Given what we have been seeing lately in the Boston-area commercial leasing market, I'd like to share some recommendations to consider before entering into your next lease:
- Use a reputable commercial leasing broker
I am always surprised whenever a CEO or CFO asks whether it’s worth having a broker on the team. The answer is yes! The best brokers know the market and your industry. They can save you time by guiding you away from locations that are poor matches for your needs. They can save you money by providing intelligence on key market prices, terms, and trends.
Perhaps past experience of using a headhunter to hire employees has unduly influenced these decision-makers. In the HR scenario, a company almost always pays an additional premium when it hires a candidate found by a headhunter. This is not the case with commercial leases. The landlord does not charge more for your lease if a broker is involved; there is no discount on rent if a broker is not involved.
- Let your lawyer help you before you sign the letter of intent
I know this sounds self-serving coming from lawyers, but a company often will want to try to sign the Letter of Intent (LOI) before starting the meter on a lawyer. The real risk, however, is that you may be forfeiting leverage that you have prior to signing the LOI. After signing an LOI, landlords often respond to a lawyer’s request for a material provision with a comment such as “This request should have been made as part of the LOI because the rental rate was priced without that provision.” The proverbial ship has sailed.
Remember, in most cases, the most affection you will ever receive from a landlord is as a prospective tenant when your company is the “buyer” and can choose from among many locations.
If there is concern over the cost of the lawyer at the LOI stage, have your lawyer agree to a fixed fee or a cap on the project that includes both the LOI and the lease.
- Fix the Assignment language!
For venture-backed companies in particular (or those with aspirations towards VC or private equity funding), insist on acceptable Assignment language within the LOI. Many leases will have language such as “a change of control of more than 50% of the equity ownership of the Tenant constitutes an Assignment and requires the prior written approval of the Landlord.” This is not acceptable for a company that may have one or more rounds of equity financing. Nor is it acceptable for a science-based company with valuable, customized laboratory space, who would risk losing that space based on a change of control triggered by substantial VC funding.
- Do not prematurely make operational decisions on moving into a location if the lease is not finalized
Your company has been looking at space for a long time. When you signed the LOI, it had a move-in date that was two months away. Now, because of delays/lack of responsiveness/holidays/whatever, you are two weeks away from the original move-in date, tired and frustrated, and the lease is still not signed. Your company is still trying to negotiate important terms while facing a fast-approaching occupancy date. At the same time, your operations people have been coordinating logistics with the landlord’s representatives, and you have been losing negotiating leverage daily. Try to avoid creating a scenario where it is economically impossible or not feasible for your company to go any place else.
- Learn the prior use of the space
If any portion of the space that your company is taking was previously used as laboratory space, make sure that you have received and reviewed carefully the evidence that the space has been remediated and that it has been appropriately certified as clean.
All businesses need to worry about finances, but entrepreneurs and start-up firms especially need to worry about the cost of everything. The expenses associated with leasing office or lab space can represent some of the highest fixed costs borne by a small company. Do your firm a favor and proactively obtain value for each leasing dollar spent. Focusing on the tips mentioned above will at least put you on the right path.
Peter Cahill of Cahill Law Group is a corporate lawyer with significant transactional and general corporate experience representing start-ups and small and mid-sized companies. His experience encompasses debt and equity offerings, drafting a variety of corporate contracts, and negotiating commercial real estate transactions.
The author is solely responsible for the content.
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