Choyce Tips: Aug. 2010: Every Word Matters

(For access to full html version, please click here.) Lease clauses matter for every tenant, building and deal. With any experienced landlord, every word in a proposed lease is chosen for its specific meaning and quantifies either a tangible or intangible cost. While every clause is theoretically negotiable, you should determine an individual landlord’s perspective before revealing your wish list or deal-breaker terms.  

For example, some tenants may use up all their leverage with a credit-conscious landlord just to get a proposal for office space in a building with a large security deposit. Meanwhile, they may also need an option to cancel or expand and a discounted rental rate in subsequent negotiations.

 

You should know the cost associated with your most critical business terms and, to a lesser extent, your wish list in all negotiations. Examples of some common cost/benefit relationships are provided below.


Space and Rent: Unsurprisingly, these two clauses preoccupy tenants more than any others. Of course, the availability of adequate space must be confirmed prior to further negotiations, but the rent needs to wait until last. The list of business terms in a lease can be compared to an ala carte menu. You need to figure out what you’re ordering before you know how much you want to pay.

 

Renewal Clauses: Some renewal clauses come with a cost. Six-months notice costs more than 12-months notice. Renewing at a fixed rate, possibly below market average when your lease expires, costs much more than a clause based on “the then current market level.” A small tenant preserving rights to a large floor area costs more than a large tenant occupying the same amount.  On the other hand, if you invest heavily in remodeling the space, a more aggressive renewal clause at a lower cost is justified.

 

Sublease Clauses: Since your company may need to sign a five- or 10-year lease for the landlord to amortize the cost of alterations, you should consider protecting your ability to accommodate growth by leasing extra space. The right subleasing clause will go much further towards mitigating excess rent exposure, so you should NOT agree to the standard terms provided by the landlord  with onerous restrictions on whom you can sublease to and at what rent. These restrictions are generally included because subleasing companies often compete with the landlord for the same prospective tenants. 

 

This “standard” right to sublease should be expanded, even at an additional price, to enable deals with other tenants in the building as well as companies negotiating directly with the landlord since they represent the best prospects to pay the highest sublease rent.