Leasing Guide: What Should I Look For When Reviewing My Lease?
Just like with anything else, it’s important to strike a balance between being too careful and being negligent. Not reviewing a lease carefully or not using the right attorney can leave you vulnerable over the course of your lease. Proposing too many changes to a lease can cause the lease process to drag out, run up your legal fees, and possibly jeopardize the landlord renting you the space.
Especially on shorter term leases, remember, if you are paying your rent and don’t have any intention to sublease, it’s unlikely any of the finer points of the lease will be revisited. Of course, it does make it easier when you have a short, simple lease as opposed to a long, detailed lease, but most NYC leases are of the longer variety.
Here are a few things you should pay attention to:
- Base tax year: This is usually (but not always) addressed prior to drafting a lease, but it doesn’t hurt to double check that this is set to the appropriate year or you will be paying for it every year when real estate tax increases are assessed.
- Landlord Work: If you are the tenant, you want this to be as specific as possible. If the landlord has not committed in writing to do certain things, he is not obligated to. For example, things like types of finishes (marble, granite, stainless steel), dimensions of glass openings in offices, types of lights being used, hot water for your sink, a certain type of radiator, type of ductwork, and walls with specific insulation. If you don’t have it outlined in the lease and you sign it, you don’t have any recourse. Don’t go too crazy with it on insignificant things, but if something is important to you, I would make sure it’s explicit.
- Extra monthly charges: This will usually be spelled out before a lease is drawn, but some landlords will try to sneak a few in. Look out for things like water, sprinkler, carting, guard charge etc. Again, these will usually be presented beforehand, in which case you have already agreed on. But if they haven’t been, there’s no reason you should pay for them. I’ve even seen leases where they hold the tenant responsible for their proportionate share of toilet paper, paper towels, and cleaning supplies in the bathrooms!
- Insurance Requirements: Make sure they are appropriate to the size of your space and quality of the building. Remember, insurance is not that expensive and does benefit you so I wouldn’t make a huge issue out of this.
- Notice Period on Good Guy Guarantee: This will have the most impact on you personally if your company goes under so I would try to reduce this as much as possible. Keep in mind that the higher the security deposit is, the more leverage you should have on the notice period. For example, if you have a 9 month deposit, they might let you off the hook with 45 days notice. If you have a 2 month deposit, it might be 150 days. Typically, 90 days or less is pretty reasonable to have.
- Air Conditioning: If it’s a class A building, you are usually not going to be responsible, but if it’s a “B” or ”C” building, you usually have your own air conditioning unit(s). If it’s a central a/c unit or window unit, you want to make sure it’s delivered in good working order and try to get a grace period on the replacement if it fails. For example, on a 10 year lease, try to make the landlord responsible for replacing the unit if it breaks down within the first 2 years. Or if you have 3 window units, have the landlord be responsible for replacing the first one (and you’re responsible for the rest). You’re also going to want the landlord to be responsible for the first servicing of the ac unit. Keep in mind that it’s almost always the tenant’s responsibility (and in their best interest) to keep a maintenance contract for central air if it’s in the space.
- Overtime HVAC: Especially in Class A Buildings, your hvac hours are probably going to be limited to a variation of normal business hours. Anything outside of that will be considered overtime and billed at a very high hourly rate (usually about $100-$200 per hour). Most people don’t ever use the overtime hvac, but make sure it’s not insanely high (I’ve seen $300+ per hour for about 2500 sf), and if it is, try to change it.
- Window Cleaning: It’s usually the landlord’s responsibility to clean the exterior of the windows in a Class A Building. In a “B” and especially a “C” building, it’s often the tenant’s responsibility to clean the exterior of the windows. It’s actually not as expensive as you think it would be (probably about $20-$50 a window), but I would try to get the landlord to clean them once for you at the beginning of the term and they usually stay pretty clean for a few years.
- Right to Expand Within The Building: Try to get ownership to agree in writing that you can expand into a larger space provided it is at least X% larger than your existing space. Obviously, the lower the percentage, the better, but I wouldn’t expect to get anything lower than 40% (at the lowest). It’s typically in the landlord’s best interest to accommodate a growing tenant as well so I wouldn’t assume the landlord has an issue with this if they don’t concede. Usually it’s to limit their liability (like most things in a lease).
- Late Fees: Make sure you have a reasonable grace period on rent payments and try to get the first late penalty waived, or even be permitted one late payment every few years if possible. Sometimes there are clauses stating if there are, for example, 3 late payments in a year, the landlord has the option to terminate your lease. Make sure the landlord can’t kick you out if you are two days late on your rent one time!
- Mandated Improvements: This means if the owner needs to upgrade anything required by the government, you have to pay your proportionate share. If at all possible, try to get this eliminated or restricted to a certain cap. This often won’t be in the lease to begin with.
- Use of Premises: Try to get this as vague as possible in case the nature of your business changes or you want to sublet. For example, you’re better off having “Office Use” than “Marketing Company” or “Travel Agency”.
- Holdover Clause: This can typically range from 1.5X the escalated rent to 3X the escalated rent. It is in your best interest to get this as low as possible (but don’t expect to get it lower than 1.5x in the best case scenario). This is particularly important if you end up subleasing the space for less than you are paying.
- Sublease Notice Period: Most landlords will expedite the approval process for subleases, but it will help to shorten the notice period so you can “promise” a sooner occupancy date for a subtenant that needs the space urgently (and get yourself an extra month of rent).
- Sublease Profit-Sharing and Right to Recapture: Landlords usually share about 50% of the profits from any subleasing, but make sure that it’s not anything more and keep in mind that they have the right to recapture, you may not ever get to profit. Also, make sure that the landlord gets 50% of the profits after all the expenses like brokerage commissions, legal fees, reimbursing the landlord’s legal fees, etc. They will also expect a percentage of any profits from furniture and fixtures sold (even though you bought them), but again, at least worth a shot to eliminate that.
- Sublease Approval %: Try to avoid requiring approval for subleasing less than 30% of your space (for example renting out an office within a law firm). Landlords usually won’t care anyway when it comes down to it, but better off not even having to notify them.
- Sublease Broker: Some leases may have clause requiring you to use them as the broker if you sublet. It definitely wouldn’t hurt you to have the choice of what broker to use. Sometimes you won’t get the choice, but it doesn’t hurt to attempt.
Make sure your lawyer is familiar, and preferably specializes in New York City real estate. It’s a relatively unique leasing process and often times attorneys that are not familiar with Manhattan office leasing will try to change things that are standard, which could result in giving you bad advice and causing you to walk away from a completely typical lease. They can also propose too many changes to compensate and turn off the landlord or unnecessarily lengthen the process.
The point of having a lawyer look over the lease is to make sure you are protected. If you have a friend that’s a lawyer and not a new york real estate attorney (and review the lease cheap or on the house), and they don’t know what they’re doing, it defeats the purpose. If I have a friend that’s a mechanic that works on motorcycles at a Honda dealership, I’m not going to ask him to replace the engine on my (hypothetical) BMW 5- Series and vice versa.
Most leases don’t have anything egregious in there, but every once in a while you find something preposterous. For example, I have seen a lease that gives the landlord the right to terminate the lease at any time for any reason with 30 days notice! Not only that, but they wouldn’t remove the clause, only change it to 60 days.
Needless to say, an experienced broker will let you know about something like this before showing (or more likely, not showing you) space in a building.