‘Your Space’: What to Look for in Your First Office Lease

Editor’s note: Kristie M. Ravert is a member of the Real Estate Section of Ward and Smith, P.A. This is the first of two articles.

RALEIGH – Leases are contracts between the owner of a building (the "landlord") and the owner of the business wanting office space (the "tenant"). The landlord has made a significant investment in the building and usually has spent time and resources in drafting a typically one sided lease which will best protect the landlord’s assets and limit the landlord’s liability. The rights and obligations of each party must be clearly set out in the lease because courts consider commercial leases to be contracts between business persons with supposed equal bargaining power and will not, by and large, protect either party from a bad bargain. This attitude of the courts regarding commercial leases is in stark contrast to their attitude regarding residential leases where the courts, as well as statutory law, tend to protect the tenant.

Accordingly, if you enter a lease for office space, you are largely "on your own" insofar as the consumer protections afforded to residential tenants are concerned, and you must be prepared to bargain for your best interests and to live with the shortcomings of your bargain.

To assist a prospective tenant of office space in bargaining for its best interests, the following is a partial list of items to consider and negotiate:

Remember That a Lease Is a Contract Open to Negotiation

Do not accept a proposed lease just because the landlord says that the terms are not negotiable. If you do not ask for more favorable terms, you won’t get them. If the landlord needs to rent the office space, the landlord should be willing to negotiate.

Do Your Homework

Research comparable office spaces and the local market to assist you in determining the relative value and acceptable terms of a lease. Sometimes a commercial real estate broker can help. Make certain, however, that the broker is your broker and not a broker assisting the landlord or a so called "dual agent" who attempts to serve both you and the landlord. An agent with divided loyalties is often worse than no agent at all.

Read and Understand Every Word of a Proposed Lease

The lease will be written in favor of the landlord. Do not be embarrassed if you do not understand all the terms of the lease. Do not just sign it to avoid any confrontation; consult your attorney and let your attorney negotiate on your behalf. Most importantly, do not sign anything, whether it be a letter of intent or the actual lease, unless and until you read and understand every term and obligation in the document.

Consider Whether Acceptable Parking Spaces Will Be Provided

The lease must ensure that you have ample parking spaces for customers and employees, and that your parking spaces are convenient to your office, not on the other side of the building at the back of a parking deck.

Determine How Your Office Will Be Identified

Once you have determined a geographically convenient location, it is just as important that your clients can find you. If your business name is new, your clients may be more familiar with the individual owners of your business; therefore, consider requesting that the building directory include the names of the individual owners or key employees as well as the name of your business, and that the directory clearly indicate where your space is located in the building.

Be Certain You Will Have Access to Your Space Even If The Building Is Closed to the Public

Technology businesses are notorious for night and weekend work hours. If you cannot enter and use your space at odd hours, your business may be hindered. Will your space have utilities at night or on weekends? Few things are more aggravating than rushing to finish a project before a looming deadline while sweltering in a stuffy office without air conditioning.

Understand All the Economic Consequences of the Lease

The lease needs to be clear not only on what you are expected to pay each month in rent, but also what additional charges you will be required to pay such as utilities, common area maintenance fees, insurance, and taxes. You need to know all the costs to be incurred. For example, what insurance are you required to carry?

Some leases are "triple net" to the landlord, meaning that the landlord pays nothing and "nets" the rent each month. Other leases may have the landlord paying for taxes, insurance, utilities, etc. and the landlord will include in the "rent" the landlord’s estimate of what the landlord will pay for these items. You must know what is included, or not included, in the rent in order to accurately compare leases and "rent."

Know the Remedies for Breach

Even though you never expect to be late with rent payments or otherwise breach the terms of the lease, over the multi-year term of a lease, glitches will happen! Your bookkeeper will start to write a rent check, note it in the ledger, get distracted, and forget the check was never actually written. You will renew your required insurance as you have done for years, but forget to inform the landlord. You need to pay particular attention to the landlord’s remedies for default that are in addition to late fees and interest charges. Make certain you know if the lease has an "acceleration of rent" clause. Such a clause gives the landlord the option of collecting the entire balance of the outstanding rent, even rent not yet due, if you default under any of the terms of the lease. If your lease is favorable to you, or becomes more favorable to you because rents have soared in the intervening time since the lease was executed, the landlord might use any breach, no matter how inadvertent or non material, as an excuse to "kick you out" just to have leverage to increase the rent or demand more favorable terms. Negotiate a requirement that the landlord must give you written notice of a default and a reasonable period of time to correct it (commonly known as a "cure period") before the landlord can declare a default and exercise its remedies.

Pay Attention to the Security Deposit Terms

Make sure the amount listed in the lease is the same amount that you did in fact pay or have agreed to pay for the security deposit. You also will want to make sure that the lease clearly sets out the procedures for having your security deposit returned upon the termination of the lease, the situations in which the landlord may use the security deposit, and, if the landlord has agreed to reduce the amount of the security deposit over time, that the conditions for the reduction are reasonable. Also consider whether you might be able to provide something of value in lieu of a security deposit but which does not require you to actually part with funds, such as a certificate of deposit which accrues interest and can be returned to you, with the accrued interest, if you satisfactorily meet the terms of the lease.

(Part II of this article, which will be published next week, will address personal guarantees of leases, charges in addition to base rent, assignments and subletting rights, and other important provisions to look for in a lease.)

Ward and Smith, P.A. provides a multi-specialty approach to the representation of technology companies and their officers, directors, employees, and investors. Kristie M. Ravert practices in the Real Estate Section, where she concentrates her practice on leasing and other real estate matters. Comments or questions may be sent to kmr@wardandsmith.com.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.