Technology startups face unique issues when it comes to negotiating and entering into commercial leases. Certain key considerations should be addressed in the negotiations between a technology startup tenant and a commercial lease landlord. The startup’s in-house legal team can be critical for navigating these discussions and helping the company understand the long-term legal implications of certain lease provisions.
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The Unique Needs of Technology Startup Tenants
Technology startups often have many distinct needs from regular commercial tenants. Since startups are rapidly growing their business operations, they may be more concerned about the ability to lease additional space if needed.
The balance sheet and financial statements of a startup look different from that of a mature company. As the company’s in-house lawyer, you should help the startup navigate these negotiations to ensure the landlord that the startup has a low potential for bankruptcy.
The protection of intellectual property is fundamental to a technology startup, and a startup’s existence may rest upon this valuable IP. In negotiating the lease agreement, the company’s in-house lawyer should be concerned about security issues and making sure competitors cannot gain access to critical IP.
Permitted use clauses in a lease agreement expressly allow tenants to engage in certain activities. These clauses can be narrowly crafted in favor of the landlord, so it is important for the in-house lawyer to negotiate flexibility for the company’s future growth. If may also be important for the future needs of the company to explicitly add assignment or subletting rights to the permitted use clause.
The landlord may be concerned about the startup causing disruptions to neighboring tenants in a commercial space. For example, a startup may consume large amounts of electricity to power specialized technology. They may also produce excessive noise, vibrations, or sounds.
On the other hand, the technology startup tenant may be concerned about its operational needs unexpectedly changing during the term of the lease. If the startup tenant’s business plan or operations evolve, the company may find itself using the leased premises in a new manner. The in-house lawyer should therefore discuss with the commercial landlord including a clause that allows the premises to be used for “any and all legally permitted uses.”
Alterations and Restoration
The company’s in-house counsel should carefully negotiate the tenant’s rights and obligations when undertaking any alterations or restoration work on the premise. Commercial landlords will often require consent rights with respect to many types of alterations. These include alterations affecting the building’s structure, electrical systems, plumbing, life safety systems, and exterior. There will likely be more consent rights for alterations required by the landlord of a multi-tenant building.
While technology startup tenants would prefer not to have to obtain the landlord’s permission before proceeding with future alterations, they will likely have to agree to certain compromises. The tenant should also keep in mind that certain alterations may result in expensive building code upgrades to the landlord’s building. The in-house lawyer should carefully review the alterations clause to make the cost of such upgrades that have little or no benefit to the tenant are assumed by the landlord.
The terms of specialty alterations are a point of contention in commercial lease negotiations. Technology startups may need alterations that fit the unique needs of their business or culture. However, such alterations may not be reusable or useful to future tenants. For example, if a startup installs a coffee bar or bowling alley, that may not have utility to another tenant in the future.
Assignment and Subletting
The drafting of the assignment and subletting provision in a commercial lease agreement can have implications on the startup’s exit strategy. While the landlord may want sole discretion over whether approve a tenant or withhold consent, technology startups need flexibility for rapid growth and potential acquisitions.
The startup’s in-house lawyer should pay particularly close attention to the permitted transferee definition. In the event that the startup wants to enter into a collaboration arrangement to share leased premises with another company, the startup will need pre-negotiated flexibility in the assignment and subletting provision.
Early Termination and Extension Rights
Technology startups should seek early termination rights in their commercial lease agreement. Early termination rights help accommodate the startup’s future growth without subjecting them to a huge termination fee. While subleasing rights can be an alternative to early termination rights, subleasing is an extra distraction for a busy startup to manage. Similarly, startup tenants should always seek renewal options.