Negotiating office leases – from the tenant’s perspective

It is easy for any attorney to lose sight of the major legal and business issues when negotiating office leases.


from the New York Law Journal, June 12, 2006


"The top 10 issues in office leasing, considering the business impact to the tenant: (not necessarily in any particular order of
importance)


1. Term sheets/letters of intent
The tenant will achieve the best results by assembling a full team of professionals to handle the transaction, including a real estate attorney, an architect or space planner, a general contractor, construction manager of construction consultant, an insurant consultant, and an experienced real estate broker.


2. Assignment and subletting
If the tenant's business changes such that it needs more or less space, or needs to relocate, the assignment and subletting provision is the vehicle for addressing these and many other issues.


3. Alteration rights
Space becomes old and tired after 5 to 10 years and needs sprucing up, and a tenant's business structure changes, requiring a different layout for its office space.


4. Building services
These need to be clearly enunciated. For example, is electricity included in the lease, is it charged based on rent inclusion, is it charged based on submetering, may the tenant obtain directly metered electricity and what profit component or expense reimbursements may the landlord charge?


5. Security deposits
Of critical important to both landlord and tenant is who the tenant is, what its creditworthiness is, and what credit support, such as cash security deposit or letters of credit, are provided.


6. Guarantees
Over the past 10 years, so-called good guy lease guarantees have become much more common in leasing transactions. A good guy guarantee is a limited guarantee of the lease designed to assure the landlord that possession of the premises will be returned to it in the event of a default by the tenant and termination of the lease, without the need for the landlord to go to court and evict the tenant, and without the risk of having to deal with a bankruptcy filing and other delays by the tenant.


7. Subordination and nondisturbance
For larger or more creditworthy tenants, or those with more negotiating leverage, it is important to try to obtain a nondisturbance agreement from all current and future lenders and ground lessors.


8. Tenant defaults and Landlord remedies
Almost all references to a default by the tenant under the lease should be qualified to refer to a default after notice if required under lease, and expiration of any applicable cure period. In this way, the tenant gets the benefit of its negotiated notice and cure rights under the default provision. Most or all of the default provisions should spell out that the tenant will receive notice and an opportunity to cure before the landlord may terminate the lease.


9. Landlord Defaults
It is rare that there is a provision spelling out landlord defaults and giving notice and cure opportunities or tenant remedies. On occasion, a tenant with more leverage in a negotiation can get a landlord to agree to grant it a similar notice and cure provision and remedies for defaults. However, that is a rare exception, generally applicable only to large gorilla tenants.


10. End of Term
The scope of the tenant's restoration obligation should be negotiated up front, and an effort made to get the landlord to agree that typical tenant improvements that will not cost the landlord an excessive amount to demolish or remove, and are not extremely difficult to remove, can remain. Tenants must also anticipate that their new space may not be ready exactly on time at the expiration of the lease.
Some leases will also allow landlords to collect, in addition to or in lieu of the increased (holdover) rent, all of its damages suffered in connection with a holdover. Those damages can amount to many millions of dollars as a result of losing a new deal with a new tenant." For more information see: www.houstonrealtyadvisors.net