Office space is one of the largest expenses a growing company incurs. Negotiating the best lease possible can save your company enough to hire a few more employees or to launch a marketing campaign. No lease is standard, however, so here are some suggestions to help you become a little more lease-savvy and negotiate a favorable office lease.
Permitted use of the premises. An office lease typically has a section that sets forth the permitted uses of the leased space. It is to your advantage to make this clause as broad as possible, because your business may diversify or you may want to sublease space to another business.
Term of the lease. Landlords are typically willing to make concessions for longer-term leases. A company’s needs may change, however, so try to negotiate a shorter-term lease with renewal options.
Rent escalations. Fixed rent over longer-term leases is relatively rare. Sometimes, landlords insist on annual increases based on the percentage increases in the Consumer Price Index (CPI). If your landlord insists on rent escalations, try to arrange that a CPI rent increase does not kick in for at least two years. Then, try to get a cap on the amount of each year’s increase. If you have to live with a rent escalation clause, consider a predetermined fixed amount.
Common area maintenance, HVAC and operating costs. Take into account operating costs that the landlord may pass on to a business. If the landlord is charging separately for these services, try to negotiate a fixed fee or cap on the amount.
Tenant improvements. New space may need some improvements or alterations. Most form leases provide that the tenant can’t make any alterations or improvements without the landlord’s consent. Businesses should ask for a clause that says they can make alterations or improvements with the landlord’s consent and that consent won’t be unreasonably withheld or delayed.
Repairs, improvements and replacements. Be aware of a clause that says that at the end of the lease premises must be returned in their original condition.
Assignment and subletting. Companies should negotiate enough flexibility in the assignment and subletting clause to allow for mergers, reorganizations and share ownership changes.
Option to renew. Try to get the option to renew your rent at a fixed predetermined price, not based on a “fair market” price.
Right of first refusal or first offer for additional space. A right of first offer obligates your landlord to present any space that becomes available in the building to you first before marketing it to third parties. A right of first refusal on space obligates the landlord to bring you any deals he is willing to sign with third parties for space in the building and allow you to match the deal and preempt the third party.
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. Also, have a good real estate broker and lawyer at your disposal, and do not sign anything without having them review the terms in advance.