What is an Exclusive Expansion Option?
An exclusive expansion option, sometimes called an exclusive right to lease, is a highly tenant-friendly provision that grants a specific tenant the sole right to expand their leased space within a property. Unlike a non-exclusive expansion option, where multiple tenants may have the right to lease additional space, and the landlord can continue to market such space, an exclusive expansion option ensures that only the specified tenant can expand within the property for some time.
What are the Pros & Cons For Tenants?
Because of the very tenant-friendly nature of an exclusive expansion option, it primarily benefits tenants by providing exclusivity of space and the option to add space under pre-determined terms and conditions. This is a scarce lease term for a tenant because a tenant would need significant leverage, such as a vacant building trying to attract a blue-chip tenant taking a large block of space.
Tenant Pros:
Control and Priority: Tenants with exclusive expansion options have exclusive control over expanding their business operations within the property. They don’t have to compete with other tenants for available space because the right restricts a landlord from marketing it, and their expansion plans take priority.
Flexibility and Security: Tenants can more confidently plan their growth strategies, knowing they have guaranteed access to additional space within the same property when needed. This flexibility and security can be particularly advantageous for businesses with long-term expansion plans.
Stability: Exclusive expansion options provide stability by ensuring tenants won’t risk losing out on desired expansion space to competitors or other tenants.
Landlord Pros:
Potential Higher Costs: Landlords may charge higher rental rates or additional fees for leases that include exclusive expansion options, as tenants essentially pay for the security and control over future expansion needs.
Difficult To Get: A tenant will only get this term if the original lease is so significant that it incentivizes a Landlord to provide it.
What are the Pros & Cons For Landlords?
The only benefit an exclusive expansion option provides a landlord is pre-determining the expansion rates beforehand and incentivizing tenant retention. Because of the value of such a lease term, it can be an effective tool to beat out other prospects in a competitive marketplace. Obviously, it will severely limit a landlord’s ability to control the property and may result in potential revenue losses if new third-party prospects want the space during the exclusivity period.
Tenant Pros:
Tenant Retention: Offering exclusive expansion options can be a powerful incentive for tenants to stay in the property long-term. It helps landlords maintain a stable tenant base, reduce vacancy rates, and foster positive tenant-landlord relationships.
Premium Rent: Landlords may be able to command higher rental rates for leases with exclusive expansion options, as tenants are willing to pay for the exclusivity and security provided by the option.
Landlord Pros:
Limited Flexibility: Granting exclusive expansion options restricts the landlord’s flexibility in leasing additional space within the property. If the tenant does not exercise their expansion option, the landlord may have limited options until the lease expires.
Potential Revenue Loss: If the tenant with the exclusive expansion option does not exercise it, the landlord may miss out on potential rental income from other interested tenants who could have leased the same space.
