Signing a Lease

Here are the top ten things you should consider before signing a lease:

1. Is a written lease necessary?

A landlord will or should be very reluctant to allow occupancy of space without a written lease because of the need for assurance that certain essential responsibilities will be fulfilled. The landlord will want to be certain that you carry appropriate insurance; maintain the premises in good condition and comply with laws; and that effective remedies are available if you default.

A written lease also benefits you as the tenant and insures you a stated term of occupancy and identifies the services the landlord will be obligated to provide to you.

Without a lease, terms and conditions, and rights and responsibilities are more likely to be uncertain or unclear, which could easily lead to disputes and liability.

2. Is a verbal lease agreement binding?

Generally, a verbal lease agreement is considered legal and binding for a term of less than one year. However, it is highly recommended to get a written letter of agreement as this protects both the landlord and the tenant.

3. Who signs the lease first?

Typically, landlords require that the prospective tenant signs the agreement first.

4. What is the purpose of a letter of intent?

A letter of intent is a written memo or letter that outlines the basic business terms agreed upon by the landlord and prospective tenant. The letter of intent should expressly state that it is non-binding since it oversimplifies what can typically be fairly complex terms and conditions to be more particularly spelled out in the lease document. The letter of intent is the roadmap for the lease negotiation.

However, the one thing that you may wish to make binding in a letter of intent is that the landlord commits to negotiate exclusively with you for a set period of time.

5. Are you dealing with the “real” landlord?

Ask who owns the building and get clarification on the authority of the person with whom you are dealing.

A landlord sometimes is required to obtain consent from its mortgage lender(s) before entering into a lease. You should ask about any such contingencies and obtain evidence that any needed consent was obtained.

When you have negotiating power or are investing significant money in improvements to the premises, you should require that landlord obtain an agreement (typically referred to as an SNDA) from its mortgage lender to honor the lease even if the landlord fails to perform its obligations to the lender and the mortgage is foreclosed.

6. Who will be occupying the premises?

Leases typically allow only the named tenant entity and its employees to use and occupy the premises, so if other entities such as subsidiaries or business partners are to use the space, or the premises is intended as “incubator” space, the lease should reflect this. 

Typically a lease will prohibit the tenant from assigning the lease or subletting the premises to another party. It is important to negotiate some flexibility in your lease and require that Landlord agree to act reasonably in considering a request for consent to assign the lease and/or sublease the premises.

If you have special use needs (vivarium, special electrical requirements, supplemental HVAC), the lease must specifically address them. Large gathering spaces in your premises may require a public assembly permit.

7. What are the premises?

The premises being leased should be accurately described in the lease, including rights to use common areas and building amenity spaces. Be sure to refer to the building address, the floor and relevant suite numbers, and if possible, attach a floor plan showing the leased premises as an exhibit to the lease. If any amenity areas were a driving force in selecting a particular building, make sure the landlord is obligated to maintain them throughout your lease term.

When attaching a floor plan, it is important that common hallways, elevator banks, electrical closets, columns, stairwells and common bathrooms are clearly excluded from the premises, unless otherwise intended. Failure to do so could obligate you to repair and maintain these areas and assume all liability for accidents occurring in these spaces.

Whenever possible, you should delete any right of the landlord to relocate your leased premises to an alternative location in the building or, at the very least, negotiate reasonable safeguards and parameters. Relocations can be very disruptive to your business.   

8. Is your use of the leased property limited?

Unless limited by an express clause, you may use the leased premises for any lawful purposes. However, a clause stating that the contemplated use of the premises is for a particular narrow use (e.g., office space for a biotechnology company, or space for solar energy research) will tie your hands unnecessarily and inappropriately.

If you have special use needs (vivarium, special electrical requirements, supplemental HVAC), the lease must specifically address them. Large gathering spaces in your premises may require a public assembly permit.

If you have special use needs (vivarium, special electrical requirements, supplemental HVAC), the lease must specifically address them. Large gathering spaces in your premises may require a public assembly permit.

Even where permitted under a lease, any intended use must also be permitted by applicable zoning laws. An inability to use the premises for the intended use because of zoning restrictions will not forgive the tenant’s obligations under the lease, including the obligation to pay rent. If you have a special use that may not fall in general office use, ask the landlord to represent that the use is permitted in the building by zoning. 

If the lease indicates you cannot use or assign or sublet the premises for a use that violates any covenants applicable to the building, including exclusive use rights granted to another tenant, inquire what those restrictions are and, if exclusive use rights, have them clearly identified in the lease as an exhibit. 

9. What privileges and services are you entitled to?

The lease should define your access rights (such as 24 hrs x 7 days), parking rights and describe any rights to use common areas and/or other amenities, including driveways, parking, shared conference rooms, cafeteria, gym, etc.

Any rights to signage, elevator usage and services, such as air conditioning after normal building business hours, and at what cost, need to be well understood.

If you expect the landlord to undertake or be responsible for the fulfillment of any conditions associated with the condition of the premises, then be sure this is stated in the lease and that your rental obligations and commencement of legal liability for the premises do not occur before the work is done and the premises turned over to you. 

10. What happens to the lease if I enter into a business transaction such as a merger or other change in control of my business entity, or transfer to a successor tenant entity?

Be careful of provisions that indicate that a direct or indirect transfer of a controlling interest in the tenant constitutes an “assignment” of the Lease. Instead, the lease should contain a safe harbor that provides that transactions made in the ordinary course of business to finance, sell or reorganize your company, such as a sale of interests in the business or a merger with another entity, will not require the prior consent of the Landlord so long as the successor entity becoming the tenant does not have a lesser net worth or financial strength. In addition, assignments or subleases to an affiliated entity should not require landlord consent. 

11. Who prepares the premises for occupancy?

Is the space ready for immediate occupancy, or is there a current occupant? Will decommissioning, cosmetic improvements or alterations be required?

If you expect the landlord to undertake or be responsible for the fulfillment of any conditions associated with the condition of the premises, then be sure this is stated in the lease and that your rental obligations and commencement of legal liability for the premises do not occur before the work is done and the premises turned over to you. 

Timing is important especially if you are relocating from another leased premises where you may be at risk of being a holdover with a significant penalty rent. 

If you are performing the improvements with a money allowance from the landlord, be sure the landlord is obligated to fund the allowance as the work progresses and not after the work is done and paid for by you. 

12. In what condition is the premises to be surrendered?

You should be careful not to assume responsibility for removing alterations that were made to accommodate your occupancy.

If you wish to remove fixtures and equipment that you have added to the building at the expiration of your lease, you should clearly set forth what items you intend to remove, because otherwise the items may become the landlord’s property upon lease expiration.