Top Five Mistakes in Office Space Leasing
By Douglas B. Marks, Esq.
Mistake #1: Waiting too Long to Start Negotiating
The most common mistake businesses make in their office space planning is waiting until the last minute to start negotiating for new office space. This can be costly, because landlords know you would rather actually run your business than worry about WHERE you run your business. The longer you wait, your landlord knows, the less likely you will be to look for other options and negotiate for a better deal.
On the other hand, when you do start early, you can gain advantages in all aspects of your lease. You have time to look around in your market for good deals, both in terms of economics and legal provisions, which can make an enormous difference to your business.
Mistake #2: Term Too Long
A long term rarely favors a tenant, yet tenants often attempt to lengthen the term of their leases. This mistake be expensive. Here’s why.
First, your business and your need for office space are rarely static. You may have a new idea or product that rapidly changes your business plans, or your company may suffer an unexpected contraction. Either way, the longer the term of your lease, the more difficult it is for you to react nimbly to new circumstances. Your space should not dictate your business plans, yet too often, a long lease term can do just that.
Another reason to avoid a long term as a tenant is the opportunity you lose to upgrade your space at a lower cost if you have a longer term. A short term leaves you free to look for better and cheaper space, and to move as soon as you find it.
You might be asking, “What about the fact that the landlord could increase your rent or move another tenant into your space? Wouldn’t a longer term be better for that reason?” Certainly, those are good questions, but as much as it may seem counterintuitive, it is actually much less likely for a landlord to move in a new tenant than it is for you to want to move.
Landlords own real estate because they want to receive income from a static piece of property. They are not focused on the active day-to-day operations you oversee every day, and they are much more likely, once they have found a stable tenant, to leave that tenant undisturbed, even if they could get a little more money from an unknown tenant.
Mistake #3: No Option to Renew
Commercial real estate brokers often refer to their desire not to “leave money on the table.” In other words, when they negotiate a lease, they want to be sure they get the best possible deal. The option to renew may not be actual cash, but it is an item that consistently gets left “on the table” by tenants, and it can be a costly mistake.
An option to renew allows you to get all the benefits of a short term while still preserving the benefits of a longer term. For example, if you sign up for a one-year term with options to renew for two more one-year terms, you have just won for your company the benefits of a three-year lease without any of its drawbacks.
And yet, most companies never ask about an option. Most landlords will agree to very favorable renewal terms, if the tenant will just ask.
Mistake #4: Operating Expenses!
It is truly shocking how few tenants inquire into the operating expenses built into their total leasing costs when they negotiate a new lease. They ask about the per-square-foot charge for the basic rent, but they often fail to negotiate on the operating expenses.
And yet, landlords often use the operating expenses as a profit center. They charge their tenants for all the center’s costs for maintenance, insurance, snow removal, and taxes, and they often even charge for their own attorney fees. I have even seen landlords charge a 15% administrative fee added on top of operating expenses.
How do you avoid paying more of these expenses than necessary? Here are a couple ideas. (1) Cap the annual increases on your expenses. Quite often landlords will agree to a cap on operating expense increases of 5% annually. (2) Agree on a base year and pay only the increases. Landlords will often work their operating expenses into their base rent and allow you to pay only the increases in operating expenses, which they need to justify (and which can also be capped). That gives you better visibility into the expenses and allow you to plan for increases.
Don’t miss out on the opportunity to save money this way.
Mistake #5: Anti-Assignment and Sublease Language
Almost every lease contains language requiring the tenant to get permission for any assignment or sublease. In about half of those, any change in control of the tenant triggers that anti-assignment language. In other words, if you sell more than half of your company or do any other significant restructuring, your sale can be held hostage by your landlord.
A simple phrase, such as, “except in connection with the sale, acquisition, or merger of tenant, or of all or substantially all of its assets” will generally be acceptable to landlords, and will free you from the restriction of an anti-assignment clause when you need to sell or otherwise restructure your company.
One Last Opportunity
One final opportunity tenants often miss comes up in connection with the anti-assignment language. If you have an option to renew your lease, and you also have the ability to sublet or assign your space, then if you want to move while the market is hot, you may be able to sublease your space to a third party for more than you are paying.
Leases often contain language that requires that you turn over any profit made this way to the landlord, but you should remove that language. If the landlord objects, insist on sharing at least 50% of the profits. Landlords will rarely object to such a fair proposition, since you are obligated to pay rent for the full term.
In the business world, success comes as you successfully manage the details of each transaction. And since your lease is one of the most important transactions your company will enter into, paying attention to those details can yield significant results.
Doug Marks manages the Commercial Law division of Kunzler Law Group. He represents clients in leasing transactions all over the United States and has advised clients in transactions from the smallest local office space lease to the largest nationwide retail store roll-out. His clients have included numerous technology companies, manufacturers, software developers, and the women’s apparel retailer Coldwater Creek, Inc., for whom Mr. Marks managed the legal side of negotiating 450 retail leases in the nation’s most prestigious malls and lifestyle centers.
You can reach Mr. Marks at DougMarks@KunzlerLaw.com or at (208) 290-1396.