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Corporate & Securities Law: The Startup Lawyer
How to Avoid Being Ripped Off When You Lease Office Space, Part III
In Part III, we’ll continue discussing the provisions that your startup company needs to consider before leasing office space.
Your startup company may not have to negotiate each provision, but you should obtain a working knowledge of them. They will likely affect your lease sooner or later.
Repair and Maintenance. Don’t let this portion of your lease be vague–it will likely go against you in the event of a dispute. Thus, make sure the lease sets out your repair and maintenance obligations in a very specific manner. Ideally, you should have few repair and maintenance obligations, such as your own personal property and other property damage caused by your negligence or misconduct. Don’t sign a lease if the landlord insists you repair and maintain the HVAC system, foundation, walls, plumbing, or common areas. You should be able to get out of those repair and maintenance obligations pretty easily (i.e., don’t think that the landlord is “giving in” and that you have to give somewhere else).
Damage or Destruction of the Premises. Most of the time this provision gets overlooked, but it could have terrible consequences in the event the building is razed. For example, the provision may require you to reconstruct the building in the event of its damage or destruction. If you are going to sign a lease with this clause, you must make sure that your obligation is limited to both the extent of your insurance proceeds and the causes of loss that are insurable.
Assignment and Subleasing. It is preferable that your right to assign or sublease your office space is unlimited as possible. Be sure to add language that unconditionally allows you to assign or sublease to a company that is owned by–or owns–at least a majority of your company signing the lease.The landlord does have an interest in a non-related subleasee. Thus, it is prudent the landlord maintains the right to reasonably withhold consent on your assignment or sublease. It may help to remember that other tenants in the building are (hopefully) signed up to a similar clause and therefore weirdo companies won’t show up next door. Also, keep in mind that you will be responsible for rent in the event your landlord-approved subleasee bails on you.
Implied Warranties. Unlike residential real estate transactions, parties to commercial real estate transactions can usually agree to waive implied warranties designed to protect the leasee (or buyer). It depends on your state, but the main implied warranty landlords like to waive is the warranty of suitability. The best advice I can give you is to not waive any warranties.
Property Taxes. You’re already paying off the landlord’s mortgage, so some landlords get greedy and have you pay the building’s property taxes as well. Be sure that property taxes aren’t a part of the CAM or other charges you have to pay.
Landlord’s Rules and Regulations. Sometimes landlords issue building rules and regulations as an addendum to the lease. They are probably not a major concern for most leases, as they are intended to benefit all tenants. The main problem usually arises when another tenant does not adhere to the rules and regulations without any recourse by the landlord.
Dispute Resolution. Your lease should have some type of non-courtroom dispute resolution process, whether it be arbitration, mediation, or coin-flipping. Leases that provide for the courtroom and that the loser pays all costs (court fees, attorneys’ fees, etc.) are used by the landlord to preclude its tenants from suing. The landlord is banking that you won’t risk having to foot their law firm’s bill in addition to your own.
Lease Audit. If your monthly lease calculation is complex, your startup should consider having a lease audit clause. This clause should allow you to employ a “lease consultant” to physically measure the premises and assure that other costs are being properly calculated. Let’s just say I’ve never found a landlord to underestimate square footage or underbill costs. Along with the lease consultant, the clause should grant you access to the landlord’s records pertaining to your rent calculations.
This wraps up the series on how to lease office space. Good luck.
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