Our second installment of “Founders Series” focused on startup financing , with a close examination of strategies for getting venture capital and other funding for a startup.
Once a startup has addressed the need to finance operation and growth, founders can turn to one of the most important things a company needs: good space.
To help with this important step, here are the top ten questions you, as a startup founder, should consider before signing a lease.
- Is a written lease necessary?
A landlord 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;
- any obligations to which the property is bound are met (such as the terms of a prime lease to which the landlord may be subject); and
- effective remedies are available if you default.
Be wary of establishing a legal relationship simply by virtue of occupancy of space in the landlord’s building. Terms and conditions, and rights and responsibilities, are more likely to be uncertain or unclear – which could easily lead to disputes and liability.
- What is the purpose of a letter of intent?
A letter of intent is a written document 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. 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.
- Are you dealing with the “real” landlord?
Always make sure to ask who owns the building and get clarification on the authority of the person with whom you are dealing before entering into an agreement. 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. If you have negotiating power, you should insist that the landlord obtain a commitment 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.
- 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, make sure the lease reflects this.
- What are the premises?
The premises being leased should be accurately described in the lease, including rights to use common areas. Be sure the lease includes the building address, the floor and relevant suite numbers, and if possible, a floor plan showing the leased premises as an exhibit to the lease. Make sure the floor plan clearly excludes common hallways, elevator banks, electrical closets, columns, stairwells and common bathrooms, 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.
- 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.
- What privileges and services are you entitled to?
The lease should define your access rights (such as 24/7 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 to avoid disputes down the road.
- What happens to the lease if I enter into a financial transaction such as a merger or other change in control of my business entity, or transfer to a successor tenant entity?
You should ask for the landlord’s acknowledgement that your efforts to finance and grow your business cannot be frustrated by the landlord’s imposition of consent rights or other conditions that render the lease an impediment rather than an asset. You should also ask that transactions that are made in the ordinary course of business to finance and reorganize your company be free of any obligation to obtain landlord consent. At the very least, if the landlord agrees not to unreasonably withhold consent, you may still be able to conduct normal business operations without jeopardizing your right to occupy the premises.
- 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 are tied to the landlord’s performance. You may want to secure the right to terminate the lease if the space is not ready for occupancy by some outside deadline date.
- 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.