The Tenant's Side of an Office Lease
Tenants can save time and money by knowing the intricacies of signing an office lease.
When negotiating an office lease, both the landlord and the tenant should know what provisions go into the lease and what each of them should be seeking. Oftentimes, the tenant negotiates the terms of the deal without being aware of the importance of certain issues. For example, a prospective tenant may have found the "perfect" office space. The tenant's lawyer drafts a lease with details of the necessary buildout for the business to function in the space. If the landlord balks — claiming not to have the funds to accomplish the buildout and wants to increase the rent (or wants the tenant to give up any free rent concessions), the space isn’t so "perfect" anymore, and the tenant has lost considerable time and money in the transaction.
In order to avoid this kind of situation, tenants should consult with their brokers and lawyers prior to reaching an agreement with the landlord so they can ask the right questions. There are some key concepts tenants should know before a lease is negotiated.
The square footage of the space to be leased should be measured and stated — particularly if the rent is to be based on the number of square feet. Tenants should verify the square footage prior to signing, or they may be stuck with the landlord's calculation, and common area maintenance (CAM) taxes and other charges will be based on this square foot measurement. Use a standard for measurement, such as the one provided by BOMA (the Building Owners and Managers Association), for the size.
The commencement date of the lease should be agreed upon and clearly stated, as well as the term of the lease and when and where to pay rent.
Tenant improvement work to be performed by the landlord should be specified in as much detail as possible. Tenants should provide any plans, drawings and specifications they have and include them as exhibits to the lease. The tenant should reach an agreement with the landlord on, and the lease should include, the following items: new materials should be used; completion of the work should be defined to include a certificate of occupancy, a clean premises (including clean ventilation ducts and windows) and a written certificate issued by the architect stating that the work is completed in accordance with the plans and specifications; punch-list items must be completed by a certain date; punch-list items and latent defects should not be accepted on the premises by the tenant; the tenant should have access to the premises during construction (but should be prepared to provide certificates of insurance naming the landlord as an additional insured); the landlord should provide the tenant with a warranty that the improvement work was done in a good and workmanlike manner, in accordance with the plans and specifications and in compliance with applicable laws; and the commencement date should be extended in the event that the tenant improvement work is not completed on time. The tenant should have the option to terminate the lease if the work is not completed by a certain date and should try to get the landlord to pay for any costs and expenses due to delay — including holdover costs and expenses, legal fees and damages with respect to any current lease and costs and expenses with respect to substitute space.
The landlord and tenant should agree on the CAM costs for which the tenant will be responsible (see CAM exclusions). The tenant should seek the right to audit the landlord’s books and records for the premises and the building to verify the tenant’s share of the CAM and other charges under the lease.
The services to be provided by the landlord should be clarified. The tenant should request that the landlord provide HVAC outside of normal business hours, electricity for computers and other electrical equipment and additional air-conditioning. The failure to furnish water, gas, electricity or sewer services will result in abatement of rent and/or termination of the lease.
The tenant should be able to make cosmetic changes and alterations to the premises without the landlord’s consent. The tenant also should be able to bring in additional telecommunications and other utility services needed to operate its business. Furthermore, a non-discrimination clause and/or "most-favored-nation" clause should be negotiated to provide, in the enforcement of building rules, consideration of renewals, expansions and the exercise of the landlord’s discretion, that the tenant will be treated no less favorably than other tenants in the building.
It should be clear that it is the landlord’s responsibility to cause the premises to be in compliance with applicable laws, regulations and building codes, including disability access laws such as the Americans with Disabilities Act.
The landlord will want to provide for assignment and subletting only with the landlord’s prior written consent. The tenant should negotiate for assignment and subletting without the consent of the landlord to affiliates and such other entities as necessary or desirable. If this is not possible, the landlord should not unreasonably withhold or delay consent.
The tenant should obtain representations from the landlord that there are not, and will not be, any hazardous materials on the premises or any violations of environmental laws or Occupational Safety and Health Administration (OSHA) regulations. The tenant should also obtain indemnification from the landlord for any violations. The landlord will similarly want to obtain the same representations and indemnification from the tenant.
Other key terms the tenant may want to reach agreement on include: the right of first refusal with respect to adjacent space or other space in the building; renewal options; termination options; limitation of the tenant’s liability (if a guarantee of the lease is required); use of a letter of credit instead of cash for the security deposit; and assigned (or available) parking spaces.
If both sides of the lease negotiation are clear about what they want and what their requirements are, any issue can be dealt with prior to embarking on what will hopefully be a mutually beneficial relationship.
The following should not be included in the calculation of common area maintenance (CAM):
- Mortgage principal and interest payments.
- Refinancing costs.
- Ground rent and related costs.
- Management fees in excess of three percent of gross receipts.
- Depreciation and amortization of the entire building and any equipment used in connection therewith.
- Cost of complying with government regulations, including, but not limited to, any environmental mandates.
- Interest or penalties resulting from late payments by landlord.
- Advertising costs.
- Brokerage leasing commissions.
- Tenant alterations and alterations made to leasable space.
- Capital improvements other than those primarily for the purpose of reducing operating costs.
- Costs reimbursed by tenants.
- Costs reimbursed by insurance.
- Costs reimbursed by government authorities such as in the case of condemnation.
- Special services billed to specific tenants.
- Legal fees related to leasing or enforcing other tenant’s leases.
- Artwork in, or on any part of, the building.
- Off-site management personnel and overhead.
- Operation of any services or amenities for which landlord collects a fee or charge.
- Any remedy of construction defects.
This article originally appeared in Heartland Real Estate Business, September 2004. ©2004 France Publications, Inc., Atlanta, GA. (404) 832-8262.