Top Five Mistakes In Leasing Office Space
Mistake #1: Waiting too Long to Start Negotiating
The most common mistake businesses make in their office space planning is waiting until the last minute to start negotiating for new office space. This can be costly, because landlords know you would rather actually run your business than worry about WHERE you run your business. The longer you wait, your landlord knows, the less likely you will be to look for other options and negotiate for a better deal.
On the other hand, when you do start early, you can gain advantages in all aspects of your lease. You have time to look around in your market for good deals, both in terms of economics and legal provisions, which can make an enormous difference to your business.
Mistake #2: Term Too Long
A long term rarely favors a tenant, yet tenants often attempt to lengthen the term of their leases. This mistake be expensive. Here’s why.
First, your business and your need for office space are rarely static. You may have a new idea or product that rapidly changes your business plans, or your company may suffer an unexpected contraction. Either way, the longer the term of your lease, the more difficult it is for you to react nimbly to new circumstances. Your space should not dictate your business plans, yet too often, a long lease term can do just that.
Another reason to avoid a long term as a tenant is the opportunity you lose to upgrade your space at a lower cost if you have a longer term. A short term leaves you free to look for better and cheaper space, and to move as soon as you find it.
You might be asking, “What about the fact that the landlord could increase your rent or move another tenant into your space? Wouldn’t a longer term be better for that reason?” Certainly, those are good questions, but as much as it may seem counter-intuitive, it is actually much less likely for a landlord to move in a new tenant than it is for you to want to move.
Commercial real estate brokers often refer to their desire not to “leave money on the table.” In other words, when they negotiate a lease, they want to be sure they get the best possible deal. The option to renew may not be actual cash, but it is an item that consistently gets left “on the table” by tenants, and it can be a costly mistake.
An option to renew allows you to get all the benefits of a short term while still preserving the benefits of a longer term. For example, if you sign up for a one-year term with options to renew for two more one-year terms, you have just won for your company the benefits of a three-year lease without any of its drawbacks.
And yet, most companies never ask about an option. Most landlords will agree to very favorable renewal terms, if the tenant will just ask.
Mistake #5: Anti-Assignment and Sublease Language
Almost every lease contains language requiring the tenant to get permission for any assignment or sublease. In about half of those, any change in control of the tenant triggers that anti-assignment language. In other words, if you sell more than half of your company or do any other significant restructuring, your sale can be held hostage by your landlord. A simple phrase, such as, “except in connection with the sale, acquisition, or merger of tenant, or of all or substantially all of its assets” will generally be acceptable to landlords, and will free you from the restriction of an anti-assignment clause when you need to sell or otherwise restructure your company.
One Last Opportunity
One final opportunity tenants often miss comes up in connection with the anti-assignment language. If you have an option to renew your lease, and you also have the ability to sublet or assign your space, then if you want to move while the market is hot, you may be able to sublease your space to a third party for more than you are paying.
Leases often contain language that requires that you turn over any profit made this way to the landlord, but you should remove that language. If the landlord objects, insist on sharing at least 50% of the profits. Landlords will rarely object to such a fair proposition, since you are obligated to pay rent for the full term.
In the business world, success comes as you successfully manage the details of each transaction. And since your lease is one of the most important transactions your company will enter into, paying attention to those details can yield significant results.