Negotiating a Lease as an Office Tenant – Part 1Posted September 23, 2021 by Articles & Publications in
Let’s assume that you have a business that needs to lease office premises and you have found a potential site. What’s next?
First, you should ask the potential landlord for a letter of intent (the “LOI”) setting forth the salient points of the transaction. The LOI should only address the lease terms that are particular to your proposed deal. It is not intended to address the terms that are customarily found in most commercial office space leases. The three key areas that should be covered in any LOI are the lease terms, the services provided by the landlord, and the legal parameters of the LOI.
The Lease Terms:
At a minimum the LOI should identify the names of the landlord and tenant, a description of the premises that you want to rent, when the lease term will commence and end, the annual rent, whether a security deposit or advance rent is required at the time the lease is executed, and whether you will have any renewal options and, if so, on what terms.
Six additional topics that you should address in the LOI (and negotiate, if possible) are:
- Is the rent “full service” (e., all services and the landlord’s costs to operate the building are included in the annual rent), or will you contribute to the landlord’s operating costs and real estate taxes, and if so, on what basis? Will it be a proportionate share based on the square footage of each tenant’s premises, will it be based on increases to landlord’s operating costs over a base year or will it be based on an “expense stop” (i.e., a proportionate share of the landlord’s operating costs above a specified dollar amount)?
- Will the landlord require a guaranty and, if so, who will provide it? Will the guaranty remain in place for the entire term, or will the amount guaranteed decrease each year so long as no default occurs?
- Will the premises be leased in its AS-IS condition, meaning that the landlord will not make any improvements to the premises prior to your commencement of possession? If you are leasing the space AS-IS with the expectation that you will build your own improvements, when will access to the space be provided and when will lease term and/or rent commencement begin? What approval rights will the landlord have over the design and engineering improvements you will make, and will the approval be subject to a reasonableness standard or be in the landlord’s sole discretion? Alternatively, if the landlord make tenant improvements at its cost, the LOI should describe the improvements.
- Is the landlord going to give you any allowances? For example, if you are accepting the premises AS-IS, will the landlord give you a monetary allowance to help defray the cost to improve the premises? If the landlord will construct improvements to the premises, will the landlord give you any monetary allowance to defray your costs for furniture, fixtures or equipment? In either case, will the landlord give you a monetary “relocation” allowance to help defray your moving costs? Also, whether the landlord willing to incentivize you by providing any rent abatement?
The Services Provided By The Landlord
In addition, the LOI should also specify the services the landlord will provide. For example, will the landlord provide “char” service (i.e., clean the premises nightly), parking (and if so, how many spaces will you be entitled to and will they be free or have to be paid for on a monthly basis). If the building in which the premises are located has a common lobby it will most likely have a building directory. How many listings will you be entitled to and will they be provided at no cost? What about suite-entry signage? Will it be “building standard” at no cost to you or will you be able to erect your own signage provided it is approved by the landlord in advance. Again, if approval is required, will it be subject to a reasonableness standard or be in the landlord’s sole discretion?
The Legal Parameters of the LOI
The LOI should also specify if either party relied on a real estate broker in identifying the subject premises and, if so, it should identify the names of the broker(s) and who will be responsible for payment of the brokerage commissions.
One provision that must be included should state that the LOI is not binding on either party until the lease document is executed by both parties. (It is not unfair, however, for a tenant to ask the landlord not to market the space in question for a specified period time to allow the parties to negotiate the final lease document.)
A properly negotiated LOI can prevent future surprises during the negotiation of the lease. If you are using a real estate agent, the agent can assist you in negotiating the LOI. It also is a good investment to retain a lawyer to participate in the negotiations or at least review of the LOI before you execute it.
In my next blog I will discuss the critical points to be aware of when the lease itself is negotiated.
Although dinner and a movie have nothing to do with commercial leases, I highly recommend The Courier, a 2020 political thriller based on a true story. It stars Benedict Cumberbatch as Greville Wynne (who appears at the very end of the film), a British salesman who gets caught up in the Cuban Missile Crisis, and Rachel Brosnahan (you may know her as Mrs. Maisel) as his CIA handler. The Courier is currently streaming on Amazon Prime and by itself it’s worth a subscription.
As for dinner while watching The Courier, sheet pan cooking is pretty fool-proof, and you can get creative. You can go from a sheet pan shrimp-boil (https://cooking.nytimes.com/recipes/1021423-sheet-pan-shrimp-boil) to sheet pan Mongolian beef (https://www.aspicyperspective.com/sheet-pan-mongolian-beef/), or, my favorite, you can take whatever you have around, put it on a rimmed baking sheet, throw some oil and sauce of your choosing (bbq, soy, maple syrup/bourbon glaze) and stick it in a 450-degree oven and keep an eye on it until it’s done. If you google “sheet pan dinners” you’ll find a plethora of choices.
Until next time.
This blog was written by Fred Press, the founding member of Press, Dozier & Hamelburg, LLC. Fred is a general business attorney who practices commercial real estate and creditor’s rights bankruptcy law. If you’re interested in finding out more about commercial lease negotiations, visit our real estate law page or contact one of our attorneys. Fred invites comments to this blog at firstname.lastname@example.org.
Press, Dozier & Hamelburg partners with businesses to achieve their goals, and represents families and individuals, often when they are most vulnerable. Our attorneys deliver valuable insight and counsel in the areas of business law, employment law, litigation, commercial real estate, estate planning and administration, and business succession planning. We provide all of our clients with personal service, emphasizing responsiveness, sensitivity, and respect. We are located in Bethesda and serve Maryland, Virginia and Washington, D.C.
Note: The content in this Blog is for informational purposes only and should not be acted upon without first consulting legal counsel. It is not intended to constitute legal advice.