6 Important Lease Terms for Growing Companies to Negotiate

1/ June 2012

6 important items for growing companiesThere are many important items to negotiate when looking for an office space for a growing company.  Obviously, the lower the rent the more money can be put into the business.  Also, free rent at the front end of a lease term helps for ramping up and to offset infrastructure costs such as cabling, furniture, phones, moving costs, etc.  Tenant Improvements are another key item to negotiate as well as minimizing the security deposit.  Aside from obvious factors, below are 6 key things (in no particular order) to negotiate for growing companies:

1.      Lease Term: The typical lease term is 5 years.  Growing companies typically don’t have a crystal ball for the next 6 months let alone 5 years.  Most building owners will do a 1 year lease term.  This can be accomplished by finding a space that can be taken close to ‘as-is.’ Generally, the cost that a building owner has to customize a space for a tenant has a direct correlation to the length of a lease term they require.  More $ = Longer Lease.  Building owners require a longer term when buildout costs increase because they spread those costs over the length of the lease.  Ultimately the buildout costs are amortized into the rent based on the length of the lease term.

2.      Plug & Play: ‘Plug & Play’ is a term used to describe a space with furniture and data/cabling already in place.  Typically spaces that are plug & play are sublease opportunities.  Subleases are great for growing companies because they often have a shorter lease term.  If a company is only going to be in a space 1-2 years, it is very expensive to set up the infrastructure (ie: furniture, cabling, phones, etc.).  Finding a plug & play space eliminates this cost and makes a growing company feel more nimble.

3.      Termination Options:  If the space desired is in a building owned by a landlord unwilling to offer a short term lease, negotiate a termination option.  A typical termination option will state: ‘Anytime after X years of the lease Tenant shall have a right to terminate the lease by providing Y months written notice and paying a penalty of Z.’ If a 3 year lease is required, get a termination after 2 years.  If a 5 year lease, terminate after 3 years.  If a 10 year lease, get termination options after years 5 & 7.  Usually the notice period (Y above) is between 6-12 months.  The termination penalty (Z) will be all ‘unamortized leasing costs’ incurred by Landlord.  Building owners take all leasing costs and amortize them over the lease term at an interest rate (which is typically between 6-10 %).  Leasing costs include buildout costs, commissions, and other concessions like free rent, moving or cabling allowances, etc.  This is even more reason for growing companies to find a space that needs limited buildout.

4.      Expansion Options: Ideally, if a growing company moves into a space there will be adjacent available space.  This way a company can take enough space for their headcount in the first year and knock a wall down to grow rather than having to initially take more space than needed or move after the first year.  A well negotiated expansion option is called a ‘First Right of Refusal’ or FROR.  If a company has a FROR and a landlord agrees to terms with another tenant to lease adjacent space, the landlord must go to the growing company and offer the expansion space at the same terms.

5.      Space Pocket:  If a growing company takes more space than needed in year one, a ‘space pocket’ can be negotiated.  For example, if the space is 4,000 square feet and the growing company only needs 3,000 square feet in the first year, then try for a 1,000 square foot space pocket.  Basically, the growing company won’t have to pay for 1,000 square feet of pocketed area for a negotiable amount of time (usually 6-12 months).  The Tenant cannot occupy the space pocket during this time.  If the tenant does cross this imaginary line indicating the space pocket and the landlord finds out, then they can start charging for the pocketed area.

 6.      Sublease Rights:  Negotiate the right to sublease space with the landlord’s reasonable consent.  This is especially important if a growing company is forced to sign a longer term lease.  If a company grows out of space, a well negotiated sublease option is a fallback to what can be considered a good problem.  Watch out for language such as ‘Landlord, at landlord’s sole discretion, shall consent to a sublease’ or ‘any subtenant must be as credit worthy as the original tenant.’ ‘Landlord shall not unreasonably withhold, condition or delay consent’ is a key phrase to negotiate.  Also, try to minimize the cost of Landlord’s consent to sublease.  The standard would be $500 per consent or ‘reasonable administrative costs for review of consent.’


Written by // Jade Rice