How to negotiate your first office lease.

By Katrin Gist  K

Reaching the point where your business is ready to move from your home office into more traditional office space, or moving your office to a larger space is an exciting time.  Your business is growing and your new space represents a new chapter in your company’s development.  Although the office space market has been recovering in the last few years, tenants still have significant leverage, and there are several strategies you should consider when searching for office space and negotiating your lease:

1.    Determine your requirements before office shopping.

Before shopping for office space, you should decide what kind of working area you want, the number of offices, arrangements for your employees, seating types, and amenities you will need (lunch/break rooms, conference facilities, etc.).  You should also consider whether your business needs traditional office space or “creative” space.” Creative space generally offers a more open work environment, can improve employee communication, and often has a more modern feel.  Employee cubicles are a cost-effective option, but if your business provides services involving significant customer interaction, privacy requirements might determine the space design.

2.    Expansion option.

One of the common characteristics of start-up companies is the potential for rapid growth.  The last thing you want is to have executed an office lease for a set amount of space and time, and then to experience rapid growth without the potential to expand within your building or get out of your lease. There are several buildings and landlords out there that will allow the kind of flexibility that you might need.

 3.    Lease Term.

When you are starting your business, you may not want to commit to a very long lease term. This could significantly decrease your options for office space since many landlords will only sign multi-year leases.  There are, however, still plenty of landlords who specialize in providing short-term space. One downside is that you might not get as much negotiating leverage in the lease terms, or get the kind of tenant improvements (office customization) covered by the landlord in the lease rate that you hoped for due to the short term.  But, the benefit is that you are not locked into a multi-year lease term when the future (growth or otherwise) is uncertain.  On the other hand, if you are in a position where your company has already experienced growth and has exemplified staying power, you might be ready for a more long-term commitment.  And, the longer the lease term, the more negotiating leverage there is for the tenant.

4.    Ask for concessions.

Don’t take the asking price or proposed lease at face value.  There is generally always room for negotiating the price per square foot and other lease terms. One strategy for getting a lower effective rate per square foot is to ask for some period of time worth of free rent.  This allows you to effectively be paying a lower price per square foot, while allowing the landlord to tell others that they leasing at the higher rate per square foot.  In this market it is not uncommon for a tenant to obtain several months’ worth of “free” rent for multi-year lease terms.

As mentioned above, obtaining tenant improvements can be tricky for start-ups that need shorter term space.  However, if it makes sense for you to commit to a longer term, a landlord should be willing to provide you a certain allowance for build-out/space customization as part of the deal.  This “TI” is valued as a price per square foot, and might range from a few dollars per square foot to well over fifty dollars per square foot for longer term leases.

5.    Learn your market.

It is important for tenants to be educated.  You should view several options before you make a decision in order to get the best deal and find the space that is optimal for you. The best way to achieve this is to work with a commercial real estate professional.  Small business owners often feel that they can find space and negotiate a lease on their own, but there are several nuances, such as escalator clauses, renewals, free rent, tenant improvement allowances, expansions and possible termination rights, that can be favorable to you if you know how to ask and what market comps are in your area.  Since a tenant’s broker is paid by the landlord and not the tenant, tenants have a great opportunity to take advantage of being represented by their own commercial real estate professional and obtain the best possible deal.

Katrin Gist is a commercial real estate broker with CBRE – Brokerage Services.  Katrin can be reached at 206-947-1399 or [email protected] for assistance with your office space.

What is indemnification?

If you are the indemnified party, an indemnification clause is simply a promise by the other party to cover your losses if they do something that causes you harm or causes a third party to sue you.  The key words are “indemnify”, “hold harmless”, and “defend”.  Indemnify and hold harmless mean the same thing — to make whole after causing a loss.  The word defend relates to responsibility for defending from law suits, and isn’t present in an indemnification provision if the indemnified party prefers to defend its own lawsuits (although the indemnifying party may be required to pay for it).  

Often, the indemnified party would ultimately be able to recover on the loss under another legal theory, such as breach of contract or tort.  So the primary effect of indemnification in most cases is to shift the cost of defending third party claims to the indemnifying party.  Even so, the indemnification provision is very useful for explicitly setting out the responsibilities of the indemnifying party.  And if the indemnification clause provides that it is the exclusive way to recover against the indemnifying party, it is very useful for setting parameters around such things as the scope, maximum liability, and time periods when a claim may be brought.  Indemnification provisions go hand-in-hand with insurance covenants.

Here is an indemnification clause from an Independent Contractor Agreement, with explanations in bold:

Contractor will, at its expense if Company requests, defend any of the following types of third party claims brought against Company or its directors, officers, or agents (collectively, “Indemnitees”): [If you are sued by anyone for any of the following reasons, the contractor will be responsible for defending you in court.

(i) any claim that, if true, would constitute a breach of the Agreement by Contractor; [Since the claim is regarded as true, the contractor must defend you based on whether the allegations in the complaint would constitute a breach of the contractor’s agreement.]

(ii) any claim related to injury to or death of any person (e.g., worker claims) or damage to any property arising out of or related to performance of any Work; [If the contractor’s work causes anyone to by physically injured or killed, the contractor must defend the suit.]  or

(iii) any claim that otherwise arises from the acts or failures to act of Contractor or its agents (including any claim that the Work Product infringes upon the rights of any third party) [If the contractor copies someone else’s code or the work infringes someone elses IP, and you get sued for it, the contractor would be responsible for defending the suit and making you whole.]. 

Contractor will indemnify and hold harmless the Indemnitees from any costs, damages, and fees (e.g., attorney fees and the fees of other professionals) reasonably incurred by any of them that are attributable to any such claim.  Should the Work Product, in whole or in part, constitute an infringement and any use of it be enjoined or threatened to be enjoined, Contractor will notify Company and, upon Company’s request and at Contractor’s expense: (i) procure for Company the right to continue use of the Work Product, or portion of it, as applicable; or (ii) replace or modify the Work Product, or any portion of it, with a non-infringing version, provided that the replacement or modification meets all Specifications to Company’s satisfaction.  If (i) or (ii) of the previous sentence are not available to Contractor, in addition to any damages or other remedies to which Company may be entitled, Contractor will refund to Company all amounts paid to Contractor for the applicable Work Product.