Leasing Trends in Commercial Real Estate

July 2025

The commercial leasing landscape is undergoing significant transformation, driven by economic volatility, shifting workplace dynamics, evolving tenant priorities, and regulatory developments. Three key trends are shaping how leases are negotiated, drafted, and enforced:

1. Flexibility and Exit Planning

   Tenants are increasingly prioritizing lease flexibility to mitigate long-term risk. This includes negotiating early termination rights, streamlined assignment and subleasing provisions, and protections for corporate restructuring scenarios. These provisions are no longer ancillary—they are central to managing legal and financial exposure. Legal counsel can help ensure that termination rights are clearly defined, conditions precedent are not overly burdensome, and approval standards for transfers are objective and enforceable. Landlords, in turn, are tightening consent standards to preserve control over tenant mix and lease economics, creating a more complex negotiation environment.

2. Tenant Improvement Clauses Under Legal Scrutiny

   The unpredictability of construction timelines and costs has elevated the legal importance of tenant improvement provisions. Leases must now include realistic construction timelines, detailed force majeure clauses, budget safeguards, and clearly defined remedies for delays. Force majeure clauses are often insufficient to address these risks, requiring more tailored contractual protections. The risk of default due to construction delays or budget overruns requires more sophisticated legal drafting and negotiation.

3. Sustainability and ESG Mandates

   Environmental, social, and governance (ESG) considerations are becoming central to lease negotiations, particularly for tenants with net-zero goals or reporting obligations. Leases must allocate compliance responsibilities clearly, address cost recovery mechanisms, and define data-sharing protocols. “Green lease” provisions are evolving from aspirational language to enforceable covenants, with implications for default, operating expenses, and tenant reporting obligations. These laws are shifting cost burdens and compliance risks in ways that require careful allocation between landlords and tenants. Failure to address these issues may expose landlords and tenants to regulatory penalties and reputational risk.

Issue 1: Flexibility and Exit Planning

Long-term leases carry significant legal and financial risk for tenants. Remote work during the pandemic highlighted the importance of risk mitigation and exit planning. Despite return-to-office trends, companies are continuing to prioritize flexibility in lease terms due to uncertain economic conditions.

Early termination options are often linked to increased financial obligations, either in the form of increased rental rates or lump sum termination fees. If paying for the benefit of a termination option, it is important to ensure that the lease clearly defines when and under what circumstances the tenant can terminate. Any conditions precedent should be carefully considered to make sure they do not present unexpected hurdles. Formulas for termination fees should also be precisely defined in order to avoid disputes.

Assignment and subleasing often provides the best option for mitigating loss when space is not needed or underutilized. Tenants should consider how to pre-negotiate terms that provide clear metrics for approval. For example, a lease might set a minimum net worth requirement for subtenants and assignees that, if met, would be deemed approved by the landlord. Tenants leasing large premises should also consider seeking pre-approval to sublease a certain portion of their premises without the landlord’s consent.

Tenants should also prioritize flexibility in assignment provisions to facilitate mergers and acquisitions, spin-offs, and internal reorganizations. For example, tenants should closely review change of control language to negotiate carve-outs so that an upstream merger does not trigger an assignment requiring landlord consent. It is also critical to ensure that permitted transfers to affiliates are exempt from terms that may be imposed on a third-party assignment, such as recapture, transfer premiums and administrative review costs.

Increases in assignment and subleasing activity over the past few years have also prompted some landlords to impose stricter consent provisions. Landlords are concerned about maintaining control over the tenant mix, creditworthiness, and lease economics in a volatile market. Strict approval standards may not always provide the protection that landlords expect. It is important for landlords to understand how contractual approval standards may be construed in light of a landlord’s duty to mitigate.

Finally, parties should consider whether failing to occupy the premises qualifies as an event of default. An ongoing default often results in an automatic nullification of discretionary options and rights under the lease, such as permitted assignments and termination options. Without understanding these terms, a tenant may vacate space as it prepares to market it for sublease and unwittingly forfeit its right to do so. Landlords often want to include occupancy requirements out of a concern about impacts on property insurance premiums if significant portions of a building or project are unoccupied. If agreeing to omit occupancy from the list of defaults, careful landlords should ensure that any increased insurance costs can be passed through to the appropriate tenant or tenants.

Issue 2: Tenant Improvement Clauses Under Legal Scrutiny 

Construction timeframes and costs are becoming increasingly difficult to forecast in tenant improvement work. Labor and supply chain shortages have led to delays and pricing volatility. In many urban jurisdictions, building permits are taking longer to obtain due to increased administrative process and staffing shortages.

For the party performing the tenant improvements, it is important to make sure construction can reasonably be completed within the required timeframe. Some leases impose construction deadlines that give rise to an event of default if not met. Parties should consider whether the lease provides realistic deadlines and understand the consequences of not meeting them. Many assume that force majeure clauses will provide automatic extensions, but commencement dates are often excluded from such extensions or subject to fixed caps. Force majeure clauses may also be narrow enough that permitting and supply chain delays do not provide a basis for extending deadlines. If a tenant has an urgent need for space that does not match up with reasonable estimates, it may be preferable to include a phased buildout on a floor-by-floor basis.

It is also important to include sufficient safeguards to ensure that the tenant improvement work can be completed within budget confines. Having a deep understanding of the tenant improvement budget and keeping a close eye on change orders are critical to decision-making for both parties. Failing to do so may result in a tenant seeking an additional tenant improvement allowance once construction is well underway. Landlords may be faced with the undesirable choice of committing to a larger allowance or being left with a partially constructed space. Tenants may be faced with paying higher rent in exchange for a larger tenant improvement allowance, causing a long-term impact on financial projections for leasing costs.

Issue 3: Sustainability and ESG Mandates

Sustainability and ESG issues are now central considerations in leasing, particularly for companies with net-zero targets, compliance obligations, or ESG reporting frameworks.

An increasing number of leases include “green provisions” that align landlord and tenant sustainability goals. These provisions often establish mutual obligations to pursue energy efficiency, reduce water usage, and minimize waste. Leases with green provisions should address data-sharing obligations and ensure each party has appropriate mechanisms in place for tracking data. If submetering is needed to accurately track tenant-specific usage, the lease should address responsibility for installation and cost.

State and local laws targeting building emissions are becoming more prevalent and aggressive and will directly affect lease economics. Effective leases should be dealing with current laws while also anticipating the implications of future legislation in this rapidly developing field. Under current laws, consequences for a building's noncompliance can result in significant monetary fines. Under a growing number of these laws, compliance depends not only on a building's performance standards but also on the sustainability practices of the tenants occupying the space. This exposes landlords to fines and penalties for practices that may be outside their control if not specifically addressed in the lease. Careful landlords should ensure that their leases address compliance requirements and clearly allocate responsibility for compliance upgrades in a tenant's space. Leases should also address whether costs associated with sustainability laws and fines associated with noncompliance can be included in operating expenses. Tenants may wish to specifically exclude certain experimental sustainability practices or non-capital improvements unless there is a demonstrated reduction in overall costs.

Likewise, many public and large private companies are increasingly required to report on emissions and carbon reduction to investors. Purchased energy reduction credits rely on accurate landlord data for tenants in multi-tenant buildings. Tenants should ensure they are entitled to reporting updates at appropriate intervals and should consider negotiating specific audit rights to verify accuracy. In some cases, landlords may be unable or unwilling to provide granular consumption data, especially in older buildings or buildings without separate metering.

Recommendations

Legal Precision as a Strategic Imperative

In today’s commercial real estate leasing environment, both landlords and tenants must approach lease negotiations with heightened diligence and foresight. Legal precision is not just a best practice—it’s a strategic necessity. The increasing complexity of lease terms around flexibility, construction, and ESG compliance demands proactive legal structuring and risk allocation. Legal counsel plays a critical role in crafting lease provisions that anticipate market volatility, align with ESG goals, and provide clear pathways for exit or adaptation. As the market continues to shift, proactive and precise lease structuring will be a key differentiator in managing exposure and preserving asset value.