A tenant rents office space only a few times in their corporate life, while landlords rent space over and over again. Keep an eye on these 9 issues that are frequently overlooked and you are more likely to end up with a happy ending.
Carefully Review Your Operating Issues
Think about the mechanics of how your
business operates as you are reading through
the lease. Watch out for issues like (a)
after hours HVAC service — is it available
and how much will it cost?; (b) do you make
higher than normal levels of noise at
particular times?; and, (c) your
employees/Tenants love to cook popcorn in
the micro-wave in the afternoon and that is
strictly forbidden by the lease.
Don’t Neglect the Workletter
There are 3 main components to a lease
agreement. The business points, the legal
points and the workletter. The final
negotiation item is the Workletter. In many
cases, the landlord will give the tenant an
improvement allowance in a dollar amount,
which typically forces the tenant to deal
with a Workletter. Not only does it state
what each party is to pay, but also what
happens if the cost of the improvements
exceed the allowed amount provided by the
landlord. The (TI) allowance can be applied
to either useable square feet of the premise
or rentable square feet. The rentable square
feet is always larger, usually 10% to 15%
more, unless it is a single tenant building,
so the dollar amount would be more. Make
sure you understand to which measurement the
allowance is being applied.
The Sublease Space Option
You’ve heard that you can get a really good
deal on sublease space. It is true, but as
with almost every benefit, there are
increased risks. Financial condition of the
sublease should be investigated thoroughly.
If they don’t pay the rent, you suffer. If
the sublease files bankruptcy, your sublease
is at risk. You are stuck with whatever
terms and conditions negotiated by the
sublease with the landlord. There is usually
no tenant improvement allowance to make
changes. You will have to live with what you
get or dig into your own pocket. What can
you do to protect yourself? Ask for some
form of security from the sublease. A letter
of credit, for example, that will provide
funds for increased rents or moving costs if
the tenant goes out of business. Once you've
negotiated a sublease deal, take it to the
landlord and try to convert it to a direct
lease. In any case make sure the Landlord
signs the sublease.
Don’t let your enthusiasm to make a deal
make you a bad negotiator.
It is easy to get wrapped up in a
negotiation and try to do anything to make
the deal. If a negotiation fails to yield
what you want, don’t look at it as failure,
but as part of the process of getting what
you want. Move on to the next best
alternative. Here is a link to info on the
office leasing process.
Separate the Business points from the Legal
Points Clearly
understand and have agreement on the
business points of the transaction before
delving into the legal points. It will keep
the negotiations clean and clearly
differentiate the stages of negotiations.
Cost-pass-through cautions
If you are moving into a new or partially
occupied building add some protection to the
Cost-pass-through provision that will
require the landlord to calculate your
annual cost-pass-through based upon a 90% or
95% occupied building. This will protect you
from moving into a building that takes a
long time to lease up. The operating costs
for a partially occupied building are
significantly less that for a full one.
Whether your lease calls for an operating
expense cost-pass-through or expense stop,
make sure you know your starting point. Be
aware of what calculation method is normal
in your market. Depending on the market,
your cost pass through base year should be
either the current year or first year of the
lease. It can be either calendar or fiscal.
If your lease calls for an expense stop in
which you pay for any expenses above a
certain amount, get the historical
information to allow you to make sure your
expense stop is current so you don’t get
stuck with unexpected costs.
The Most Forgotten Part of the Lease: Rules
and Regulations
The smart tenant, the good broker, and the
efficient attorney will always read the
entire Lease. Not because it’s fun reading,
but rather to understand the potential
ramifications that could be set in motion
should some unfavorable clause actually come
into play. While everyone always reads the
summary page and most read the next ten to
fifteen sections, only a few get through the
dry sections – sixteen to infinity. Very few
really read the Rules and Regulations. After
all, it’s mostly non-issues like “Tenant may
not have sales” or “Tenant can't have pets.”
Be careful, some of these hidden issues may
actually impact you as a tenant. Read the
Rules and Regulations as carefully as you do
the rest of the Lease. Can you cook in your
suite? Most say you can't. Seems microwaves
weren't invented when most leases were first
drafted. What are the building hours? If it
says 8 AM to 6 PM, what happens if you want
to come in early or stay late?
Tenant Improvement allowance is often
applied to square feet
The (TI) allowance can be applied to either
useable square feet of the premise or
rentable square feet. The rentable square
feet is always larger, usually 10% to 15%
more, unless it is a single tenant building,
so the dollar amount would be more. Make
sure you understand to which measurement the
allowance is being applied. The attached
link shows the generally accepted method for
measuring office space. Office Rental Tips & Tactics
Helpful advice for making the most of this Guide- Get Professional Help...Finally, as mentioned in the beginning, as a tenant you rent office space only a few times in your corporate life, compared to landlords who rent space over and over again. Our final tip is to level the playing field by taking advantage of the availability of a good tenant representative on both relocations, renewals or subleases. They represent you and their services to you are almost always paid by the landlord. Doing so will save you both money and frustration over the long run, not to mention help you avoid making costly mistakes.
