You just closed a small financing round, hired some new team members and are looking to move into a new office space. Here are seven things to avoid when signing up for your new digs.
You just closed a small financing round, hired some new team members, and are looking to move into a new office space. After finding the perfect spot and locking down a two-page letter of intent, the landlord sends over the lease agreement—and it's 70 pages long. How do you get through this massive document without delaying the move-in process? What should you focus on? Here are seven things to look out for when signing up for your new digs.
The first few sections of almost every lease agreement contain the basic lease terms—rent, start and end dates, square-footage, etc. It is definitely not OK to be sloppy or loose here. These numbers drive your move-in scheduling, monthly payment obligations, and operating expense responsibility. It is completely standard and within your rights to expect these basic terms to be explicitly and accurately nailed down in the lease agreement.
Long Term Commitments.
Long-term leases simply do not make sense for start-ups. Whether you're knocking it out of the park or navigating troubled waters, it is unlikely that any space will be suitable for your business for the next seven years. Even for the next three or four years. I often advise clients to keep the lease term to just a few years or less. You'd like to preserve as much flexibility as possible—and don't want to be overburdened with a ton of extra space, or stuck in a cramped office environment. You might pay a little more in rent for the privilege of a shorter lease, but any experienced entrepreneur will tell you that the added flexibility is worth every penny.
No Sublease Outs.
Even if you can negotiate a shorter lease term, it is really important to make sure that you have the ability to sublease your space in the event of a sudden downturn. You should expect that your landlord's consent will be required in order to sublease your space. However, the lease should specify that the landlord's consent should not be "unreasonably withheld, conditioned or delayed." Further, the procedures around subleasing should be clear and easy to follow.
Onerous Repair Obligations.
Obviously, you are on the hook if you trash your space. The repair obligations to look out for relate to things that are out of your control. Unless the damage is caused by your actions (or the actions of people whom you invite into the office), you should not be on the hook for structural repairs to the building (building walls, plumbing, HVAC systems) or repairs to the shared common areas. You also want to avoid any obligations to comply with local building codes and federal laws—unless the landlord is making rock-solid representations about pre-existing compliance, or your duties are triggered only in connection with your actions (such as your renovation of the space).
This is something that landlords will often sneak into the lease. It is a provision that allows the landlord to move you to a "comparable space" within the building. Strike this immediately if you can. The landlord will typically agree to cover the expenses associated with the relocation—but that's not the point. Moving is a huge distraction for your start-up. Signing a lease is supposed to provide some level of comfort that you have established a "home" for the short term. You do not need the extra headaches from an unexpected move.
Ignoring Difficult Building Rules.
Most lease agreements will come with an attached set of building rules and regulations. The vast majority of these will be standard, with variances driven by the location, size and type of office building. The landlord will also have a unilateral right to change these rules. So why do I even raise this point? Well, it is primarily a matter of managing the landlord's expectations, particularly if your start-up has some unusual aspects to its operation that might inadvertently trip the building rules. For instance, I worked with a start-up that would host on-site training in its offices. The building had rules around third party visitors that would affect the company's ability to hold these sessions. By discussing our concerns with the landlord up front, we were not able to revise the rules, but we did get assurances that the landlord would be very supportive of our client's training activities.
Thinking You Don't Need a Lawyer.
Of course, because I am an attorney, you probably knew this one was coming. In all fairness, I actually do believe that lease agreements are frequently "over-lawyered" by counsel. That being said, even the most "standard" leases contain clauses that are confusing and potentially harmful to your company. It is also probably true that my list of lease traps does not address all of your start-up's unique concerns. You need a lawyer who not only has experience in reviewing and negotiating leases, but who also understands your start-up, your risk tolerance and how your specific business issues come into play.
ANDRE GHARAKHANIAN is the founding partner at Silicon Legal Strategy, the premier boutique law firm providing targeted, bottom-line-oriented advice to technology start-ups, innovative entrepreneurs, and seasoned investors.