How to Avoid Being Ripped Off When You Lease Office Space, Part III
You can begin with Part I or skip to Part II.
In Part III, we’ll continue discussing the provisions that your startup company needs to consider before leasing office space.
Your startup company may not have to negotiate each provision, but you should obtain a working knowledge of them. They will likely affect your lease sooner or later.
Repair and Maintenance. Don’t let this portion of your lease be vague–it will likely go against you in the event of a dispute. Thus, make sure the lease sets out your repair and maintenance obligations in a very specific manner. Ideally, you should have few repair and maintenance obligations, such as your own personal property and other property damage caused by your negligence or misconduct. Don’t sign a lease if the landlord insists you repair and maintain the HVAC system, foundation, walls, plumbing, or common areas. You should be able to get out of those repair and maintenance obligations pretty easily (i.e., don’t think that the landlord is “giving in” and that you have to give somewhere else).
Damage or Destruction of the Premises. Most of the time this provision gets overlooked, but it could have terrible consequences in the event the building is razed. For example, the provision may require you to reconstruct the building in the event of its damage or destruction. If you are going to sign a lease with this clause, you must make sure that your obligation is limited to both the extent of your insurance proceeds and the causes of loss that are insurable.
Assignment and Subleasing. It is preferable that your right to assign or sublease your office space is unlimited as possible. Be sure to add language that unconditionally allows you to assign or sublease to a company that is owned by–or owns–at least a majority of your company signing the lease.The landlord does have an interest in a non-related subleasee. Thus, it is prudent the landlord maintains the right to reasonably withhold consent on your assignment or sublease. It may help to remember that other tenants in the building are (hopefully) signed up to a similar clause and therefore weirdo companies won’t show up next door. Also, keep in mind that you will be responsible for rent in the event your landlord-approved subleasee bails on you.
Implied Warranties. Unlike residential real estate transactions, parties to commercial real estate transactions can usually agree to waive implied warranties designed to protect the leasee (or buyer). It depends on your state, but the main implied warranty landlords like to waive is the warranty of suitability. The best advice I can give you is to not waive any warranties.
Property Taxes. You’re already paying off the landlord’s mortgage, so some landlords get greedy and have you pay the building’s property taxes as well. Be sure that property taxes aren’t a part of the CAM or other charges you have to pay.
Landlord’s Rules and Regulations. Sometimes landlords issue building rules and regulations as an addendum to the lease. They are probably not a major concern for most leases, as they are intended to benefit all tenants. The main problem usually arises when another tenant does not adhere to the rules and regulations without any recourse by the landlord.
Dispute Resolution. Your lease should have some type of non-courtroom dispute resolution process, whether it be arbitration, mediation, or coin-flipping. Leases that provide for the courtroom and that the loser pays all costs (court fees, attorneys’ fees, etc.) are used by the landlord to preclude its tenants from suing. The landlord is banking that you won’t risk having to foot their law firm’s bill in addition to your own.
Lease Audit. If your monthly lease calculation is complex, your startup should consider having a lease audit clause. This clause should allow you to employ a “lease consultant” to physically measure the premises and assure that other costs are being properly calculated. Let’s just say I’ve never found a landlord to underestimate square footage or underbill costs. Along with the lease consultant, the clause should grant you access to the landlord’s records pertaining to your rent calculations.
This wraps up the series on how to lease office space. Good luck.
About the Author
Ryan Roberts is a startup lawyer and represents technology companies through all phases of the startup process, including incorporation, seed & venture financings, and exit transactions. Click here to learn more about his practice.
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Please consider subscribing to The Startup Lawyer, following @startuplawyer on Twitter, or contact Ryan directly.21 Responses
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LC,
You bring up some good points.
I agree that a lot of lease negotiation and construction depends on what's customary to the city, state, or regional area. In Texas, landlords seem to not offer gross leases on spaces larger than 1,500 square feet. In California, the landlords I have dealt with seem to be worried more about insurance increases than property tax increases, making it easier to get caps on the latter.
A landlord and tenant can squash a lot of these issues by simply having a gross lease; it would end the issues of CAM charges and calculations, lease audits, etc.
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LC,
You bring up some good points.
I agree that a lot of lease negotiation and construction depends on what's customary to the city, state, or regional area. In Texas, landlords seem to not offer gross leases on spaces larger than 1,500 square feet. In California, the landlords I have dealt with seem to be worried more about insurance increases than property tax increases, making it easier to get caps on the latter.
A landlord and tenant can squash a lot of these issues by simply having a gross lease; it would end the issues of CAM charges and calculations, lease audits, etc.
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[...] wrote a series of articles about tips and suggestions on how to lease office space at one of my other legal blogs, The Startup Lawyer. For the most part, these general suggestions [...]
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I have been caught in a fight with my office space landlord regarding the improvements he promised. We are now six months into our lease and the landlord refuses to finish the improvements. How do I get the landload to complete his side of the bargan?
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In all of the offices I have leased, I have always had to pay my pro rata share of property taxes. From what I hear from you, I should not have to pay property taxes? You also advise not to be responsible for maintenance of HVAC…should I interpolate that to mean also that the landlord should pay for the HVAC unit itself?
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In all of the offices I have leased, I have always had to pay my pro rata share of property taxes. From what I hear from you, I should not have to pay property taxes? You also advise not to be responsible for maintenance of HVAC…should I interpolate that to mean also that the landlord should pay for the HVAC unit itself?
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Matt-
As to the property taxes, you are right in that it's very common for the tenant to pay for their pro-rata share of the property taxes. And negotiating that may be non-starter from the landlord's perspective.
As for the HVAC, I always advise my clients to not be responsible for HVAC maintenance. (1) You are assuming the risk for something that may have not been maintained by a prior tenant (or the unit you lease could just have a dud HVAC system) and (2) the landlord is in a much better position to maintain all the HVAC units of the facility so they are in working order.
I assume that your last question is about paying for the HVAC system when you are going to lease a brand new building or shell space that hasn't been built out yet. In that case, I have seen tenants have to pay for the HVAC unit. The key is to get enough of a tenant improvement allowance to cover that and the rest of the buildout. The problem is that you have to price out all the HVAC and other to-be-installed improvements BEFORE you negotiate your tenant allowance.
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Matt-
As to the property taxes, you are right in that it's very common for the tenant to pay for their pro-rata share of the property taxes. And negotiating that may be non-starter from the landlord's perspective.
As for the HVAC, I always advise my clients to not be responsible for HVAC maintenance. (1) You are assuming the risk for something that may have not been maintained by a prior tenant (or the unit you lease could just have a dud HVAC system) and (2) the landlord is in a much better position to maintain all the HVAC units of the facility so they are in working order.
I assume that your last question is about paying for the HVAC system when you are going to lease a brand new building or shell space that hasn't been built out yet. In that case, I have seen tenants have to pay for the HVAC unit. The key is to get enough of a tenant improvement allowance to cover that and the rest of the buildout. The problem is that you have to price out all the HVAC and other to-be-installed improvements BEFORE you negotiate your tenant allowance.
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L.J. says:
Thanks for the info. I noticed you did have information on what the tenant's obligations would be in the event of damage to the building. I was wondering what would happen to a tenant's contract if the building is sold. I was considering renting office space in a building, but found a for sale ad indicating that this property is for sale. This landlord seems easy-going, but what happens if the building changes ownership?
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Thanks for the info. I noticed you did have information on what the tenant's obligations would be in the event of damage to the building. I was wondering what would happen to a tenant's contract if the building is sold. I was considering renting office space in a building, but found a for sale ad indicating that this property is for sale. This landlord seems easy-going, but what happens if the building changes ownership?
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LK says:
what is it called when you are protected to continue your office lease in a building and the building is sold
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K says:
Is it a customary to include a property lien on a lease?
The lease I am negotiating also has me reponsible for the plate glass. Is that reasonable? I do have insurance coverage for such but there seems to be limitations associated with plate glass coverage with regards to the insurance plan.
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Is it a customary to include a property lien on a lease?
The lease I am negotiating also has me reponsible for the plate glass. Is that reasonable? I do have insurance coverage for such but there seems to be limitations associated with plate glass coverage with regards to the insurance plan.
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I wouldn't say it's "Customary" but some states also have statutory landlord's liens.
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I wouldn't say it's "Customary" but some states also have statutory landlord's liens.
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Jenn Valdez says:
Ryan – I started reading Part I of your article and couldn’t stop until I finished Part III. Thank you, they are very objective and informative. I stumbled across your articles because I am working on a startup and am in the process of negotiating a lease.
Here’s my question: We have negotiated fairly reasonable terms with a 2-month security deposit, and a 2-year lease with a personal guarantee from me and my husband as the owners of the corporation. Now the landlord is also requesting our personal financials. As startup business owners our financials don’t offer much, and most of our start-up funds will be coming from an outside investor. Is it customary for lessors to request personal financials for lease properties, and if so should we be providing ours, asking for the investors, or offering both? Our investor is already providing a substantial investment in our startup, so I’m a little hesitant to also ask him to supply financials for the lease.
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Ryan – I started reading Part I of your article and couldn’t stop until I finished Part III. Thank you, they are very objective and informative. I stumbled across your articles because I am working on a startup and am in the process of negotiating a lease.
Here’s my question: We have negotiated fairly reasonable terms with a 2-month security deposit, and a 2-year lease with a personal guarantee from me and my husband as the owners of the corporation. Now the landlord is also requesting our personal financials. As startup business owners our financials don’t offer much, and most of our start-up funds will be coming from an outside investor. Is it customary for lessors to request personal financials for lease properties, and if so should we be providing ours, asking for the investors, or offering both? Our investor is already providing a substantial investment in our startup, so I’m a little hesitant to also ask him to supply financials for the lease.
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[...] Part 3: Eight of the not-so-obvious terms that can bite you if you don’t address them. [...]
[Property Taxes. You’re already paying off the landlord’s mortgage, so some landlords get greedy and have you pay the building’s property taxes as well. Be sure that property taxes aren’t a part of the CAM or other charges you have to pay.]
As a commercial developer I would have to disagree with this statement. Although in our region most office buildings are leased with a “gross lease,” the taxes along with other operating expenses are in fact a part of the rent and there is usually an annual escalator clause.
In our shopping centers, in ALL cases the taxes are part of the CAM as they are “net leased” properties and the tenant is responsible for all operating expenses.
Nice article, however; the topic is appreciated even though I’m a landlord!
LC