15 Point Checklist for Negotiating Commercial Leases (Renting Office Space)

Here are some business & legal issues to consider when negotiating a lease for office space. It is best to discuss and negotiate these items before you agree on the price/rent. You will have more leverage to negotiate before you commit instead of asking your lawyer try to negotiate these things after the fact. Many commercial leases will have lots of extra fees built in that can easily be avoided simply by negotiating up front (signage, keys, parking, etc.). But if you don’t ask, many of these fees will be extra charges in the lease. Plus, the answers to some of these questions may also affect the amount of rent you’re willing to pay.

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Outside GC can help you negotiate better lease terms (but the earlier you involve us, the more successful we can be negotiating on your behalf).

E-mail me for a zero cost consultation at [email protected]

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1. Rent:? It’s not just how much and when payable, but also:

·?????? Can you withhold rent if there’s a problem?

·?????? How much grace period, if any, do you have?

·?????? How much are late fees?

·?????? Does Landlord have right to increase rent? If so, how much and how often. You’ll want to add some limits on this.

·?????? Beware of hidden costs (see below re “Common Area Maintenance” or “CAM”).

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2. Security Deposit: Should typically not be more than 1 month’s rent. If it is more, then it should “burn down” over time, with a portion being used towards rent, until only 1 month’s deposit is left.

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3. Utilities: Who’s responsible for gas, electric, water, heat, AC, etc.?

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4. Furnishings: Furnished or unfurnished?

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5. Sublet Rights: Yes or no?

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6. Parking: Is parking included? How many spaces? Any specific areas or spaces reserved for you?

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7. Locks/keys/keycards: Make sure the landlord is required to change keys/cards from prior tenant; How many copies do you need (and do you have the right to make/obtain extra copies)? Are there any security systems? Do you need one? If so, has access changed from the prior tenant?

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8. Signage: Do you have the right to add your company name / signs on exterior of building (and/or any interior locations and lobby directories)? Often can get premium outside signage at no extra cost, if you negotiate up front. Also, it should be landlord’s obligation to remove any signage at the end of term (at their own cost). You may be surprised to ?know that many landlords use these signs as opportunities to charge incremental fees – or to make you pay for costs of adding and removing big outdoor signs. It’s industry standard to include these without extra fees, but only if you negotiate before you sign.

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9. Access to Maintenance Areas: Make sure the lease says so if you need any access to maintenance areas outside your rented space (e.g., roof, basement, utility closets, plumbing and wiring, under floor or in ceiling cabling, etc.), e.g., for installation of antennas or special telecom services. ?If so, be sure you are granted the access rights you need. Also, understand whether you can leave behind any cables, T1 lines, etc. at the end of the lease, without having to pay to remove them. This is also industry standard, but many landlords will try to charge you for this if you don’t negotiate it up front.?

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10. Alterations/Construction: There’s likely a clause saying Tenant may not make ‘alterations’ to the premises. There are two possible issues to look for here:

·?????? If you do intend to do any remodeling or construction beyond mere cosmetics (atypical) then be sure this is expressly permitted.

·?????? But even if you don’t plan to make any alterations, these clauses often overly broad and inadvertently restrict you from making even?cosmetic?alterations (window treatments, floor or wall coverings, paint, etc.). Always clarify that these types of cosmetic alterations are allowed.

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11. Confidentiality: Make sure confidentiality is mutual (often not so in most commercial leases). Many tenants assume confidentiality provisions are not really necessary because they’re not planning on sharing any confidential info. But don’t forget, the landlord may have access to your premises (e.g., for cleaning, repairs, maintenance, etc.). Your computers and documents are laying around when landlord personnel come on site to do this stuff. Not to mention the fact that as your landlord, you might discuss with them confidential future expansion or growth plans. So yes, you do need a mutual confidentiality provision.?

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?12. Right of First Refusal (ROFR): You might want to ask for a right of first refusal to expand and take more space in the building if and when it opens up. (Especially important for startups and fast-growing companies). This should kick in whenever space opens up and/or whenever the landlord makes an offer to another prospective tenant (i.e., you can match the deal and take the space instead). If you do want to ask for this, do you only want it for “adjacent” or “contiguous” space (e.g., same floor, next floor up or down, etc.), or anywhere in the same building or even the same complex of buildings? ??

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13.?Termination?(and other penalties)

·?????? By Landlord: Sometimes leases allow “immediate” penalties imposed by landlord, without?any notice and cure period. Be sure to avoid these types of clauses so tenant?always has notice and cure period before?any remedies kick in (no “immediate” default clauses).

·?????? By Tenant: How and when can the teant get out of the lease during the term? At the end of the Term, how much advanced notice is required to opt out (or in) to any renewals?

14. Common Area Maintenance (CAM) Charges: Most commercial leases have additional fees and costs (sometimes hidden in clauses that look like they have nothing to do with the rent). Sometimes this is clearly labeled as “Additional Rent”, or “Common Area Maintenance Charges” (“CAM”), but sometimes it’s called something easier to overlook, like “Operating Costs” or “Operating Contribution” or similar – often based on a percentage of the overall operating costs of the entire building or facility.

• The Landlord should be fully responsible for upkeep/maintenance/cleaning, etc. of common areas and equipment. For example: HVAC (at very least have landlord rep it’s in good repair and have 90-120 day warranty), Elevators, Cleaning, trash removal, cutting grass, removing snow, windows (outside), and other repairs or maintenance. But you will likely be charged a fee for these services.?
• Often there are confusing formulae for these fees, such as based on the size of your premises vs the overall size of the building. You will often pay a percentage of the overall Operating Costs for the building.
• Do NOT assume that it is calculated fairly. Read the fine print.
• Be sure you clearly understand any and all hidden costs, fees, expenses. If you don’t understand the formulae, ask questions.?
• Often times, these operating expenses are “padded” with lots of fees that the tenant really should NOT be contributing towards. And/or the formula might have you paying for more than your proportional percentage of space in the overall building.
• Review these provisions and formulae carefully, and be sure you understand them (I will help you with this, but feel free to ask the landlord to explain what’s covered and what’s not, in plain English).
• Perhaps try to include an absolute cap.?
• Include audit rights (2 year lookback).
• Legal Stuff about Operating Costs: have the landlord rep and warrant that any calculations of additional rent, operating expenses, taxes and other costs shall be calculated reasonably, in accordance with industry standards, and consistently applied in a manner similar to most or all other tenants. ?
• Accounting Stuff about Operating Costs: Under recent accounting rules, the cost of the renter’s share of certain capital expenses (e.g. new roof, new elevator) in buildings could be passed through as an operating expense in one lump sum if you’re not careful.?I’ve seen Tenants charged a surprise one-time $20K charge for a new elevator or generator that should have been depreciated at a minimum of 10 years (when the lease only had 1-2 years left to go).

·?????? Be sure to include a provision in the lease that all CapEx will be passed through as CAM charges on a depreciated basis consistent with IRS rules, to avoid any large one-time cash payments.

·?????? Ask your accountant or CPA what else they recommend, either in the lease, and/or operationally, to account for the lease properly. Make sure you ask your accountant or CPA about IFRS 16 &ASC 842. Lawyers are not accountants, and we cannot give you accounting advice.

15. More Legal Stuff (Generally): A good lawyer will make sure the following provisions are addressed.?

·?????? Good Title: Landlord owns good title and can deliver the property free of liens and encumbrances.

·?????? Broom Clean: Delivered “broom clean” and ready to occupy.

·?????? Compliance with Laws & Codes: Lease will often contain provisions saying the premises are “as is” or tenant has the right to inspect and if tenant didn’t find anything wrong on inspection, any issues are then tenant’s problem. However, you should clarify that Landlord is still responsible for “latent” or hidden defects, code violations, etc., and must still comply with all applicable laws, notwithstanding inspections and “acceptance” of premises. For example?(i) ADA Compliance is Landlord’s responsibility; even if those laws change post move-in?(ii)?No hazardous materials, asbestos, mold, other “latent” defects or code violations which ?may or may not be apparent on mere visual inspection.

·?????? All the Issues Above: Your lawyer should ensure all the issues listed above are addressed (signage, parking, utilities, sublet rights, access to common areas, CapEx language, etc).

·?????? Reps & Warrants. Carefully review all reps/warrants/covenants/indemnities (this alone could be its own separate long list).

·?????? Other Non-Standard Language. Carefully review for other non-standard terms. Make sure the landlord didn’t add anything unusual or non-industry standard. (this alone could be its own separate long list).

In conclusion:?

Again, you will have more leverage if you address these issues BEFORE you agree in principle to rent the space and settle on a price.?

About the Author:

Brian Heller has over 20 years of experience as a lawyer and business development executive in both in-house and private practice roles. Brian regularly negotiates and drafts a wide variety of agreements related to SaaS/PaaS, licensing, digital & social media & advertising (insertion orders, social media influencer campaigns, content production & licensing, ad network and ad platform deals (DSP, SSP, DMP, CDP), ad-tech, streaming (IPTV, OTT), etc.), fin-tech / crypto currencies, cloud services and mobile apps, virtual reality and artificial intelligence, renewable energy, terms of use / terms of service, privacy policies, data processing agreements (DPAs), marketing, distribution and other technology agreements. You can find him on Twitter @briheller.

Brian is originally from Shaker Heights, Ohio (near Cleveland), and has lived in Michigan, Boston, New York City and Washington, DC. He now lives in Vienna, Virginia with his wife, Stacey (who is also a lawyer for Outside GC) and their two kids (in school at UVA and MIT). He spends his free time serving as an advisor to several startups, ventures and non-profits.

https://www.outsidegc.com/attorney/brian-heller