A small-business owner with a promising startup finally is ready to lease an office and realize his vision of expansion. He finds a 4,000-square-foot space in a great location that’s accessible to clients and partners. It’s too good to be true, he thinks, blinded by the fact that the monthly rent is a few notches below what similar units are going for because he is subleasing.
He meets with the sublandlord and excitedly signs a five-year contract. A little less than two years go by, and the subtenant’s vision of expansion isn’t happening as timely as he predicted. In a few months, the young entrepreneur will have gone through his burn rate, and he will need to move.
The mistake he made wasn’t in failing to read the fine print, it was in failing to understand the fine print. Five terms he should have been better-educated on are explained below.
The sublease market is highly desirable because it is less expensive, has shorter terms and usually is “plug-and-play.” The market is less expensive and has shorter terms because the original tenant’s reasons to sublease probably are related to the success – or failure – of his business. The space might be too small for his growing team or, conversely, too big and unaffordable. Stuck in a long-term lease, he needs some fast relief.
“Plug and play”
“Plug and play” refers to existing infrastructure, including Internet connections, phone lines and Wi-Fi, as well as office equipment, furniture and supplies, that all are part of the package. While not crucial to a lease, it is a definite perk the subtenant should have shopped around for.
Option to renew
The option to renew gives a tenant, in this case, the subtenant, the right to extend the lease term if all goes well. It is an important aspect of the lease and should have been negotiated.
“You can’t predict your growth and best case scenario you grow out of the space but just in case that doesn’t happen having the ability to stay in the space you’ve called home and renew your lease at Fair Market Value removes the worry of relocating,” writes Kalin Kelly in a LinkedIn article titled “The Broker Jargon You Need to Know to Not Get Burned.”
Right of first offer
A right of first offer is a clause in the lease requiring the landlord – in this case, the sublandlord – to notify the subtenant if and when expansion space becomes available in the building. While the sublandlord ended up not needing the clause because of a downturn, he would have benefited from it if his business experienced an upturn.
“If you don’t have this flexibility then be prepared to be back in the market searching for a bigger space that will most likely take 4-6 months to find not to mention dealing with trying to get rid of your existing obligation for the space you just outgrew,” Kelly writes.
A corporate guaranty is something the subtenant should have known about and obtained. It refers to a type of monetary backup in the event of a lease default. Especially common among startup companies, a corporate guaranty is an investor who agrees to pay your rent for the remainder of the lease term in the event of a default.
“With a background in startups and as both an angel investor and commercial real estate broker these stories are the most frustrating and sad to hear,” Kelly writes. “Mainly because they’re preventable.”