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New Kira Real Estate Study on Tenant Termination and Contraction Rights

Wed 26 Oct 2022

Have changes in work patterns since the onset of the COVID-19 pandemic been reflected in restructured commercial leases? A new Kira Real Estate Study by Litera used the Kira machine learning-based contract review and analysis platform to look for patterns in commercial leases to determine whether changes to leasing practices are underway.

A secondary literature review shows that no great transformation of leasing practices and office space contraction is currently underway, even in the face of the pandemic-driven changes in work practices. There are, however, signs that some tenants are de-risking their leases by pushing for shorter and more flexible lease terms to build exit strategy options into the leases they negotiate. Some legal experts are advising that tenants negotiate for better termination or contraction rights but that landlords are, in turn, pushing for compensation for such moves in the lease terms.

Findings from Artificial Intelligence Lease Review

When it comes to the actual lease terms being negotiated, however, few signs of a massive shift in practices around termination and contraction rights are evident. This study used the Kira machine learning-based contract review and analysis platform to analyze 200 publicly available leases. The software identified and extracted unilateral tenant termination rights and tenant contraction rights clauses from the leases. The analysis then compared the leases negotiated before the pandemic with those negotiated during the pandemic to see if there were differences.

It found that a slightly smaller percentage of the pandemic-era leases (16%) had unilateral termination rights than the pre-pandemic leases (18%). The fact that the use of tenant termination rights went down in this period suggests that landlords retained their bargaining power in the face of pandemic pressures. A similar pattern emerged for unilateral tenant contraction rights. In both periods, the share of leases with tenant contraction rights remained the same at 25%.

Tenant Termination and Contraction Rights Study

The analysis of the leases suggests that, while the pandemic may have changed the way tenants use the premises they lease, the actual termination and contraction terms negotiated between the parties have not yet undergone significant changes.

The report concludes with recommendations for tenants and landlords as they negotiate new leases in light of ongoing changes in work patterns. The full report, “Tenant Termination and Contraction Rights: A Post-Covid Expansion?” is available for download.


 


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