Negotiating a lease for your company’s office or facility can be precarious. Real estate is not your core business, and you do not want to spend tremendous time (or expense) finalizing the lease document. In addition, start-ups and emerging companies without strong financials do not enjoy significant leverage in strong real estate markets. Still, a real estate lease is a major commitment for any company and one that deserves your attention. The question is, where do you focus to get the maximum bang for your buck? Below are some lesser-known lease provisions that merit your attention:
Operating Expenses. Depending on the financial structure of your lease, you may either pay a proportionate share of all expenses incurred by the landlord to operate, maintain and repair the premises and building, or you may pay a proportionate share of increases in these expenses that exceed the expenses incurred during the first year of your lease (the “base year”). Operating expense provisions are long and detailed, but here are some costs that you should definitely consider:
• Roof repair versus replacement: Roof replacement is very expensive, and many landlords
exclude roof replacement from operating expenses passed through to tenants. Make sure
you understand how the landlord determines whether the roof has been repaired or
replaced and consider using a cost threshold for this determination.
• Capital expenditures: Capital expenditures for repair or replacement of portions of the
premises and building should be amortized over their useful life. At the very least, you
should not be paying for any portion of the amortization period falling before or after your
lease term. Also, you should consider negotiating a cap on your payment of capital
expenditures, particularly if you have a short lease term.
• Costs for which the landlord is actually reimbursed versus costs for which the landlord is
entitled to reimbursement: Watch this issue carefully. If the landlord is entitled to
reimbursement but can still collect expenses from you if not actually reimbursed, it has less
incentive to seek reimbursement from its insurers and other parties who are required to
reimburse the landlord.
• Management fees: Consider a cap on management fees based upon a percentage of your
base rent plus additional charges in order to avoid runaway landlord and third party
management fees for personnel who may (or may not) be managing the premises and
• Cap on increases in operating expenses: Consider negotiating an aggregate cap on
increases in operating expenses instead of attempting to negotiate multiple exclusions from
operating expenses. This cap is difficult for tenants to obtain in strong real estate markets
but may be worth pursuing.
Compliance With Laws. Your overall obligation to comply with laws should apply solely to your business and your specific use of the premises instead of general requirements applicable to the building as a whole. Otherwise, you could incur large costs to complete alterations to your premises under laws that apply to a general office use, for example.
Surrender. You should clarify the condition for your surrender of the premises to the landlord on the expiration of your lease term. Is it required that the premises be in the same condition as when delivered to you at the commencement of the lease term? This can be a tough standard to meet. Negotiate instead to surrender the premises to the landlord in good condition and repair, with any damage caused by you repaired. Also, if you complete any additions or alterations to the premises, confirm up front, in writing with the landlord whether you will be required to remove those additions and alterations at the end of the lease term. In particular, watch out for removal requirements applicable to cabling and wiring. Many landlords attempt to require tenants to remove all cabling and wiring from the premises at the end of the lease term, regardless of who installed the cabling or wiring. Such a requirement could get very expensive.
Limitations on Landlord’s Liability. Many landlords attempt to limit their maximum liability under the lease to the landlord’s interest in the premises or building. Before agreeing to this provision, you should be sure to confirm how much equity the landlord has in the building and remember that the landlord can finance (or refinance) the building at any time. If your lease is for a longer period of time, you should consider negotiating a different cap on maximum recovery against the landlord, such as the landlord’s interest in the entire development (office complex, shopping center, etc.) or all assets of the particular landlord entity (i.e., confirming no personal liability of any director, officer or employee of the landlord entity).
The items above represent just a few of the myriad issues in lease negotiations. Careful review and negotiation are important to ensure that you get the deal you bargained for.
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