One contract that virtually all businesses enter into is an office lease. But despite how common office leases are, the…One contract that virtually all businesses enter into is an office lease. But despite how common office leases are, the provisions in them can vary dramatically. Indeed, a prospective tenant and landlord each has a significant amount of room to negotiate the specific terms of their lease agreement. Business owners should be sure to fully negotiate this important contract, with a view toward protecting and maximizing the interests of their businesses over the full term of the lease.
As most office leases have multi-year terms, two key provisions of an office lease to which a business owner should pay particular attention to and negotiate are the assignment and subletting provisions. As a business evolves and rides the waves of business and economic cycles, its office space needs will likely change as well.
For example, while the business might enter into a lease that provides sufficient space for its current employees and some growth for more employees over the next two years, what if the business is hit by a downturn and needs to lay off some employees, thus resulting in the leased space being too large for the business? If such excess space is not sublet or assigned, it could have a harsh financial impact on the business’s bottom line.
Most office leases provide that the tenant shall be able to assign or sublet the leased space, or a portion thereof, with the consent of the landlord, which shall not be unreasonably withheld. However, business owners can strategically negotiate for improved rights, including by:
- Detailing criteria under which the landlord’s consent would be deemed to be “unreasonably withheld.” For example, the lease can provide that the landlord would be unreasonably withholding consent to a sublet or assignment request if the proposed new tenant is financially stable (e.g. it is a profitable business with a healthy balance sheet) and will use the space for standard office space purposes;
- Minimizing the fees that your company will need to pay the landlord for processing a sublet or assignment request. For example, the lease could provide that such fees will be limited to no more than actual expenses incurred by the landlord for reasonable due diligence and professional services, with a cap on the maximum amount that your company will have to pay;
- Providing that if a tenant who takes over the premises via an assignment or sublet ends up paying more rent to the landlord than your company would have been required to pay under your lease agreement with the landlord, the additional rent will be split between the landlord and your company; and
- Including in the lease a list of related parties which the landlord agrees to pre-approve for assignment and subletting purposes.
There are many ways in which a potential tenant can improve the assignment and subletting provisions of an office lease. iven the potential importance of these provisions over the term of a lease, business owners should be sure to fully negotiate such provisions with their prospective landlord.
About the Author: Josh Humi, an associate with PilieroMazza, practices in the Business and Corporate Law Group. He may be reached at [email protected].