Office space is one of the largest expenses a company takes on yet many Tenants are not properly represented and end up signing a lease that commits them for many years without any meaningful attempt to negotiate the terms of the lease.
The landlord will typically hand you a "standard" lease, as if it is the perfect form of a lease agreement. This lease will certainly be in favor of the landlord. Don't be afraid to carefully review and negotiate the terms of the lease.
Negotiating a favorable office lease will depend on how much leverage you have. Are other companies making a play on the same space? Has the space been vacant for a long time? Is it in a prime location?
Pick 3 viable options and negotiate all 3 simultaneously. The goal is to drive the rate/rent down and concessions up.
Here are some suggestions to help you negotiate a great office lease for your business:
Space
To compare different office spaces and run a proper cost comparison analysis, you need to know the exact rentable and usable square footage of each space you're considering. Usable square footage is the area you actually will occupy. 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.
Permitted Use Of The Premises
The office lease will have a section that sets forth the permitted uses of the leased space. Make this clause as broad as possible because your business may grow and your plans may change. You want the flexibility to use the space in any reasonable, legal manner. Make sure that zoning ordinances do not prohibit you from running your business in that location.
Term Of Lease
Landlords will usually give more concessions for a longer term lease however your needs may change and you may find yourself locked into paying an above market rent should rates increase over time. On the other hand a long term lease gives you stability and keeps your rent down in a rising economy.
Make sure to negotiate rights to renew, terminate, expand or contract. It may not be possible to get everything nevertheless you want maximum achievable flexibility.
Rent Escalations
Fixed rent is relatively rare unless the space is located in a high vacancy market or the space has not generated any interest. Landlords will insist on annual increases based on either a set annual percentage increase or the percentage increases in the Consumer Price Index (CPI ) or a combination thereof.
Operating Expenses
Take into account operating expenses 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. This is known as a Triple Net lease. If the landlord is charging you separately for these services, try to negotiate a fixed fee or cap on the amount. Other leases will charge you your pro rata share above the base year. This is known as a Full Service Gross lease. Make sure to negotiate operating expense exclusions. Landlords will charge extra for services supplied after-hours or on weekends. Negotiate a certain amount of "after hours" usage if your business runs after hours.
Tenant Improvements
Your new space may require improvements or alterations from simple carpet and paint to a complete build out. Who pays for these improvements? It depends on how tight the commercial office space market is and how sophisticated the landlord is.
The more sophisticated landlords will usually build the space out for the right tenant and lease term with a cap on total tenant improvement dollars. The amount is totally negotiable. Most 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. Negotiate that such upgrades can remain without penalty after the term of the lease expires in case that particular technology becomes obsolete. In addition, use the fact that your technological improvements will increase the value of the property as a bargaining chip.
Assignment And Subletting
Seek 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. If the company shrinks, you also need to be able to sublet.
Option To Renew
The renewal rate will be stated in the lease as "fair market". Make sure to have language in the lease that defines how the fair market is determined. It will save you money down the road especially if the price of office space escalates.
Right Of First Refusal For Additional Space
Negotiate a right of first refusal or right of first offer which obligates your landlord to present any pre-defined 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 pre-defined space in the building and gives you the opportunity to match the deal and preempt the third party.
Other Key Terms To Think About Include:
What charges, taxes or fees are or are not included in the rent?
How much is the security deposit 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!
The tenant's obligation to pay any increased taxes as a result of the landlord selling the building. Negotiate Prop 13 protection if possible.
The landlord's right to terminate your lease early for his convenience.
A disclaimer about the building and the services provided to tenants.
Personal guarantee. If this is required, include language to protect yourself.
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.
You don't want the landlord to call the shots.
It is strongly suggested to have a seasoned Tenant Rep and real estate attorney at your disposal. Don't sign anything without having them review the terms in advance.
