the firm is ready to decide which building or buildings best suit the firm’s needs. This decision is typically made by the management of the firm; however, management should consider getting the input of all, or at least a portion of, the professionals and employees at the firm. While the firm cannot please everyone with its selection of office space and location, conducting a survey or poll of the firm’s employees will, at a minimum, make employees feel as though they had a hand in the decision and are part of a firm that considers their opinions when making a major decision such as office location.
Negotiating the Lease
Once the firm has decided which building meets its needs and requirements, it is time to initiate lease negotiations with the landlord. The process of negotiating a lease typically begins with the potential tenant sending a request for proposal (RFP) to the landlord, spelling out the firm’s business needs.
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The landlord will counter with a response to the RFP, and, assuming that the parties can come to an agreement on the business terms of the deal, the parties will enter more formal lease negotiations.
THE REQUEST FOR PROPOSAL PROCESS.
The RFP is the first opportu-
nity for the professional services firm to more formally convey to the potential landlord its business needs and requirements. Many, if not all, of the conditions contained in the RFP will be derived from the preliminary assessment and building inspection that the firm undertook. Depending on the level of sophistication and detail of the preliminary analysis, the firm should try to include in the RFP as many of its key business requirements as possible. Thus, for example, the firm should include in the RFP, at a minimum, its initial rental rate offer, the manner in which the firm is willing to pay for operating expenses, the firm’s parking needs, the term or length of lease that the firm is willing to enter, and the size of the office space required.
In many cases, the RFP will also include additional requirements or specifications that the firm may not have considered preliminarily, but which will most assuredly be picked up in the lease. Examples of such provisions include options to extend or terminate the lease, assignment /subletting provisions, security deposit and prepaid rent provisions, and insurance requirements.
It is important to include in the RFP as many important lease provisions that the firm can identify because the RFP forms the basis of all future lease negotiations. Thus, for example, if the firm does not include in the RFP a right of early termination, it will be very difficult to try to go back and add such a provision to the proposed lease. In such a situation, the landlord would almost certainly feel that the firm was trying to retrade the deal by incorporating provisions that the firm had not contemplated or deemed important enough to include in the original RFP. As would be true with any other type of contract, in this situation you would expect the landlord to be very reluctant to add or delete important business terms in the 11th hour of the lease negotiations.
Although the professional services firm may have never submitted an RFP
for commercial office space previously and is unfamiliar with all of the terms that it should include in the RFP, the firm can and should rely on the real estate agent to help inform (and possibly draft) the RFP. The real estate agent will be more experienced than the firm in initiating lease negotiations and submitting RFPs. In many cases, the real estate agent will have exhaustive form RFPs that can be modified by the firm (or the real estate agent) to re-f lect its needs and requirements. Indeed, it is entirely possible that the real estate agent will have recently negotiated a different lease with the landlord and will know what tenant requirements the landlord is willing to consider.
To some extent, the RFP will be ref lective of and responsive to any initial marketing materials that have been provided by the landlord. For example, if the landlord has advertised 10,000 square feet of office space at $20 per square foot for a 10-year lease term, the RFP may include an initial offer of
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8,000 square feet at $18 per square foot over a seven-year term. In addition, the RFP should include whatever key business terms that the professional services firm, in consultation with its real estate agent, deems important and necessary to any commercial office lease.
Depending on its level of motivation, which is often a product of the strength of the market, the landlord will respond to the RFP with its own counteroffer. In many cases, the landlord will respond to each of the items set forth in the RFP in turn; however, this does not always happen, and the firm should make sure that it keeps track of any terms that were not included in the landlord’s response to the RFP. It is common for landlords to demonstrate their agreement to terms contained in the original RFP by simply not responding to or countering such terms; however, the firm should confirm that any terms not responded to by the landlord are agreeable and will be picked up in the lease. Assuming that the parties can come to an agreement on a majority of the business terms set forth in the RFP, they will proceed with more formal lease negotiations.
IMPORTANT LEASE PROVISIONS.
Although the scope of this chapter
does not permit a detailed analysis of all the different provisions contained in the typical commercial lease, the professional services firm should bear in mind that nearly everything in the lease is negotiable. The following are several of the more important, common lease provisions that the professional services firm and its real estate agent should look out for when negotiating a lease. The CD-ROM that accompanies this book contains a sample of a standard commercial office lease, which can be referred to when considering each of the following lease provisions:
1. The premises—usable versus rentable space: Rentable space is the amount of square feet that the tenant is actually paying for and includes common areas in the building such as hallways, restrooms, lobbies, elevator shafts, and stairwells. Usable space is the amount of square feet that can actually be used by the firm. In almost all commercial leases, the tenant will be required to pay for its pro-rata portion of the rentable space in the building, and the rental rate will be based on price per square foot of rentable space, not usable space. Thus, if the firm is considering entering a 10,000 square foot lease, at $20 per square foot (a total lease cost of $200,000 per year), the firm should ask what portion of the 10,000 square feet is usable to determine what it will be paying for the space that it can actually use. In this case, if the usable square feet totals 9,500, as opposed to 10,000 rentable square feet, the effective price per square foot will have increased from $20 to $21.
Again, while it is not uncommon for rental rates to be quoted in this manner, before entering the lease, the firm should understand what it is paying for and make sure that the landlord isn’t making a hidden profit by overallocat-ing rentable square feet to the various tenants in the building.
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2. The lease term and renewal rights: Most leases provide that the term of the lease begins on the “commencement date” and ends on the “termination date.” As with many terms contained in the lease, however, these are defined terms contained elsewhere in the lease that the firm should understand and agree to before it executes the lease. For example, if the lease provides that the commencement date is the earlier of a date or the date on which the landlord completes tenant improvements, then, conceivably, the tenant could be responsible for paying rent before the premises are ready to be occupied.
Obviously, the firm would want to avoid paying rent unless and until the premises are tenantable and, thus, might simply change the foregoing language to the later of a date certain or the date on which tenant improvements are completed.
In addition to the dates on which the lease begins and ends, the firm should make sure that the lease protects the firm in the event that the firm’s office needs change over time, which is almost sure to happen. Most leases contain a renewal option that gives the tenant the right to extend the lease upon proper notice. The firm should try to negotiate a renewal option that can be exercised closer to the end of the term of the lease, which will allow the firm to continue paying rent in the premises at the prevailing fair market rate. Recognize, however, that the landlord will try to negotiate a renewal provision that obligates the tenant to exercise the option well before the end of the lease (to provide the landlord with sufficient time to re-let the premises, if necessary) and may try to secure a premium above fair market rates.