that meet the tenant’s other requirements.
Strategy #2
Do not rely on early occupancy. Sure, negotiate early occupancy into the lease but do not count on it for financial or operational requirements. This is not as risk-free as Strategy #1, since the company could lease a space that is occupied or being refurbished and still risk a delay in commencement.
Strategy #3
Negotiate a detailed timeline when early occupancy is required to meet financial or operational objectives. If your company’s critical timetable depends on early occupancy, there should be a mutually agreeable timeline for accessing and improve the required areas in the lease. Ideally the lease should also have penalties if the landlord is unable to meet the timeline.
When a requirement is time-sensitive, this approach may be ideal in a market with few vacant and refurbished spaces available. However, it may also be difficult to find a landlord amenable to agreeing to a timetable for access in the lease, especially if there are contingencies outside of their control like outside contractors doing refurbishment.
Conclusion
When considering available spaces and negotiating early occupancy into a lease, tenants should be aware of the situation and the risk of being unable to occupy a space prior to the lease commencement. To ensure early occupancy and no delays in lease commencement, tenants should consider eliminating spaces that are occupied by another tenant or where improvements are being planned by the landlord.
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Endnotes
1Early Occupancy Sample Clauses (lawinsider.com) (Web view)
