‘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.

RALEIGH — Last week, we focused on a number of issues a new business owner should examine in a proposed lease from a landlord, including research of comparable space, location of the space, parking rights, access, identification and charges in addition to base rent. Here are additional issues to consider.

Determine Whether the Landlord Requires Personal Guaranties

Some landlords require someone to guarantee personally the tenant’s performance of the lease, including, but not limited to, the payment of all rent and expenses. If this is the case, make certain you read and understand all of the terms of the guaranty agreement. You do not want it to be a surprise when the landlord looks to you personally to make good on a defaulted company lease, perhaps after you have sold your interest in the company. Negotiate a limited personal guaranty such as one limited to a maximum amount or limited to the percentage of the outstanding debt that is equal to the percentage of the business owned by the individual guarantor, and which contains reasonable terms for the substitution of a guarantor.

Consider Whether Alterations or Improvements to the Space Are Permitted

Often tenants want to make alterations and add improvements to the rented space. You need to be certain that the lease addresses what you can and cannot do with and without the landlord’s permission. Who will retain ownership of the alterations and improvements upon the termination of the lease? Do you have permission to take them with you or do they become the property of the landlord? If you have permission to take them with you, in what condition must you leave the space? Prior to making any alterations or improvements, it is always a good idea to obtain the landlord’s written permission that specifically addresses which party will retain ownership of the improvements at the termination of the lease.

Understand the Relocation Terms of the Lease

The lease may allow the landlord to relocate your space elsewhere in the same building. If you are a small tenant, the landlord may have agreed with a large tenant that the landlord will give "your" space to the large tenant at its request. If so, you want to make certain that the lease provides either that you will receive a comparable space satisfactory to you or that you will have the right to terminate the lease. The landlord should pay the expenses of any such forced relocation, including the making of improvements to the new space, moving, new stationary, business cards, etc.

Identify Costs and Expenses of the Leased Space That Are Not Included in the Rent

Operating expenses and common-area costs can be a significant portion of your ultimate rent cost. It is important that such costs and expenses are clearly defined, determined in good faith and in a fair and equitable manner and are not intended to be a profit center for the landlord. Capital improvements, excessive management fees paid back to the landlord, costs of transactions with affiliates of the landlord at rates in excess of fair-market rates and costs (such as the landlord’s overhead, advertising, leasing expense and the expense of resolving disputes with other tenants) are some of the expenses that you should negotiate to be paid exclusively by the landlord. When evaluating the operating expenses, check to see if the landlord will be cleaning and removing trash from your leased space as well as the building or if you will need to contract with an outside company for trash removal.

Examine What Utilities Will Be Provided

If the landlord provides the utilities to your space, you may find a provision that limits the usage both by the hours during which utility services will be provided and by the level of utility service available. Will you be using equipment and computers that may draw excessive electricity? Although large office buildings generally have an adequate electric supply, that may not be the case with a smaller or older building. You will need to review this carefully and make certain that your needs will be met, and, if not, negotiate terms for excess usage into your lease. You also will need to examine the method that the landlord uses to determine the amount the landlord is reimbursed for such expenses. You should negotiate that individual meters be installed to adequately reflect the individual usage rather than a square-foot proration, as not all tenants may use the same proportionate share. Likewise, you should negotiate that the landlord may not charge in excess of the current market rates of other utility competitors. Further, you also should make certain that the lease allows you to contract directly for specialty services such as unusual telecommunication and Internet services that the landlord does not provide.

Determine Whether the Lease Allows for Assignment or Subletting

Whether you will be able to assign the lease or sublet the premises becomes more important as your business begins to grow and expand or if, unfortunately, your business plan proves to be overly optimistic and you have more space available than you can use and it is at a cost you cannot afford. You want to make certain that you can assign the lease to a purchaser if your business is sold or that you can sublet portions of your space that are not being used without triggering a default under the lease. In many instances, a landlord will be willing to allow such assignments and subleases provided you obtain the landlord’s permission first or find a tenant or subtenant with more than a stated net worth. You want to be certain that such permission will not be unreasonably withheld, conditioned or delayed.

Understand the Consequences if the Building Is Damaged or Destroyed

The lease needs to address damage to, or destruction of, the building. Do you have the right to terminate the lease if your leased space or the building is not restored to full use within a specific time? If the lease is not terminated, you will want to make certain that you have a provision to allow the payment of no, or a reduced, rent (a "rent abatement") during the period that you are unable to use your space.

Signing a lease is a commitment not to be taken lightly. Prior to assuming the obligations of a lease, make a list of expectations you will have as a tenant and use that list in negotiating a lease that will best serve your business purposes and allow you to be successful. Sign your lease with the confidence that you understand all of your rights and obligations.

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.