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As businesses grow, from a home or garage to a first leased space, their leaders often rush to sign the landlord鈥檚 lease with little to no review or thought as to the provisions included. Often, a tenant is presented with a 鈥減re-printed鈥� form lease and assumes that it must be even-handed 鈥� and therefore acceptable to sign without further consideration. While the following list is not intended to be a comprehensive one of issues that should be considered when signing such a lease, it highlights many of the hidden issues in pre-printed lease forms that tenants need to think about.

Assignment and subletting

Many leases treat transfers of equity (change in control or ownership interests of the tenant), or transfers of a material portion of tenant assets, as an 鈥渁ssignment鈥� for lease purposes requiring that the tenant obtain the landlord鈥檚 consent to any proposed transfer (usually along with a fee to the landlord). Tenants, especially as they grow and add new partners, often assign an interest in the lease without realizing that the landlord鈥檚 consent was required. Beyond the issues that can arise with seeking the landlord鈥檚 consent, an 鈥渁ssignment鈥� (including 鈥渁ssignments鈥� by change of control) can often trigger a right by the landlord to recapture the leased space, which often prompts renegotiation of the lease. In addition to the economic impacts, seeking the landlord鈥檚 鈥減rior鈥� written consent to any change in the tenant鈥檚 equity structure is often an unwanted procedural step. Given the growth strategies of many early stage companies, the provisions regarding equity transfers and assignments need to be given special consideration and attention during negotiations.

Options

Options to terminate, expand and renew leases are key considerations requiring careful analysis of the tenant鈥檚 long-term requirements during negotiation of the letter of intent and lease. Tenants often desire the option to renew their lease as a means of maintaining control over their space for a longer period of time than the original lease term (especially in a retail lease). Furthermore, expansion rights can be critical for growth in numbers. Termination rights are equally important for a number of reasons. In this scenario, unexpired portions of leases can impede the completion of a merger or acquisition. Pre-printed leases typically do not include these options. If a tenant wants any of these options, they must be negotiated prior to lease execution.

Default

Of particular concern to a startup company are lease provisions requiring continuous occupancy, and those prohibiting insolvency of the tenant. During the life cycle of a startup, there may be times when temporary (or permanent) vacation of leased space is prudent. Vacating may constitute a technical default, which will often create a legal impediment to what may otherwise be a sound business decision. Furthermore, as part of the financial growth of a startup, a tenant may be technically 鈥渋nsolvent鈥� under many of the definitions set forth in the lease agreement. In any event, give due consideration to this language in a lease. Do not simply assume that because it is part of a standard form, it is acceptable.

Expiration and surrender obligations

Two issues of concern with expiration and surrender obligations in leases are the condition of the premises and the holdover provisions. Many leases require the tenant to return the premises in the 鈥渟ame condition鈥� it was received. In some cases, this may mean the tenant could be obligated to remove tenant improvements installed at, or prior to, lease commencement 鈥� often at a substantial cost. Furthermore, the tenant needs to understand the ramifications of remaining in the space after expiration of the lease term, often called a 鈥渉oldover.鈥� If a tenant is moving into a new space, the timing of the build-out of that space and expiration of the term in the old space is difficult to coordinate. During a holdover under many leases, a tenant鈥檚 rent often doubles, and a tenant may become responsible for consequential damages to the landlord on account of the holdover (i.e., the loss of a new lease with a new tenant taking the old space).

Lien waivers

When negotiating a lease, it is important to know the type of security (collateral) the tenant鈥檚 lender may require for equipment, working capital or other financing needs. For example, SBA lenders, whose loans are secured by personal property, typically want a landlord to waive statutory (possessory) lien rights and afford them (the tenant鈥檚 lender) a reasonable opportunity to either cure any lease default or enter the premises and take possession of the collateral. These issues are best addressed in advance of lease execution. Once a lease is signed, the tenant loses most of its leverage to have a landlord grant a tenant鈥檚 lender any rights.

Given the importance of a lease in satisfying a growing company鈥檚 needs, it is advisable to become well informed about leasing issues before it is too late. It is never too early to ensure that the lease adequately suits the tenant鈥檚 current and future requirements. As with any transaction, it is recommended that officials consult with their broker or legal representative about important issues.

Attorney Robert Koury is co-chairman of Jordan Ramis PC鈥檚 Dirt Law芒 practice group. His practice concentrates on real estate law. Contact him at 503-598-5591 or [email protected].