Office operations are the hub of business success. In most cases, because of the amount of rent and inducements involved, an office lease for a tenant leasing a large block of office space is heavily negotiated and tailored to meet the detailed long-term needs of the tenant.
Businesses with small to moderate space requirements are usually presented with the landlord’s “standard form” office lease. Few are standard to the industry — most are merely standard for the particular landlord’s use — but most have common provisions, and all are subject to negotiation.
Because of time pressures and the desire to limit legal expenses, the small to mid-sized standard form office lease tends to receive less attention than leases designed for large space needs. However, attention to and negotiation of a limited number of areas in a form office lease can enhance your office operations and avoid unexpected expenses.
* Understand your space. Space in most office buildings is leased on a “rentable” square foot basis. Various methods are used to calculate rentable area, but all involve the addition of an “add-on” factor, in which a pro rata portion of a building’s public or common areas is added to the tenant’s actual usable space to determine the rentable area. This can constitute from 5 percent to 20 percent of the rentable square footage of your space. If possible, require the landlord to warrant the size of rentable and usable space and disclose the method of calculation. At a minimum, require the landlord to disclose the amount of the add-on factor.
* Make the landlord deliver. Most form leases contain provisions that relieve the landlord from responsibility if the tenant’s space cannot be delivered on the anticipated date. Delays in the tenant taking occupancy may result in holdover costs for and damage claims against that tenant by the landlord whose space it is vacating. Require your new landlord to deliver your space by a date that will enable you to make an orderly relocation and provides some time cushion if delays occur. Provide for a right to terminate the lease if possession is not delivered within a reasonable specified time after the anticipated date.
* Examine the operating expenses. Most form office leases provide for the tenant to pay a pro rata share of building operating expenses and take a broad approach in describing these expenses, but many fall within the description that cannot properly be included and should be expressly eliminated.
Although equitable landlords will not pass on many of these costs even if not expressly excluded, the prudent tenant will ask for an express exclusion of expenses including capital expenditure; cost of repairs due to casualty or condemnation; repairs or maintenance paid by warranties or third parties; depreciation of the building or building equipment; leasing commissions; legal fees and expenses; costs associated with the landlord’s offsite operations or general overhead; installation of tenant improvements; correction of defects in the building; advertising and promotional costs of the landlord; fines or penalties resulting from the landlord’s failure to comply with laws or because of late payment of property taxes by the landlord; and management or administrative fees in excess of those normally charged in the local market.
* Provide for adequate landlord services. Many form leases contain only a general description of the utility, HVAC and janitorial services the landlord is obligated to provide. Services are usually provided only during business hours, and often the quality and quantity of services are provided at the landlord’s discretion. Make sure the lease contains services that are adequate for your normal operations and provides for services for any special needs of your business, such as specialized equipment and after-hours operations. Request minimum quantities or specifications for electrical, HVAC and janitorial services.
* Require the landlord to comply with legal obligations. Form office leases tend to impose overly broad obligations on the tenant to comply with legal requirements applicable to the leased space. Narrow the focus to cover only the manner in which the space is used, as opposed to obligations that may arise because of pre-existing physical conditions in the space.
Require the landlord to deliver space at the term commencement that complies with legal requirements, including the obtaining of a certificate of occupancy if required. Eliminate tenant obligations for modifications to the structural components of the building or building systems that are necessary to bring the premises into legal compliance. Those modifications tend to be costly and arguably should be the landlord’s responsibility if they are generally applicable to all similar types of office buildings.
Require the landlord to keep the common areas in compliance with legal requirements, including any imposed by laws pertaining to disabled persons.
* Know your repair obligations and alteration rights. Make sure both your and the landlord’s repair obligations are clearly delineated. Avoid the obligation to maintain building system components unless they exclusively serve your space. Attempt to provide that repair obligations related to building systems or other components include only ordinary maintenance, not replacement.
Form leases usually require the landlord’s approval of alterations to the space. Request provide flexibility to perform decorative, nonstructural alterations.
* Obtain expert insurance advice. Your form office lease contains required types and amounts insurance coverages and may contain requirements for specific policy provisions. Forward this section to your insurance professional to obtain confirmation that the landlord’s requirements conform to your business needs and will not result in unnecessary or prohibitive expense.
Require the landlord to carry full replacement fire and extended property insurance on the building, and make sure the lease contains a mutual waiver of claims provision whereby the landlord and tenant each waive claim against the other for damage to its property caused by occurrences that can be covered by customary fire and extended coverage insurance.
* Obtain practical assignment and subletting rights. Most form leases require the landlord’s approval for assignment and subletting of space. Many prohibit transfers of beneficial ownership interests in the tenant.
Request the right, without the landlord’s consent, to assign and sublet to affiliated persons and entities if needed for your business operations, along with the right to assign the lease to any person or entity that purchases your business. Provide for the right, without the landlord’s consent, to transfer beneficial interests in the tenant that conform to your business needs.
* Temper severe landlord remedies. Most form office leases contain rigorous landlord remedies in the case of a tenant default. While the landlord should be entitled to reasonable remedies, attempt to eliminate rent accelerations or other remedies that provide for payment by the tenant of rent after occupancy rights have been terminated without a corresponding credit for reletting proceeds or for the rental value of the space.
* Eliminate personal property liens. Form office leases often contain a contractual lien covering the tenant’s furniture, equipment and other personal property within the space to secure payment of rent. In most states, a landlord is provided a lien by statute — commonly called a distress for rent statute — on this same property.
The contractual lien in form leases is a personal property pledge under the Uniform Commercial Code and is in addition to the landlord’s statutory lien. If the tenant finances furniture or equipment, this will most likely run afoul of those financing arrangements. Many tenants have loan covenants in credit facilities with their primary business lenders that prohibit this type of contractual lien. The contractual lien remedy is rarely used by landlords; ask that it be eliminated. Depending upon the terms of your financing arrangements, you may need to ask for an affirmative waiver by the landlord of its statutory lien rights.
* Eliminate relocation clauses. It is common for the form lease to contain provisions that allow the landlord to relocate the tenant to other space in the building. While these usually purport to effect the relocation at no cost to the tenant, the disruption to your business and the hassles make it worthwhile to request elimination of these relocation rights.
* Read the rules and regulations. Form office leases often contain a lengthy list of building rules and regulations relating to a broad range of operational activities, such as interior signage, use of service elevators, weight limitations for equipment, the ability of the tenant to have a vending machines, and approval of persons the tenant may hire to perform routine maintenance. Review these with an eye to their conformity to your operational needs. Request the landlord to waive any rule and regulation that conflicts with any reasonable intended activities in your space.
Finally, be reluctant to accept the following response by the landlord’s representative to your proposed modifications: “It’s our standard form provision.” Your business will be spending a significant amount of money on, and you and your co-workers will be spending a substantial amount of time in your new office space.
Make sure your lease provides adequate rights for the occupants of the new space to enjoy the sojourn there.
Timothy N. Tucker ([email protected]) is real estate counsel with King & Spalding LLP. Reach him at (404) 572-4806.
