Before You Sign Your Lease
Finding the right office space can be a daunting task for a tenant. There are several issues that should be addressed when identifying the office space and during the leasing process, but before the final lease is signed. This Checklist identifies certain pertinent pre-signing matters that a tenant should consider before finalizing its lease. This Checklist, however, need not be followed in strict chronological order. The categories and stages outlined can overlap depending on variables and the particulars of the transaction.
Find an Experienced Broker
A tenant looking for office space should initially hire an experienced broker. A broker is a fundamental asset to the tenant at the beginning of the leasing process, especially because the broker can:
• Assess the tenant’s priorities for its new space.
• Estimate the amount of space the tenant actually must rent to achieve its operational goals.
• Identify potential office space for the tenant.
• Provide an analysis and comparison of the projected costs over the lease term for potential space that the tenant is considering.
• Guide the negotiations with the landlord and the landlord’s broker of material issues that can be raised during the letter of intent stage, such as:
o the specifics of the landlord’s concession package for the tenant, including any tenant allowances, the initial build-out and free rent periods;
o the amount of the tenant’s security deposit; and
o the need for the tenant to offer a lease guaranty, either from a parent company or other creditworthy person or entity.
The tenant and the broker should enter into a brokerage agreement that clearly documents the method and timing of payment of the broker’s commission. Typically, the tenant’s broker receives its share of the commission from the landlord’s broker, who is paid by the landlord. Therefore, the tenant must ensure that its broker and the landlord’s broker have finalized and signed the co-broker agreement before the lease is finalized and signed.
Do Your Due Diligence
Once the tenant finds the right space, the tenant and its attorney must conduct their due diligence. Conducting due diligence can be very expansive and consist of a wide range of considerations.
When doing due diligence of the premises, the tenant should consider:
• Market conditions. The tenant’s broker and attorney can advise the tenant about the market conditions and the local customs for office leasing. This information is pertinent for the tenant to conduct its lease negotiation effectively.
• Space size. The tenant’s broker can advise the tenant about the landlord’s method for measuring the premises. There are various methods that the landlord can use to determine the size of the space. The tenant should understand how the landlord measures the space in its building. The tenant should confirm that the landlord used local customs to measure the space. The size of the space often directly affects the tenant’s base rent, additional rent, and tenant improvement allowance. For more information concerning the importance of properly measuring the space.
• Permits. The tenant should determine at the letter of intent stage whether any additional permits must be obtained for the occupancy or the initial build-out. The party responsible for securing any necessary permits, and any costs associated with the issuance of the permits, should be clearly stated in the letter of intent.
• Expenses. The tenant’s broker should obtain the past year’s operating expenses and taxes to provide the tenant with an estimate of its additional rent costs. The tenant’s attorney can explain the escalations clause in the lease. Because the escalations clause can potentially provide the landlord with major profits, the tenant’s attorney can negotiate the escalations clause to ensure it is a fair clause for the tenant. The tenant should also understand what its options are regarding electricity and whether the electricity to the premises is either, provided by direct meter; provided by sub-meter; or included in the rent.
• Heating, ventilation, and air-conditioning (HVAC). The tenant should consider hiring an engineering consulting firm to determine whether the current scope of available HVAC in the space is sufficient for the tenant’s needs. The tenant’s architect and engineer can advise the tenant on the negotiation of the HVAC specifics when the tenant is negotiating the letter of intent and the lease. The tenant may require supplemental air conditioning units or certain alterations to be performed to successfully achieve the necessary HVAC levels for the tenant’s occupancy.
• Maintenance and repair. When conducting its due diligence of the space with its architect and engineer, the tenant should be aware of what its maintenance and repair obligations are under the lease.
Negotiating the Letter of Intent
The parties should finalize the letter of intent early in the leasing process. The letter of intent generally sets out the business terms of the transaction agreed to in principle between the parties. The letter of intent should clearly specify if it is binding or non-binding.
By effectively negotiating the letter of intent, the parties can:
• Reduce the time involved in finalizing the lease itself.
• Avoid miscommunications or misunderstandings between the parties.
• Create deadlines for important events.
Negotiating and Finalizing the Lease
The landlord’s attorney typically drafts the initial lease draft and sends it to the tenant’s attorney for the tenant’s review. The tenant’s attorney usually sends to the landlord’s attorney a markup of the initial lease draft outlining the tenant’s objections to the landlord’s form of lease. The markup details the tenant’s objections to specific lease clauses. Depending on the scope and complexity of the lease transaction, the parties can go through multiple redrafts of the lease agreement before it is finalized and signed.
Right Before Signing the Lease
Before signing the lease, the tenant should review the lease to ensure that the final lease form reflects
the material terms agreed to by the parties, including:
• Rental payments.
• Term of lease and any extension options.
• Commencement date and any contingencies.
• Expiration date.
• Security deposit requirements.
• Description of the premises
• Rights of first refusal for additional space or any purchase options for the building.