Office Tenant s Pre-Signing Checklist

Resource ID: 2-505-1724 Office Tenant s Pre-Signing Checklist ROBERT J. KRAPF, RICHARDS, LAYTON & FINGER, P.A., WITH PRACTICAL LAW REAL ESTATE Search the Resource ID numbers in blue on Westlaw for more. This Checklist outlines issues a tenant should consider before signing its office lease. This Checklist also provides useful information for a tenant negotiating its office lease. This Checklist does not address relevant state and local law. State and local laws may require additional matters to be considered by the tenant before it finalizes its lease, but the information contained in this resource is useful and relevant to tenants negotiating an office lease in every state. For state-specific guidance on real estate leasing, see State Q&A Tools under Related Content. Finding the right office space can be a daunting task for a tenant. There are several issues that should be addressed when identifying the office space and during the leasing process, but before the final lease is signed. This Checklist identifies certain pertinent pre-signing matters that a tenant should consider before finalizing its lease. This Checklist, however, need not be followed in strict chronological order. The categories and stages outlined can overlap depending on variables and the particulars of the transaction. For a flowchart of the items a tenant should consider before signing its lease, see Office Tenant s Pre-Signing Flowchart (1-505-9457). FIND AN EXPERIENCED BROKER A tenant looking for office space should initially hire an experienced broker. A broker is a fundamental asset to the tenant at the beginning of the leasing process, especially because the broker can: Assess the tenant s priorities for its new space. Estimate the amount of space the tenant actually must rent to achieve its operational goals. Identify potential office space for the tenant. Provide an analysis and comparison of the projected costs over the lease term for potential space that the tenant is considering. Guide the negotiations with the landlord and the landlord s broker of material issues that can be raised during the letter of intent stage, such as: zthe specifics of the landlord s concession package for the tenant, including any tenant allowances, the initial build-out and free rent periods; zthe amount of the tenant s security deposit and any burndown schedule; and zthe need for the tenant to offer a lease guaranty, either from a parent or other creditworthy person or entity. The tenant and the broker should enter into a brokerage agreement that clearly documents the method and timing of payment of the broker s commission. Typically, the tenant s broker receives its share of the commission from the landlord s broker, who is paid by the landlord. Therefore, the tenant must ensure that its broker and the landlord s broker have finalized and signed the co-broker agreement before the lease is finalized and signed. For guidance on state and local laws and customs governing the broker relationship, see Real Estate Brokerage Laws and Customs: State Q&A Tool. CONSIDER YOUR LOCATION With the help of an experienced broker, the tenant should decide on the right location for its office space. The following factors may be important to the tenant when deciding on a location: Tax incentives for relocating to a particular county or city. Convenient and accessible public transportation. Commute time for employees. Opportunity for the tenant s name to appear on the building s facade. Character of surrounding area. Accessibility to clients and visitors.

FIND THE RIGHT SPACE The tenant should scope out potential space candidates with certain criteria in mind, including: The building s location, based on whether the tenant wants to be located: zin a prestigious building; or zon a particular street. Sustainability and energy efficiency programs of the building, which can impact the tenant s: zoperating costs throughout the lease term; and zpublic image and environmental awareness commitments. The building s security. The presence and operations of other tenants in the building. The landlord s financial condition, reputation, and past dealings with office tenants. The building s amenities, such as a health club, food court or rooftop garden. The tenant s preference for a large or small proportionate share of the building. The exact specifications of the premises, including its location in the building, size, and configuration. Amenities in the premises such as a kitchen, conference rooms, and storage space. Parking availability. Potential loss factor for each building, which is the calculation of the amount of common area allocated to the rentable square footage of the premises and which is not necessarily exclusive or usable by the tenant. For example, loss factor space can include an elevator, public restroom, or common hallway. Monetary considerations, such as: zrent; zterm; zsecurity; and zthe landlord s concession package such as any free rent period and tenant allowance for the tenant s improvements to the premises. Preliminary space planning and budgeting analysis with the tenant s architect. FIND AN EXPERIENCED LOCAL REAL ESTATE ATTORNEY The tenant should retain an experienced local attorney, even during the early stages of negotiations of the letter of intent. A tenant should expect its attorney to: Help in the negotiations of the letter of intent. Conduct legal due diligence relating to the building and the leased premises. Negotiate the lease and any ancillary documents, such as: zthe work letter; zthe guaranty; zthe subordination, non-disturbance and attornment agreement (SNDA); and zany third party consents, such as a consent from a ground lessor or the landlord s lender. Check that the lease and all ancillary documents are in final form before the tenant signs the lease. When selecting an attorney, the tenant must consider: Discussing the scope of the representation. Obtaining a budget or estimate of fees. Signing a retainer agreement which outlines the fees and scope of representation. At this point in the leasing process, the tenant should also consider engaging its accountant, attorney, or both, to advise the tenant on potential financial considerations in connection with entering into the lease agreement. HIRE AN ARCHITECT OR ENGINEER, OR BOTH The tenant should consult with its broker and real estate attorney to determine whether the scope of the transaction warrants hiring any third party consultants, such as an architect or an engineer. Whether a tenant decides to hire an architect or engineer, or both, depends on: The scope of the tenant s initial build-out. The size of the space. Which lease party is responsible for performing the initial build-out. Local law requirements for sealing of plans necessary for building permits and the like. Generally, a tenant may hire: A licensed architect to: zdraw up preliminary plans and specifications or review the landlord s plans and specifications; zreview the space for the tenant s needs; zestimate the costs of the initial build-out; and zmonitor the progress of the landlord s work if the landlord is performing the initial build-out. A licensed engineer to generate a report analyzing: zthe current state of the premises; zstructural capacity; zhvac service and landlord s specifications for the premises; and zadequacy of utilities for the premises. The tenant should also consider reviewing the space with its facilities manager to determine any particular needs that should be addressed during the lease negotiations. DO YOUR DUE DILIGENCE Once the tenant finds the right space, the tenant and its attorney must conduct their due diligence. Conducting due diligence can be very expansive and consist of a wide range of considerations. Some due diligence, such as title searches, are long lead-time items so the parties should plan accordingly. 2

When doing due diligence of the premises, the tenant should consider: Market conditions. The tenant s broker and attorney can advise the tenant about the market conditions and the local customs for office leasing. This information is pertinent for the tenant to conduct its lease negotiation effectively. Title and departmental searches. The tenant s attorney can conduct a search of the local governmental departments to determine whether there are any violations filed against the building and the landlord. If the space is very important to the tenant and its operations, the tenant should discuss the cost of purchasing a leasehold title insurance policy. Typically, a tenant renting small to midsize office space can simply conduct a title search to determine matters of record affecting the building without purchasing title insurance. This is a less expensive alternative to purchasing a title insurance policy. The decision to buy leasehold title insurance should be made after the tenant has consulted with its attorney. A title search of the county s records allows the tenant to: zconfirm that the landlord owns the fee title interest in the real property where the building is located; zassess if the lease will be subject to terms, covenants, conditions and restrictions (CC&R) and easements of record that can impact the tenant s operations at the building; and zdetermine if there are any third parties with interests that are superior to the lease, such as mortgage lenders or ground lessors, and whether the tenant should require any nondisturbance agreements from these third parties. Space size. The tenant s broker can advise the tenant about the landlord s method for measuring the premises. There are various methods that the landlord can use to determine the size of the space. The tenant should understand how the landlord measures the space in its building. The tenant should confirm that the landlord used local customs to measure the space. The size of the space often directly affects the tenant s base rent, additional rent, and tenant improvement allowance. For more information concerning the importance of properly measuring the space, see Practice Note, Office Leasing: Letters of Intent: Premises (2-503-8544). For a sample lease provision, see Standard Clause, Leased Premises Definition and Tenant s Right to Re-Measure (Commercial Lease) (W-002-2090). Permits. The tenant should determine at the letter of intent stage whether any additional permits must be obtained for the occupancy or the initial build-out. The party responsible for securing any necessary permits, and any costs associated with the issuance of the permits, should be clearly stated in the letter of intent. The tenant s attorney, broker, and architect can each advise the tenant on the local permitting requirements specific to the tenant s lease. Zoning. The tenant should confirm that the property is zoned to permit the tenant s intended use. The tenant s attorney can usually determine the zoning of the property and whether the tenant s intended use falls within that zoning classification. Escalations and electricity. The tenant s broker should obtain the past year s operating expenses and taxes to provide the tenant with an estimate of its additional rent costs. The tenant s attorney can explain the escalations clause in the lease. Because the escalations clause can potentially provide the landlord with major profits, the tenant s attorney can negotiate the escalations clause to ensure it is a fair clause for the tenant. The tenant should also understand what its options are regarding electricity and whether the electricity to the premises is: zprovided by direct meter; zprovided by sub-meter; or zincluded in the rent. For more information on electricity in office leases, see Practice Note, Office Lease: Key Provisions: Electricity (6-503-7910). Heating, ventilation, and air-conditioning (HVAC). The tenant should consider hiring an engineering consulting firm to determine whether the current scope of available HVAC in the space is sufficient for the tenant s needs. The tenant s architect and engineer can advise the tenant on the negotiation of the HVAC specifics when the tenant is negotiating the letter of intent and the lease. The tenant may require supplemental air conditioning units or certain alterations to be performed to successfully achieve the necessary HVAC levels for the tenant s occupancy. Telecommunications and technology. The tenant should consult with its architect and facilities manager to ensure that the building provides adequate telecommunication and technology services for the tenant s operational needs. Present occupancy. If there is an existing tenant in the premises, the tenant s attorney can draft language into the lease to provide for the landlord s obligation to deliver the premises in a broom clean condition and free and clear of any and all occupants and personal property. The tenant should determine if it will need to have access to the premises before its lease term commences for measurements or any other physical due diligence, as that access will need to be included in the letter of intent or the lease. Maintenance and repair. When conducting its due diligence of the space with its architect and engineer, the tenant should be aware of what its maintenance and repair obligations are under the lease. Emergency backup. The tenant should assess whether it needs any backup generators in the premises. The tenant s need for backup generators is often referenced in the letter of intent. Financial conditions. The tenant should assess, to the fullest extent possible, the financial condition of the landlord and the debt being carried by the building in which the premises are located. NEGOTIATING THE LETTER OF INTENT The parties should finalize the letter of intent early in the leasing process. The letter of intent generally sets out the business terms of the transaction agreed to in principle between the parties. The letter of intent should clearly specify if it is binding or non-binding. By effectively negotiating the letter of intent, the parties can: Reduce the time involved in finalizing the lease itself. Avoid miscommunications or misunderstandings between the parties. 3

Create deadlines for important events, such as: zdelivery of the premises to the tenant; zcompletion of the initial build-out; zdelivery of an SNDA; or zdelivery of any third party consents. For more information about leasing issues a tenant should consider when negotiating its letter of intent, see Practice Note, Office Leasing: Letters of Intent (2-503-8544) and Standard Document, Letter of Intent for an Office Lease (Pro-Tenant Long Form) (8-503-5892). NEGOTIATING AND FINALIZING THE LEASE The landlord s attorney typically drafts the initial lease draft and sends it to the tenant s attorney for the tenant s review. The tenant s attorney usually sends to the landlord s attorney a markup of the initial lease draft outlining the tenant s objections to the landlord s form of lease. The markup details the tenant s objections to specific lease clauses. Depending on the scope and complexity of the lease transaction, the parties can go through two to six, or more, redrafts of the lease agreement before it is finalized and signed. The tenant s attorney can also negotiate each of the following, if applicable: Guaranty. Work letter. Letter of credit or other security. Third party agreements, such as: zconsents to the lease transaction; or zsndas. Architect s and construction agreement for the initial build-out if the tenant is performing the work. During the ongoing negotiations, the tenant should ensure that: It receives any necessary estimates from the architect or contractor, or both. It finalizes any final, or preliminary, plans and specifications to be attached to the lease. It receives and reviews its engineer s report. Its broker has negotiated and signed the co-broker agreement with the landlord s broker for the payment of the tenant s broker s commission payment. For more information about negotiating the key provisions of an office lease, see Practice Note, Office Lease: Key Provisions (6-503-7910). CLOSING DOCUMENTS When the lease is finalized and ready for signing, the parties should ensure that all of the necessary riders, exhibits, and schedules that are a part of the lease are also finalized and attached to the lease. The parties should confirm that any lease attachments are correct before the tenant signs the lease. These lease documents can include: An illustration showing the floor plan for the space. The landlord s cleaning specifications. For an example of a landlord s cleaning specifications, see Standard Document, Schedule of Cleaning Specifications for an Office Lease (4-504-9834). The building s rules and regulations. For an example of building rules and regulations, see Standard Document, Schedule of Rules and Regulations for an Office Lease (9-504-9676). The work letter for the initial build-out. The landlord s HVAC specifications. A form of SNDA, tenant estoppel, or both. For sample forms, see Standard Documents, Tenant Estoppel Certificate (5-503-1923) and Subordination, Non-Disturbance, and Attornment Agreement for a Commercial Lease (Pro-Lender) (4-503-3456). There may also be ancillary documents that may need to be signed at the same time the lease is signed. These ancillary documents can include a: Memorandum of lease, which includes only the most important terms (other than rent), such as: zduration of lease; zdescription of premises; zrenewal rights; zrights of first refusal; and zexclusive use clauses. For a sample form, see Standard Document, Memorandum of Lease (W-000-4631). SNDA or other recognition or non-disturbance agreement. Written authority for the landlord s agent. Third party consents. The landlord s approval of plans and specifications for the initial build-out work or improvements to the premises. Internal approvals from the tenant, including member consents or corporate resolutions. Guaranty, if applicable. For an example of a good guy guaranty, see Standard Document, Vacating Guaranty of Office Lease (3-503-4381). For an example of a full guaranty, see Standard Document, Full Guaranty of Office Lease (W-001-8976). Proof of payment of broker s commission due at the lease signing. RIGHT BEFORE SIGNING THE LEASE Before signing the lease, the tenant should review the lease to ensure that the final lease form reflects the material terms agreed to by the parties, including: Rental payments. Term of lease and any extension options. Commencement date and any contingencies. Expiration date. 4

Security deposit requirements. Description of the premises, including an illustration of the tenant s space showing any additional space the tenant may be able to use, such as: zelectricity closets that are not located in the premises; zterrace space; zbasement space; or zstorage space. Rights of first refusal for additional space or any purchase options for the building. For more information on expansion options in leases, see Practice Notes, Options for Additional Space in Commercial Leases (9-521-3488) and Purchase Options in Commercial Leases (0-522-0582). ABOUT PRACTICAL LAW Practical Law provides legal know-how that gives lawyers a better starting point. Our expert team of attorney editors creates and maintains thousands of up-to-date, practical resources across all major practice areas. We go beyond primary law and traditional legal research to give you the resources needed to practice more efficiently, improve client service and add more value. If you are not currently a subscriber, we invite you to take a trial of our online services at legalsolutions.com/practical-law. For more information or to schedule training, call 1-800-733-2889 or e-mail referenceattorneys@tr.com. 04-17 Use of Practical Law websites and services is subject to the Terms of Use (http://static.legalsolutions.thomsonreuters.com/static/agreement/westlaw-additional-terms.pdf) and Privacy Policy (https://a.next.westlaw.com/privacy). 5