Taking The Mystery Out Of Leasing Office Space
Presented By Mark Rauch
"Things turn out best for those who make the best of the way things turn out."
-Jack Buck-
Most businesses need to lease space. Office space is one of the largest expenses a company takes on yet many Tenants are not properly represented and sign leases that commit them for many years without any meaningful attempt to negotiate the terms of the lease.
Prior to negotiating your lease, make a list of terms that would benefit your business.
The landlord will typically hand you a preprinted agreement that he or she is likely to call the "standard" lease, as if it is the perfect form of a lease agreement.
This form is certainly one-sided in favor of the landlord. No "standard" lease exists. And regardless of whether the form looks standard or preprinted, don't be afraid to carefully review and negotiate the terms of the lease.
Your ability to negotiate an office lease depends on how much leverage you have. Are other companies making a play on the space? Has the space been vacant for a long time? Is it in a prime location? Factors such as these may make the difference between you or the landlord calling the shots.
Here are some suggestions and information to help you become more knowledgeable and negotiate an advantageous office lease for your business:
Space.
To compare different office spaces, you need to know the exact usable square footage of each space you're considering. Usable square footage is the area to which you will have exclusive access. It is less than rentable square footage, because it deducts the common areas such as public corridors, elevators, lobbies, and bathrooms from the overall calculation. You also need to know the exact physical boundaries of the lease.
Permitted Use Of The Premises.
An office lease typically has a section that sets forth the permitted uses of the leased space. Make this clause as broad as possible, even if your intended purpose is initially narrow. Because your business may grow and your plans may change, you want the flexibility to use the space in any reasonable, legal manner. In addition, make sure that zoning ordinances do not prohibit you from running your business in that location.
Length (term) Of The Lease.
Landlords are typically willing to make concessions for longer-term leases. Your company's needs may change, however, and you may find yourself locked into paying above-market prices if demand for rentals declines over time.
A shorter-term lease allows you the flexibility to pack up and leave sooner if you are not pleased with the location.
On the other hand a longer-term lease can give you stability and keep your rent lower.
It is often to your advantage to try to negotiate "options to renew" and "termination options".
Rent Escalations.
Fixed rent over longer-term leases is relatively rare. You should carefully review any rent escalation clauses and match them with the projected cash flow of your business. Landlords will insist on annual increases based on either a set annual percentage increase or the percentage increases in the Consumer Price Index (CPI ). If the landlord has had trouble renting the space, they may readily agree to negotiate lower annual increases if you are willing to sign a more long-term lease.
Common Area Maintenance, HVAC, And Operating Costs.
Take into account operating costs the landlord may pass on to you. Some leases require the tenant to pay for cleaning, building security, electricity, HVAC (heating, ventilation, and air conditioning), maintenance, and repairs. If the landlord is charging you separately for these services, try to negotiate a fixed fee or cap on the amount. In addition, some landlords will charge extra for services supplied after-hours or on weekends.
Tenant Improvements.
Your new space may need some improvements or alterations. Who pays for these improvements (a new paint job, new carpets, reconfiguring the space) depends on how tight the commercial office space market is in your city. Most pre-printed form leases specify that the tenant cannot make any alterations or improvements without the landlord's consent. Ask for a clause that says you can make alterations or improvements with the landlord's consent and that the consent won't be unreasonably withheld or delayed.
Repairs, Improvements, And Replacements.
Get very clear about who is responsible for what kind of repairs, improvements, and replacements. Many businesses improve upon the structure of the original location by adding additional wiring for computers and additional telephone lines as well as enhancing the capacity for other technology. You may be able to negotiate that such upgrades can remain without penalty. In addition, you may be able to use the fact that your technological improvements will increase the value of the property as a bargaining chip.
Watch out for clauses that say you have to return the premises in their original condition at the end of the lease term. Try to negotiate a clause that states the following: "The premises will be returned to the Landlord at the end of the tenancy in the same condition as at the beginning of the tenancy, excluding (1) ordinary wear and tear, (2) damage by fire and unavoidable casualty not the fault of the Tenant, and (3) alterations previously approved by the Landlord."
Assignment And Subletting.
Try not to allow severe limitations or prohibitions on assigning or subletting the space. Startup companies especially should negotiate flexibility in the assignment and subletting clause.
Watch out for a clause that says a change in more than 50 percent of the company's stock ownership will be deemed an assignment that is prohibited without the landlord's approval. As the company grows and new people invest in the company, this clause can be inadvertently triggered. And if the company shrinks, you also need to be able to sublet.
Option To Renew.
Try to get the option to renew your lease at a fixed predetermined price, not based on a "fair market" price. It will save you money down the road - especially if the price of office space escalates.
Right Of First Refusal Or First Offer For AdditionalSpace.
A right of first offer obligates your landlord to present any space that becomes available in the building to you before marketing it to third parties. It also obligates the landlord to bring you any deals he's willing to sign with third parties for space in the building and gives you the opportunity to match the deal and preempt the third party.
Other Key Terms To Think About:
* What charges, taxes or fees are or are not included in the rent?
* How much is the security deposit (if there is one) and what are the conditions for its return?
* How can the lease be terminated early and what penalties will you have to pay?
* How are disputes resolved, should they arise, between lessor and lessee?
Watch Out For These!
There are also certain terms of which to be wary. In particular, look out for:
* The tenant's obligation to pay any increased taxes as a result of the landlord selling the building.
* The landlord's right to terminate your lease early for his convenience.
* A disclaimer about the building and the services provided to tenants.
* Personal guarantees or payment of the rent required from the company's owners.
Ultimately, if a prospective landlord is difficult to deal with during lease negotiations and makes unreasonable requests, you might want to consider leasing office space elsewhere. It is strongly suggested to have a good Tenant Rep and lawyer at your disposal. Don't sign anything without having them review the terms in advance.
Nothing contained herein is to be considered legal advice. Always seek
legal advice when evaluating any legal document.
