Office Lease Checklist
Key Items to Consider
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1.10 Office Lease Forms |
1.17 Holdover |
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1.1
Office
Lease Forms
The typical office lease or office rental form covers a multiple of
issues never discussed by the parties. Yet, within these
never-discussed issues lurk, among other things, unreasonable risks,
hidden costs, significant ambiguities, and the legal rights and
obligations of the tenant.
Commercial office lease or office rental forms produced by landlords or their attorneys are similar in format and content with each office lease containing approximately 50-100 provisions. The essential difference among such leases lies in the treatment afforded those provisions: changing one or two words can be the difference between a fair or unfair provision and a good or bad deal for you.
The following areas need to be evaluated
and negotiated, if necessary, before signing an office lease or office
rental agreement.
a)
Are there
any unreasonable or unfair provisions?
b)
Has the
true cost of the office lease been calculated?
c)
Are there
any ambiguous provisions?
d)
Have all
rights and duties been sufficiently defined?
e)
Is the
tenant entitled to the same protections as the landlord by making
any unilateral clauses reciprocal in nature?
1.2
Negotiated Terms
a)
Is the
office lease or rental agreement correctly dated for reference purposes?
b)
Are the
parties accurately described with full legal names, correct states
of incorporation, and principal business addresses?
c)
Are the
Leased Premises fully and accurately described, including the floor
or suite number, street address, municipality, state, and zip code?
d)
Are
exhibits referred to and attached showing the legal description and
the location of the Leased Premises and building?
e)
Is the
square footage of the Leased Premises specifically stated and how it
is measured?
f)
Is the
square footage measured by the rentable square feet (includes
portion of common area), by usable square feet (limited to space
within four walls of Leased Premises), by referring to various points
within the building (such as from the outer walls to the center of
some point), or by referring to the Building Owners and Managers
Association International (BOMA) standards?
g)
Is the
term specified by the number of years including the commencement and
termination dates?
h)
What
triggers obligations to move in and pay rent: substantial completion
(is substantial completion defined, for example, as the time when
the tenant is able to use the Leased Premises for the intended
purposes without material interference?); issuance of a certificate
of occupancy; the time the premises are ready per specifications and
plans; or the time when only minor details of construction,
decoration, or mechanical adjustments remain to be completed?
i)
Is the
agreed-upon rent specifically stated?
j)
If the
rent is stated in more than one way—for example, monthly, annually,
per square foot, for a full term—are the different amounts
consistent?
k)
Is the
monthly rent prorated for the first and last months if occupancy in
those months is less than a full month?
l)
Is there
a reasonable grace period, such as 10 days, before a penalty is
charged for late rent?
m)
If there
is my free rent, when does it start and how much is given?
Does it include triple net expenses?
n)
Does the
free rent start during the construction period or upon occupancy?
o)
Can free
rent be revoked if a default
p)
Does the
rent increase periodically by the consumer price index (CPI), or by
a fixed percentage?
q)
Does the
increase start immediately, on the first day of the calendar year
following the lease commencement year, on the first anniversary of
the commencement date, or at some later point in the lease term?
r)
Is there
a maximum cap on rent increases?
1.3
Delay In Possession
a)
If
possession is delayed through no fault of the tenant, what remedies
does the tenant have: rent abatement; money damages; cancellation;
reimbursement for prepaid monies, such as the security deposit and
the first month’s rent; or all of these remedies?
b)
Are the
commencement and termination dates extended for a period of time
equal to any delay?
1.4
Operating Expenses
a)
Does the
tenant pay a pro rata share of the increase in operating expenses
over a base figure (gross office lease) or a pro rata share of the total
operating expenses for the operating year (net office lease)?
b)
Is the
base the amount of operating expenses in a calendar year or is it an
expense stop?
c)
If the
base is a calendar year, is the base year specified?
d)
What was
the prior lease year’s base expense amount?
e)
Are the
base year expenses based on full tenant occupancy or are they
properly adjusted for vacancies?
f)
Are
operating expenses grossed up if the building has vacancies? A
gross up of 85% is less advantageous than a 95% gross up.
g)
Are the
following expenses excluded: any payments (such as salaries or fees)
to the landlord’s executive personnel; costs for items that, by
standard accounting practice, should be capitalized (such as HVAC
replacement), unless those costs reduce operating expenses and are
amortized over the reasonable life of the capital item in accordance
with generally accepted accounting principles and the yearly
amortization does not exceed the actual cost reduction for the
relevant year; depreciation or interest (unless it is related to
allowable capital item); taxes on the landlord’s business (such as
income, excess profits, franchise, capital stock, estate,
inheritance); leasing commissions; legal fees; costs to
correct original construction defects; expenses paid directly by a
tenant for any reason (such as excessive utility use); costs for
improving any tenant’s space; greater than 5 percent increase in
management fees or employees’ salaries or benefits or both; any
repair or other work necessitated by condemnation, fire, or other
casualty; costs exceeding those obtainable through competitive
bidding; services or benefits, or both, provided to some tenants but
not to this tenant; and any costs, fines, and the like due to the
landlord’s violation of any governmental rule or authority?
h)
Is the
landlord required to provide a reasonably detailed and itemized list
of expenses?
i)
Does the
tenant have the right to audit the landlord’s books and records?
j)
If the
audit reveals a discrepancy of 2 percent or more, must the landlord
pay for the audit?
k)
How are
disputes over increased operating expenses settled: by negotiation;
by mediation; by arbitration; by lawsuit; by the landlord’s list,
which is conclusive and binding unless the tenant objects in x days;
or by the landlord’s CPA’s certification, which is conclusive?
l)
Is the
increase prorated for the first and last years of the term if
occupancy in those years will be less than 12 months?
m)
Are there
any limitations on operating expense increases?
n)
If a
triple net office lease, have the amounts been stated in the lease?
o)
Does the
tenant receive a credit if the operating expenses are reduced or if
the paid estimated monthly amounts exceed the actual incurred
expenses?
p)
Is the
tenant required to contribute to the landlord’s Promotional Fund?
1.5
Security Deposit
a)
Under
what circumstances and when is the security deposit returned?
1.6
Use
a)
Can the
tenant use the Leased Premises for any lawful purpose?
b)
If not,
do the restrictions on use limit in any way the type of business the
tenant intends to conduct at the Leased Premises?
c)
Can the
use be changed in the event of a sublease or assignment?
1.7
Office
Building Services
a)
Which
party provides and pays for such services as: heating, ventilating,
and air conditioning (HVAC); electric lighting; water; janitorial
services; and snow removal?
b)
Are the
services provided during normal business hours only, during
specified hours (such as from 6:00 A.M. to 7:00 P.M.), during
weekends and holidays? Are any excluded holidays specifically
listed?
c)
What
standard governs the landlord’s provision of HVAC: the standard for
first-class office buildings in the area; the landlord’s sole
discretion, as the weather warrants; sufficient (or reasonable)
amounts and temperatures sufficient for the tenant’s comfortable
occupancy?
d)
What
standard governs the landlord’s provision of janitorial services:
five days a week; during or after work hours; the standard for
first-class office buildings in the area; a degree deemed sufficient
by the landlord?
e)
Are the
janitorial services specified, such as emptying waste baskets,
vacuuming, and washing windows?
f)
What
remedies does the tenant have if the services are interrupted?
Can these remedies include money damages, rent abatement, and lease
cancellation?
g)
Is the
tenant automatically entitled to its remedies or is it entitled to
them only if one or more of the following occurs: the interruption
is caused by the landlord’s negligence or intentional act; the
causes were not beyond the landlord’s reasonable control; or the
landlord failed to use its best efforts (or reasonable efforts, due
diligence, reasonable diligence, diligence) to restore the services
promptly (or with reasonable dispatch)?
1.8
Repairs and Maintenance
a)
Is the
tenant’s liability for repair or maintenance, or both, any greater
than keeping the Leased Office Premises—but not every part—in good order
and condition, and to return the Leased Premises at lease
termination in the same condition as received at the commencement,
except for ordinary wear and tear, damage by the elements, fire, and
other unavoidable casualty?
b)
If the
tenant’s obligation is greater than that stated in question 72, does
the obligation include responsibility for the structural portions of
the building—roof, exterior walls, and systems (HVAC, electrical,
mechanical, plumbing, and water)—even if the tenant does not have
access to them?
c)
If the
tenant’s obligation includes part or all of the items listed in
question 73, has the landlord assigned any warranties to the tenant,
and is that assignment legally effective?
d)
If the
landlord has an obligation to repair, is the obligation to repair
with reasonable promptness or within a reasonable time after
receiving written notice?
e)
If
required repairs require capital improvements, is the landlord
required to amortize those costs over their useful life in
accordance with GAAP (General Accepted Accounting Principals)?
1.9
Alterations and Improvements
a)
May
alterations be made with the landlord’s consent if the alterations
cost less than a particular amount as referenced in the office lease?
If the landlord’s consent is required, is the landlord’s decision
conclusive?
b)
In
addition to alterations, does the provision cover changes,
improvements, additions, installations, and decorations?
c)
At the
office lease’s termination, does the landlord have the option of keeping
and owning the alterations and the like made by tenant or of having
the tenant remove the alterations and repair the damage?
d)
Does the
tenant have the right to remove trade fixtures, all alterations, or
alterations owned or paid for by the tenant, such as improvements
made at the commencement of the office lease and paid for by the landlord
and tenant?
1.10
Insurance
a)
Do the
office tenant’s policy coverage and limits meet the minimums required by
the office Lease?
b)
May the
tenant use a blanket or umbrella insurance policy that covers, in
addition to the Leased Premises, other premises owned or leased by
tenant?
c)
If the
landlord is added as an insured, is the landlord’s interest under
the insurance policy specifically limited to the landlord’s interest
under the office lease?
1.11
Indemnity and Hold Harmless Provisions
a)
If the
tenant must indemnify and hold the landlord harmless from claims,
damages, or injuries arising out of the tenant’s occupancy of the
Leased Premises, what is the degree of the tenant’s responsibility?
Is the tenant responsible for any and all claims; for any and all
claims except those arising from the landlord’s intentional (willful
acts, willful misconduct, wanton misconduct, and unlawful acts) or
negligent (any negligence—primary, sole, or gross) acts or
omissions; to the extent of the tenant’s fault; or except for
consequential, special, and direct damages?
b)
Under
what circumstances is the landlord not liable to the tenant?
1.12
Damage and Destruction
a)
If the
Leased Premises are damaged by casualty, is the landlord obligated
to repair and restore them as soon as reasonably possible or to use
due diligence?
b)
Does the
tenant’s rent obligation abate from the date the Leased Premises or
access thereto are damaged or impaired and remain abated until the
damage is repaired?
c)
Is the
rent abated in proportion to the nature and extent of damages, the
impairment of the use (diminution of value) that the tenant can
reasonably make of the Leased Premises, or the amount of unusable
square feet?
d)
May the
tenant cancel the office lease if the landlord fails to repair and restore
the Leased Premises within a reasonable time, such as 90 days?
1.13
Assignment and Sublease
a)
Is the
tenant prohibited from assigning or subleasing the office lease without the
prior written consent of the landlord?
b)
What
standard governs the landlord’s decision to consent: the landlord’s
sole discretion; the provision that consent shall not be
unreasonably withheld or unduly delayed; or objective, reasonable
criteria, such as the subtenant’s financial strength?
c)
Must the
tenant obtain consent from the landlord for an assignment to an
affiliated company, and is “affiliated” defined?
d)
Is the
landlord entitled to profits derived from the sale of tenant’s
business?
e) What are
the fees paid to the landlord for processing and approval? Is there
a limit on such fees?
1.14
Default and Remedies
a)
Is
vacating or abandoning the premises a default even if the tenant
continues paying the rent?
b)
Is the
tenant’s failure to pay the rent a default only after the rent is
more than 10 days overdue and the tenant receives written notice of
the failure to pay?
c)
Is the
tenant’s failure to comply with the other material terms in the
office lease a default even if the tenant cures the material breach within
30 days of receiving written notice of the breach, or if, due to the
nature of the breach, more than 30 days are needed to cure and the
tenant began curing within 30 days and is diligently pursuing the
cure to completion?
d)
Are the
following events—bankruptcy, receivership, seizure of assets,
assignment for the benefit of creditors—automatic defaults or
defaults only if those events are not vacated, released, dismissed,
or otherwise corrected within a reasonable time (60 days) after
those events occur?
e)
Before
exercising its remedies, must the landlord give the tenant notice or
make a demand for cure?
f)
Is the
landlord entitled to unreasonable remedies, such as “confession of
judgment,” “acceleration of rent,” or “cumulation of damages that
exceeds total rent payable, absent a default”?
g)
Must the
landlord mitigate damages, such as by making reasonable efforts to
re-let?
1.15
Brokers’
a)
Are the
brokers properly identified as it relates to who is representing the
tenant and the landlord?
1.16
Quiet Possession
a)
Does the
landlord warrant the tenant’s “quiet possession” and the landlord’s
right to execute the lease?
1.17
Holdover
a)
If the
tenant holds over with or without the landlord’s consent, is the
rent increased by an unreasonable amount? Holdover rent is
typically 150-200% of the rent currently being paid.
1.18
Tenant Improvements
a)
Are all
of the proposed improvements itemized on the plans and
specifications and attached as exhibits?
b)
If there
is a construction allowance, how are the funds disbursed?
c)
If the
premise is not in a finished state, (such as no ceiling, lights, or
HVAC), does the landlord finish the space to an improved shell
condition without including it in the construction allowance?
d)
Who is
responsible for performing the construction?
e)
Is the
bidding competitive for letting the contract?
f)
Are the
timing perimeters for approvals from landlord reasonable?
1.19
Attorneys’ Fees
a)
Is each
party entitled to have its attorneys’ fees paid by the other, if
such party is the prevailing party in any litigation, or in a
dispute settled short of litigation, to enforce the office lease?
b)
Is the
prevailing party entitled to other reasonable expenses and court
costs?
1.20
Force Majeure
a)
Is a
general catchall phrase—for example, “any other cause beyond the
landlord’s control” –or any specifically included item—for example,
the inability to obtain fuel—a risk that the landlord ought to bear?
b)
Is the
provision reciprocal between landlord and tenant?
1.21
Percentage Rent
a)
If there
is a percentage rent clause in the office lease, what is the breakpoint
percentage? For example: 6% (the lower the percentage, the
less it will be).
1.22
Right to Enter
a)
Except
for emergencies, must the landlord give the tenant reasonable
advance notice of entry?
b)
Except
for emergencies, can the landlord enter the Leased Premises at any
time, at any reasonable time, or only during (or after) business
hours?
c)
May the
landlord enter to inspect, make repairs, construct improvements, or
show the Leased Premises to prospective tenants (such as in the last
three months of the office lease term only)?
d) During the landlord’s entry, is the tenant entitled to damages or rent abatement for injury caused by the landlord’s negligence or unreasonable interference with the conduct of the tenant’s business?
1.23
Signage
a)
If the
tenant has sign rights, are they specifically stated as to where it
can be placed?
b)
Are there
signage criteria attached to the office lease defining the size and look of
the sign?
1.24
Relocation
a)
Does the
landlord have the right to relocate the tenant to new office space?
b)
How many
times during the term may the tenant be relocated?
c)
Are there
restrictions on the area to which the tenant may be relocated, for
example, the same building, same floor, near the elevators?
d)
May the
tenant be relocated if it leases more than a specified number of
square feet (say 2,500)?
e)
May the
landlord relocate the tenant only if certain specified events occur,
for example, another tenant wants more than a specified percentage
(say 75%) of the whole floor, or the relocation is necessary to
provide the landlord’s services more efficiently (so the landlord
can’t use relocation to harass a tenant)?
f)
Must the
“new” space be substantially the same in size, dimensions, and
configuration?
g)
Must the
effective usable space in the “new” space be equal to or greater
than the “old” space?
h)
Must the
landlord give the tenant at least 60 days’ advance written notice of
any relocation?
i)
Will the
rent and additional rent (percentage share) not be increased during
the original term and any option periods, even if the “new” space
contains more square feet than the “old” space?
j) Will the
“new” office space be built-out similar to the “old” space?
k)
Does the
landlord pay all reasonable expenses incurred by the tenant in
relocating, including the tenant’s salaries in administering the
move, moving expenses, phone transfer, and changing the address on
business stationery and any advertisement?
l)
Does the
office lease change on the date the office space is ready for moving in, and are
the terms and conditions the same (other than with respect to
necessary changes—i.e., suite number of size of leased premises)?
m)
If the
tenant agrees to move to a smaller space, are the rent and
additional rent proportionally reduced?
n)
Does the
tenant have the right to cancel if it does not want to relocate?
o)
Is the
tenant entitled to a sign near its “old” space for several months,
advising persons of the tenant’s new location?
p)
Is a
dispute over whether the “new” space meets the relocation
requirements submittable to arbitration?
1.25
Parking
a)
Is the
tenant guaranteed free parking?
b)
Is the
tenant guaranteed a minimum number of parking spots?
c)
If the
tenant is not guaranteed a specific number of parking spots, is the
tenant allocated spaces (and location) on the same basis as all
other tenants (considering the tenant’s percentage share)?
d)
Can the
landlord change the parking area?
e)
Can the
landlord impose a fee for the use of the parking lot?
f)
Can the
tenant’s invitees use the parking lot?
g)
Is there
enough parking for the tenant’s needs?
h)
Is the
parking area shown on an Exhibit attached to the office lease?
1.26
Reasonable Consent
a) Where
landlord’s consent is required, is there a reasonable standard, or
is it arbitrary for the landlord?
1.27
Waivers
a)
If the
failure to exercise any rights is not a waiver, is this provision
applicable to both parties?
b)
Must any
waiver be in writing and signed by the waiving party?
1.28
Hazardous Substances
a)
If the
building was built before the mid-1970s, does the landlord agree to
hold harmless and indemnify the tenant from any liability for
asbestos claims?
b)
Does the
landlord hold harmless and indemnify the tenant from any hazardous
wastes claims (except those caused by the tenant’s negligence or
misconduct)?
c)
If the
premises becomes untenantable because of hazardous waste or asbestos
not placed there by the tenant, may the tenant cancel the office
lease?
d)
Is “untenantable”
defined in light of federal OSHA standards?
1.29
Title
a)
What is
the status of the ownership; investment group, private individual or
bank owned?
b)
Can the
landlord perform its obligations?
c)
Is the
landlord current on their loan payments or is the property in
default?
1.30
Office Lease Exhibits
a)
Is each
exhibit marked, initialed, and dated, and does it refer to the
landlord and tenant?
b)
If the
exhibit is more than one page long, does each page show the number
of pages in the exhibit?
c)
Are the
exhibits referenced in the office lease?
d)
Does the
rider control if the rider and the office lease are in conflict?
1.31
Option and First Rights
a)
Does the
tenant have one or more options to extend the term for one or more
years on the same terms and conditions as those found in the
original office lease, except for rent?
b)
Is the
tenant required to give notice of exercising the option too far in
advance (for example, one year before the office lease ends)?
c)
Is the
rent during the option term renegotiated or increased by a fixed
percentage, the CPI increase, a fixed dollar amount, or the current
market rate?
d)
Is the
option rent specific enough so that the option is enforceable
(avoiding vague terms such as “as agreed by the parties” or “to be
negotiated”)?
e)
Is
arbitration provided if the parties cannot agree on the option rent?
f)
If there is a first right of
refusal for expansion, is the expansion space clearly defined
physically and economically?
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