In order to negotiate a successful lease agreement for a biotechnology laboratory facility (“biotech lab”), landlords and tenants should evaluate the nature of their concerns, adopt a cooperative attitude, and avoid relying on traditional “form leases” better suited to leases for general office space. Biotech lab leases differ from leases for general commercial office space in that they, among other things, (1) have a higher base rent, in part because of a general shortage in biotech lab space; (2) require more tenant improvements; (3) entail a more costly facility build-out; (4) present greater risks in terms of both degradation of the facility and liability for both parties arising out of environmental damage; and (5) require more flexibility with respect to the tenant’s use of the commercial space. As a result of these differences, the tenant will generally be concerned with flexibility and safety, while the landlord will be concerned with achieving high rents, maintaining the value of the facility over the long term, and limiting its exposure to the risks inherent in a lease of a biotech lab facility. Among the major clauses in which these concerns manifest themselves are those relating to tenant improvements, those relating to hazardous materials, and those relating to services and utilities.
1. Tenant Improvements
Tenant improvements in biotech labs far exceed those in standard commercial spaces, running from $150 to $300 per square foot, as opposed to $30-$40 in standard office leases. Thus, carefully working through the various issues associated with tenant improvements is of paramount importance in drafting a biotech lab lease. These issues are typically resolved in a work letter which is attached as an addendum to the lease agreement.
Since the initial build-out of a biotech lab is more specialized and costly than that of a typical commercial space, tenants have much more input in the design and construction of tenant improvements in biotech leases than in general commercial leases. The landlord will want to both keep tenant improvements to a minimum, and also make them as general as possible. Generalized, minimal tenant improvements will lower the landlord’s renovation costs when negotiating lease agreements with future tenants down the road. The tenant, meanwhile, will want to ensure that the tenant improvements are specialized enough to serve its needs, and will try to avoid paying for generalized improvements by bargaining for a definition of “tenant improvements” in the lease that does not include them. Furthermore, the tenant will also want the lease agreement to provide the tenant some leverage and flexibility in making changes to the tenant improvements as the tenant’s needs evolve. The landlord, meanwhile, should reserve a right of approval for such changes, especially major ones.
Payment considerations vary depending on which party will bear the burden of paying for tenant improvements. For instance, the landlord may want to demand more in terms of security if it has to pay a large share of the tenant improvements. The tenant, however, may not want the landlord to pay for a large share of the tenant improvements. Since a tenant improvement allowance is basically a loan from the landlord to the tenant to build the tenant improvements (the landlord will put an interest factor on the allowance and include it in the base rent), and since landlords traditionally pay very high interest on funds that they borrow, the tenant will want to see if it can obtain financing at a lower cost from another source.
2. Use, Regulations, and Hazardous Materials
Because biotech tenants almost always use some hazardous materials — including radioactive ones — provisions relating to use, regulations, and hazardous materials need to be carefully considered by both parties. Generally speaking, the landlord has the most to fear, being less able to control environmental damage, and being financially vulnerable to any long-term damage to the property.
First, the landlord and tenant need to agree to conduct an entrance (or Phase I) environmental examination, for which the landlord typically pays, and an exit (or Phase II) environmental examination, for which the tenant typically pays. The entrance exam is necessary in order to establish a baseline environmental condition of the premises against which the current tenant’s possible future damages can be measured. An exit environmental examination is also necessary because, just as contamination may not be evident at the time the tenant enters into the lease, contamination by the tenant may not be evident when it quits the lease.
Second, the parties need to consider the representations and warranties that they make in the lease agreement concerning hazardous materials. The landlord should ensure that the tenant warrants and represents that it will comply with all applicable environmental laws and regulations, specifically referring to the standards, directives and guidelines of any environmental agency that may not be covered in general compliance-with-the-laws clauses, such as the Department of Health and Human Services Select Agent Program. The tenant, meanwhile, should ensure that the landlord warrants to pay for all clean-up of pre-existing hazardous materials, instead of passing this cost onto the tenant as a part of the operating expenses.
Third, the landlord should bargain for exculpation, reporting, notice, remediation, and indemnity clauses in order to further reduce risk. Also, aside from carrying it himself, the landlord should require the tenant to carry pollution insurance. Both parties should name each other as insureds on their policies, and they should make sure while negotiating that the insurance requirements in the lease are commercially reasonable.
Fourth, the landlord should require the tenant to acquire the approvals and permits, and to give copies of all permits to the landlord. In addition, the landlord and tenant should make a list of permitted uses, so that the landlord can be sure that the tenant’s use of the premises do not interfere with the activities of other tenants. The lease should provide that the tenant has to obtain permission for any uses not on said list.
Finally, the landlord may want to bargain for a right to conduct tests and inspections on the premises to ensure that the tenant is complying with the lease’s provisions about use and hazardous materials. The tenant will want to bargain for security procedures in the conducting of said inspections, such as non-disclosure agreements and advance notice, so as to ensure that the inspections do not endanger its operations or its intellectual property rights.
3. Services and Utilities
Biotech tenants typically require much more in terms of services and utilities than would a standard office tenant. Specifically, their needs with respect to HVAC, plumbing, electrical and janitorial services may be unusually high. The tenant will want to make sure that it addresses its particular needs in these areas during the negotiations of the lease agreement, as many of the needs may require attention during build-out.
First, the tenant will want the lease to detail the capabilities and specifications of the various services and utilities. Further, any extra equipment not fixed to the building that the tenant may need – such as liquid nitrogen tanks, backup generators, and underground storage tanks – should be specified in the lease. Of particular consideration here are the backup generators. If the landlord should assent to a demand for such generators, it should make sure to put in language stating that the landlord does not guarantee that the generators will be operational, so as to avoid liability in the case that they are not. Finally, the parties need to consider what equipment is considered to be part of the premises and so has to be surrendered by the tenant at the expiration of the lease.
Second, the parties must consider how the costs for the building’s utilities will be paid and apportioned. The landlord will attempt to pass all such costs onto the tenant, including the costs of replacing building systems. The tenant, meanwhile, should resist assuming responsibility for capital improvement costs that benefit the building generally. In multi-tenant situations, the parties should consider the use patterns of different tenants in charging the tenants for utilities. Another consideration with respect to costs is how to charge excess use. Typically, the landlord will want to avoid excessive or after hours use, because of the wear and tear it puts on the building. Thus, the lease should specify the hours of the operation and levels of permitted use. Any use outside those hours or above those levels should be subject to an extra charge that takes into account the wear and tear it puts on the building.
Finally, though in most commercial leases, the burden of replacing and renovating falls on the landlord, in a biotech lab lease, the tenant may want to assume this responsibility so as to ensure that its lab activities are not interrupted by repair work and that its intellectual property rights remain secure. If the tenant assumes this burden, the landlord should require notice for all repairs and approval for major ones.