Ready to move your startup out of the garage and into real office space? Here are 4 tips on negotiating your startup office lease:
1. Don’t lease too much, or too little, space.
For a startup, one of the most challenging aspects of leasing is to determine the right amount of space. Lease too much space, and you will incur substantial, unnecessary costs at a time when your resources are limited. Lease too little space, and you may not be able to grow as quickly as you would like.
To address this issue, try to lease a small amount of space but also try to include a right to expand in your lease. This right can take the form of an option to expand, a right of first offer or a right of first refusal, and it can relate to specific space (for example, the adjacent space) or to any space in the same building that becomes available during the term of your lease.
In some cases, you may also be able to include an option to contract in your lease. This is a right to reduce the size of your initial space, if your circumstances change, usually after notice and payment of a fee to the landlord.
2. Include an early termination right in your lease.
Leases sometimes grant tenants the right to terminate the lease prior to the end of the term, usually after notice and payment of a termination fee to the landlord. Although a termination fee can be substantial, it is usually less than what you would owe if you simply moved out and stopped paying the rent.
As a startup, your future is uncertain. You may grow incredibly quickly, or you may be out of business in a year. In either case, you may find that you want to terminate your lease before the term has ended. An early termination clause will give you this right and will do so at a cost that is fixed, in advance, at a time when the landlord is trying to convince you to become a tenant, as opposed to the sort of negotiation that might take place later, when your circumstances have changed, and you are desperate to get out of your lease obligations.
As an alternative to paying a termination fee, some leases grant tenants a right to terminate if certain unfavorable events occur, such as a startup’s failure to secure expected funding or a startup’s failure to achieve certain financial benchmarks. These types of clauses are much less common than termination clauses that require payment of a fee, but it is sometimes possible to persuade a landlord to include such a clause in a startup lease.
3. Include a right to assign your lease, if you sell your company.
Most startup founders hope for a big future payoff in the form of an IPO or a sale of their company, yet few startup founders understand the impact that a poorly written lease could have on their future plans. Many leases prohibit an assignment or sublease without the landlord’s consent, which means that a simple “no” from your landlord could derail all of your carefully laid plans to sell your startup to Google.
At a minimum, the assignment and sublease provision of a startup lease should require that the landlord must respond to a request for consent within a short period of time (5 or 10 days) and should also provide that the landlord’s consent cannot be unreasonably withheld or conditioned. It is better, however, if the assignment and sublease provision provides that the landlord’s consent is not required, at all, if you are assigning your lease as the result of a merger or sale of your company or substantially all of its assets.
In addition, beware of the many traps for the unwary that can be found in assignment and sublease provisions. Sometimes these clauses provide that an assignee of your lease will not be able to exercise any option to extend the term, and this prohibition is unlikely to be acceptable to potential buyers of your company. An assignment and sublease provision may also give your landlord a right to “recapture” your space if you ask for the landlord’s consent to an assignment. In other words, rather than saying yes or no to your proposed assignee, the landlord may simply be able to take back your space, which would, again, defeat your plans to sell your company.
4. Hire an attorney to negotiate your lease.
You may be reluctant to hire an attorney, due to the cost, but, when it comes to leasing, you should be more concerned about the cost of not hiring one. Remember that your opponent, on a lease negotiation, is likely to be a landlord who has spent his or her entire career in real estate and knows every trick of the trade. You, on the other hand, have probably negotiated few, if any, commercial leases, leaving you at a tremendous disadvantage, simply because you do not know what you do not know, and, when it comes to leasing commercial space, what you do not know can cost you thousands of dollars.
How The Gauthier Law Group can help: Ready to lease new space for your startup? The Gauthier Law Group has extensive experience in commercial leasing and represents commercial tenants in Milwaukee, Chicago and Madison, as well as in other parts of Wisconsin and Illinois. Please call (414-270-3855) or send an email to learn more about how The Gauthier Law Group can help you with your startup lease.
This article was written by Janice L. Gauthier, Esq. Ms. Gauthier has an A.B., cum laude, from Harvard University and a J.D, cum laude,. from Harvard Law School. She is a real estate lawyer and the owner of The Gauthier Law Group, LLC, a boutique real estate law firm in Milwaukee, Wisconsin, that represents international, national, regional and local real estate owners, developers, sellers, buyers, borrowers, lenders, tenants and landlords in the Greater Milwaukee, Chicago and Madison Areas, as well as in other parts of Wisconsin and Illinois. You can contact Ms. Gauthier at 414-270-3855, ext. 101 or by email. To learn more about Ms. Gauthier’s background and experience, please review her Google and LinkedIn profiles.
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