by Mary C. Klima, Associate

As many geographical areas of the United States continue to struggle economically, vacant commercial office space is plentiful and landlords are
typically willing to go a little further to get the deal done. This statement does not necessarily ring true in all markets and/or submarkets across the country, as we have seen continued leasing strength in areas in Washington, D.C. and immediately outside of the city. However, if you go a little further outside of Washington, D.C., tenants (and particularly tenants with strong credit) have greater leverage where there is an over-supply
of vacant office space. Generally speaking, the leasing market today is a tenants’ market and no tenant should just accept and sign a landlord’s lease form without asking for commercially reasonable tenant changes and inserts. Below is a list of five important areas for tenants to focus on during lease negotiations for office space. This article obviously does not focus on every area tenants should focus on during lease negotiations, but is meant to highlight some of the most important topics.

1. Commencement Date And RentCommencement Date

The Commencement Date and Rent Commencement Date in a lease are usually structured based upon whether the landlord or tenant is going to do the initial construction in the leased premises. If the tenant will control the initial build-out process, the tenant should have ample time to diligently construct the improvements in the premises before the tenant is required to pay rent. Accordingly, the commencement date is usually the date the landlord delivers the premises to the tenant for such initial build-out and the rent commencement date is several months later.
As a tenant, you must be armed with information regarding how long construction will take and prepare for delays in taking into account how much of a free rent period is needed in order to prevent paying rent on space not yet ready for occupancy by the tenant.

The lease commencement date and rent commencement date are usually one in the same if the landlord controls the initial buildout of the premises and are the date the landlord substantially completes the initial build-out. Tenants must pay particular attention to not allow rent to be due any earlier than upon completion of the initial build-out. It is more common for the landlord to control the initial build-out of the premises and typically the lease includes provisions that protect the landlord against any liability whatsoever if the landlord fails to complete the construction
work by a certain date. This type of language can be extremely problematic for a tenant on a tight timeframe that needs to commence its
business in the premises by a date certain (usually because the tenant’s current lease is expiring and the tenant needs to be out of the
current space). Tenants must require a potential landlord to deliver the premises to the tenant by a date certain and if the landlord fails to meet such deadline, the landlord should either have to pay the tenant a day-for-day rent abatement or permit the tenant to terminate the lease and look for alternative space to lease. Landlords can be reticent in providing for such an abatement or “kick out right”, but such requests are typically considered reasonable. In the event a lackadaisical landlord does not diligently pursue the construction of the tenant’s space, at some point the landlord must be penalized for not completing the work in a timely fashion.

2. Operating Expense Carve-Outs And Audit Right

Operating expenses are typically defined in the lease document as any and all expenses, charges and fees incurred by the landlord in connection with owning, managing, operating, maintaining, servicing, insuring and repairing the building, parking facilities, driveways, grounds, and all other related exterior appurtenances, that landlords pass through to the tenants of the building. Each tenant pays a percentage share of the total operating expenses, based on such tenant’s share of the total rentable square footage in the building. Typically, a landlord’s form lease will be overly inclusive in what is deemed an operating expense and can accordingly be passed through to tenants. However, every tenant should ask for a list of items to be excluded from operating expenses. Such list includes items such as limits on capital expenditures passed through to the tenant, limits on management fees for property managers over a certain percentage of gross revenue of the building, costs and expenses incurred by the landlord but actually reimbursed through insurance proceeds, warranties or condemnation awards, expenses incurred in
connection with the sale, financing, refinancing, mortgaging or change of ownership of the building, and leasing commissions, attorneys’ fees, and other expenses incurred in connection with negotiations for leases with prospective tenants, or similar costs incurred in connection
with disputes with prospective tenants.

Additionally, in order to ensure that the landlord is correctly calculating the amounts a tenant owes each year towards operating expenses, a tenant should ask for a right to audit from the landlord in order for the tenant to review the landlord’s books and records and confirm that the landlord has not been overbilling the tenant for operating expenses. In the event the tenant discovers any inaccuracy in the landlord’s calculations of operating expenses, a tenant can oftentimes have its auditor’s hourly fees paid (up to an amount that is capped) and receive reimbursements of any amounts overpaid by the tenant. Alternatively, if the tenant’s auditor determines that the tenant underpaid operating expenses, the tenant would be required to pay the landlord any amounts found to be owing. In an area where such subjectivity is used by the
landlord to determine what expenses of the building to pass through to the tenants, the specific requirement to exclude certain expenses and the ability to audit a landlord’s books and records are rights every tenant should ask for in its lease.

3. Cosmetic Alterations Carve-Out And Removal Of Alterations At The Expiration Of The Term

Most lease forms provided by the landlord prohibit the tenant from making any alterations in the demised premises without the approval of the landlord, which approval can oftentimes be withheld in the landlord’s sole and absolute discretion. Tenants should always request that
the landlord’s consent not be unreasonably withheld, conditioned or delayed. In addition, tenants should request that the landlord’s consent not be required for any interior cosmetic changes to the premises. Landlords will typically agree to this concept, but propose a dollar amount pursuant to which the  landlord’s consent right is triggered. Additionally, landlords usually require that the tenant provide the landlord with notice of such alterations and oftentimes will only agree to permit recarpeting, repainting or other purely cosmetic alterations to be made in the premises without the landlord’s prior consent.

Additionally, typically landlords limit a tenant’s rights to make such cosmetic alterations only to those that will not be visible from outside the
premises, do not require the issuance of a building permit to perform, and do not adversely affect the building’s structure or the building’s mechanical, electrical, plumbing or life safety systems. These limits on a tenant’s rights to make cosmetic alterations in the demised premises are fairly standard and reasonable.

One other item of note regarding alterations that a tenant should be sure to request from a landlord relates to removal of alterations at the expiration of the lease term. Landlord form lease provisions typically permit the landlord to require the tenant to remove all alterations in the demised premises at the expiration or earlier termination of the lease. Tenants should always request that initial improvements constructed prior to the occupancy of the demised premises be carved out from this requirement. Additionally, a tenant should require that the landlord tell the tenant at the time the tenant requests the landlord’s consent to the alteration, whether or not the landlord will require the removal of the alteration at the expiration of the lease. Oftentimes, removal of alterations can be expensive and timeconsuming. A tenant may choose not to make the alteration in the event the landlord requires the tenant to remove such alteration at the end of the lease term.

4. Landlord’s Responsibility For Repairs, Maintenance And Providing Services

A landlord’s form lease may not expressly state the services the landlord is required to provide and/or the landlord’s maintenance requirements. Tenants should always make sure it is clear in the lease what the landlord’s repair and maintenance obligations are and whether the tenant has any remedy in the event the landlord fails to meet its repair and maintenance requirements. The landlord should be required in the lease to at least agree to keep and maintain the exterior of the building and structural supports, foundations, roof and common areas that form a part of the
building, and the base building mechanical, electrical, life safety, HVAC and plumbing systems, pipes and conduits that are provided by the landlord in the operation of the building and premises in clean, safe, sanitary and operating condition in accordance with all applicable laws and the standards customarily maintained by landlords of buildings of comparable size, age, class and location, and will make all required repairs thereto. Tenants of greater financial strength and size should ask for the ability to make any repairs and maintenance in the event the landlord fails,after written notice from the tenant, to make any such repairs. If the landlord pushes back against such request from a tenant, the tenant
should at least ask that it have the ability to make repairs in connection with an emergency where serious personal injury or material property damage are imminent in the demised premises. Smaller, less creditworthy tenants may not have the leverage to ask a landlord for such “self-help” rights, but may ask for the ability, rather than filing a lawsuit against a landlord failing to meet its repair and maintenance obligations, to arbitrate the matter. Arbitration is typically a cheaper and faster remedy for tenants and is not usually set forth as an option for the tenant in the lease, unless the tenant specifically asks for it.

Additionally, a tenant must ensure that all of the specific services a landlord is required to provide to the tenant are expressly listed in the lease. Typical services to be provided to tenants are electricity, water, janitorial, elevator service, plumbing and heat and air conditioning. Every tenant should require in its lease that there be what is called an “interruption of services” clause. Such clause typically states that if the tenant is without any of the services, the landlord is required to provide under the lease, for a certain number of days in a row (three or five days are fairly common requests), and such failure to provide services is caused by the negligent acts or omissions of the landlord, then the tenant shall be entitled to a rent abatement for the period of time the tenant is without any of the services, the landlord is required to provide. Without such an interruption in services clause, the tenant could be without a utility for weeks and be required to pay rent without the ability to use the demised premises.

5. Insurance And Indemnity

The final provisions of the lease that tenants should pay particular attention to relate to insurance and indemnity. Most importantly, a tenant should ensure that it has all of the insurance the landlord requires under the lease. Many times the amounts of insurance specified in the lease are higher than what the tenant actually carries and the amount the landlord actually requires. Tenants should not be afraid to ask the landlord to lower the insurance requirement amounts to meet the amounts the tenant already carries. Additionally, tenants should require that landlords specify the amounts of insurance the landlord actually carries on the building in the lease to provide the tenant with comfort that the building is
adequately insured. An item that goes hand and hand with insurance is indemnity. Indemnity provisions in the lease usually require that a tenant  pay (indemnify) a landlord for damages in the event a claim or the like is filed against the landlord. A tenant’s indemnity should be limited to matters arising in the demised premises and should not include those claims or losses that arise from the landlord’s or its agents’, employees’ or contractors’ negligence or willful misconduct. Additionally, a tenant should ask the landlord to indemnify the tenant from and against any and all liability, damage, expense, cause of action, suits, claims, judgments and cost of defense arising out of or in connection with matters arising in
the common areas of the building. Landlords should be willing to agree to these requests from a tenant, as the landlord’s insurance covers the
common areas and the tenant’s insurance covers the demised premises.

Conclusion

In sum, before asking a potential landlord for any of the items described above during the lease negotiation process, as a tenant, you must
take into account your creditworthiness, the size of the space you intend to lease, and the market or sub-market you are looking to lease. As a
practical matter, a landlord is willing to provide more lease concessions to a billion dollar tenant leasing 50,000 rentable square feet in a submarket with vacancy rates of 15%, as compared to a small financially weak tenant looking to lease space in the Central Business District of
Washington, D.C., for example. However, at the end of the day, it does not hurt to ask a potential landlord for any or all of the items discussed
above.

The information or opinion provided in this article is the author's own and not necessarily that of Watt, Tieder, Hoffar & Fitzgerald, LLP. The author is solely responsible for the information and opinion that he or she has provided. The information contained herein does not replace seeking specific legal counsel to directly address individual client needs.