Unforeseen costs can crush a business that opts to sign an office lease without legal counsel. From initial construction costs to later capital improvements, the list of potential hidden costs is long and adds up quickly.
To avoid the possibility of paying several large bills down the line, ask your lawyer to help you negotiate a fair lease up front that covers the following, as necessary: a landlord-performed buildout, a tenant-performed buildout, operating expenses and end-of-lease condition.
If the landlord is performing demolition and/or construction at the space you are planning to lease, crucial details need to be ironed out in advance and put in writing, including the nature and scope of the construction, a procedure for preparing and approving plans and specifications, the construction schedule and the approval of contractors.
It’s common to see a lease that includes a construction allowance, or set amount of money the landlord will pay, with any costs beyond that falling on the tenant.
Unless you have protections built into the lease to limit how much the landlord can spend on construction without your approval, the landlord has a “blank check” to incur construction costs in excess of the construction allowance. That is an even bigger concern when the construction is being performed by the landlord’s affiliated construction company, which is often the case.
If you opt to handle buildout on your own, there is still the potential for hidden costs. A lease in this situation will typically provide that the premises are to be delivered by the landlord “as is,” with no obligation on the landlord’s part to perform any work or improvements prior to delivery. Thus, the landlord has no legal obligation to demolish the prior tenant’s installation, remove furniture, equipment or cabling, or address any issues or problems with the premises, such as correcting existing legal violations or removing hazardous materials. A legal professional can help write an agreement that shifts the burden of the delivery condition of the premises from the tenant to the landlord.
Most leases require the tenant to pay its proportionate share of the operating expenses for the building, but there are certain things you should try to avoid. In particular, capital improvements — upgrades to the building performed by the landlord that enhance the value of the building — should not be the tenant’s responsibility. While you can be expected to pay a share of the day-to-day operating expenses of the building, as a tenant you should not pay for major upgrades to the building unless the landlord is required by law to perform the upgrade, or the upgrade results in greater efficiencies or reduces overall operating expenses for the building.
When your lease is up and it’s time to turn the premises back over to the landlord, what are you obligated to do and what costs could come your way? Many leases require the tenant to remove its furniture, trade fixtures and equipment at the end of the lease term. Be careful to avoid provisions that make you responsible for restoring the premises to the condition that existed prior to the installation of any alterations or improvements you chose to make. Most leases provide that alterations or improvements installed by the tenant become the property of the landlord upon installation.