Renting a new office space is something a company will probably only do a handful of times. A landlord, however, will most likely rent out to dozens or hundreds of tenants over the years, affording them much more experience in the business of office leasing. As a potential tenant, here are some key tips that you should keep in mind to avoid a bad deal.
1) Take a Close Look at Your Day-to-Day Business Operations
Do your employees often stay after hours? Does your business make a lot of noise at certain hours? Do your employees like to cook in the kitchen? Make sure you keep in mind your day-to-day business operations as you read through the lease. Look for potential issues such as noise curfews, limitations on kitchen use and after-hours HVAC service surcharges.
2) The Workletter – Last But Not Least
Lease agreements contain three main parts: the business points, the legal points and what is known as the Workletter. If a landlord negotiates an improvement allowance in dollars with the tenant, the tenant will need to refer to the terms of the Workletter. The Workletter stipulates the amount each party must pay for improvements, as well as how much the tenant may have to pay if the improvements go over budget.
3) The Sublease Alternative – Cheaper is Not Always Better
Subleasing space can sometimes be a cheaper option, however, cheaper may come at an unforeseen price.
- Who is your sublessor and what kind of financial condition are they in? You are in trouble if they can’t pay the rent, let alone if they file for bankruptcy.
- The original terms and conditions the sublessor negotiated with the landlord are the terms and conditions you will have to live with.
- What you see is what you get – it is unlikely that you will inherit a tenant improvement allowance. Any improvements you want to make will probably come out of your own pocket.
- There are ways you can protect yourself if, in the end, subleasing makes the most sense:
- Request a letter of credit from the sublessor so that you have access to funds in the event that they go out of business.
- Speak to the landlord and see if the sublease can be converted to a direct lease. The sublessor may be willing to pay the penalty in order to be free of the liability of a lease.
- Don’t forget to get the landlord’s okay and signature on your sublease agreement.
4). Overly Enthusiastic People Can Make Bad Negotiators
In your excitement to close the deal you may overlook something of key importance. Move forward methodically and cautiously.
5) Negotiate the Business Points, then the Legal Points
Before moving on to the legal points, it is important to agree on the business points and understand them thoroughly. Differentiating between the various stages of negotiations is key to keeping things moving along smoothly.
6) Cost-pass-through Provision
If the building you are moving into is new or only partially occupied, you will want to make sure the cost-pass-through provision requires you to only pay a percentage of the operating costs for a partially occupied building.
7) Read the Rules and Regulations Carefully
Always read the entire lease. Thoroughly. It may be dry and boring, but going through it in detail will most certainly prevent future headaches.
The Rules and Regulations are a part of the lease that should not be overlooked, since these issues may impact your business directly. Are you allowed to cook in the building? Are you allowed in the building after 6PM or on weekends?
8) The Tenant Improvement Allowance and Square Footage
Is your tenant Improvement Allowance applied to the rentable square feet of your building or the useable square feet? Keep in mind that the useable square feet measurement is always smaller by at least 10% to 15%.
9) Operating Expenses
Make sure you are aware of the starting point of your operating expense cost-pass-through or expense stop. The cost-pass-through base year is either the current year or the first year of your lease, and it may follow either a calendar or fiscal year. If you have an expense stop in your lease that requires you to pay expenses above a fixed cost, ensure your expense stop is current. You don’t want to wind up paying unforeseen additional expenses.
10) Seek Professional Advice
Since landlords typically are more experienced in lease negotiations than the average corporate tenant, it pays to get professional help from a tenant representative. Their experience will almost certainly save you headaches and money down the road. Remember, a tenant representative is working to represent your interests.