Office Lease Issues for Tenants- A Few Issues To Consider in the Landlord Request for Proposal

May 2011
T3 Advisors

T3 Advisors continues to share the knowledge through our Lunch and Learn series.  This past week we were fortunate to have Elizabeth Garner and Joe Torpy from the law firm: Brennan, Dain, Le Ray, Wiest, Torpy & Garner, visit the T3 Advisors offices.  The discussion covered the Request of Proposal and the potential pitfalls tenants may face between the Letter of Intent and the Lease.   The common theme of the discussion was that lease negotiations do not take place in a vacuum, but rather are a function of numerous circumstances and conditions such as strength or weakness of the marketplace, size of the premises, size and financial strength of the tenant, and much more.  During a lease negotiation the tenant has the full attention of the landlord and it is the best time to clear up any potential confusion that might come down the road.
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Some of the key provisions within the Request for Proposal that we discussed were:

  • Premises:  It is important for tenants to understand what common areas or amenities are available in the building.  In most cases, a tenant selects a location based on the amenities and it is important that they negotiate the right to use such areas for the duration of their lease.
  • Lender: Given today’s financial markets, it is important to understand who the lender is on the property.  The tenant should be aware of the current debt structure on the property including information such as the maturity date of the loan. Tenants should try and get non disturbance agreements when possible to guard against future disruption in the event of a building sale or foreclosure.
  • Delivery Condition:  Landlord’s typically use language stating that they will deliver the premises in “as-is” condition with the exception of some type of work.  It is necessary for the tenant to define the nature of the improvements upfront in an exhibit to avoid any confusion once the lease is signed.  These confusions around delivery condition can lead to huge tenant construction budget over runs.
  • Tenant Electricity: Tenants should be cautious about how Landlord’s bill electricity.  Most buildings operate very different and it is imperative for the Tenant to understand if the electric is going to be billed based on a separate meter or on a pro rata share basis.  Tenants should also understand what charges are included in the electric bill.  Does it include just lights and plugs, or does it include HVAC as well?
  • Extension Option:  In the negotiation, Tenants should ask for as much notice as possible when it comes to exercising their renewal right.  In addition, the determination of the renewal rate is key.  Most landlords attempt to put a floor on the renewal rate which is detrimental for a tenant in a down market.  Tenants should seek to have their renewal rate determined by fair market value based on traditional baseball arbitration.

These are only a few lease issues for tenants we discussed.  All tenants should have good real estate representation and legal counsel.

Thanks to Elizabeth Garner and Joe Torpy for leading us an engaging conversation.  We look forward to sharing the knowledge from our next Lunch & Learn series.