In order to negotiate a successful lease agreement for a biotechnology laboratory facility (“biotech lab”), both the landlord and the tenant need to consider the unique issues presented by such a lease. As opposed to a lease for general commercial office space, a biotech lab lease will, 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 possible liability for the landlord and tenant from environmental damage caused by the tenant, (5) present greater risks in terms of default of rent, (6) have longer land-carry times, and (7) require more flexibility with respect to the tenant’s use of the commercial space.
Tenant concerns can vary widely with respect to the size and business of the tenant. Tenants in biotech lab leases can run the gamut from big pharmaceutical companies presenting build-to-suit issues to fledgling start-ups in need of small incubator laboratory space. Generally speaking, in a biotech lab lease situation, the tenant’s main concerns are with flexibility and safety. Flexibility is necessary if the tenant is to respond to the rapidly changing nature of the business, and safety is needed to both comply with government regulations and safeguard the tenant’s research material and intellectual property rights.
On the other side of the bargaining table, landlords in biotech lab leases are generally concerned with achieving high rents, maintaining the value of the facility over the long term, and hedging against the inherent risks of renting to biotech companies. As with tenants, these concerns will vary in number and degree with the type of landlord. Some landlords are large Real Estate Investment Trusts (REITs) who are relatively risk neutral, and some are single building owners who are generally more risk averse. Also, some landlords are leasing brand new facilities, and some are leasing older facilities, sometimes being converted into use for biotech labs for the first time.
Because of the variance among and between tenants and landlords, and because of the differences between biotech leases and standard commercial leases, traditional “form” leases should not be relied on in drafting a lease for a biotech lab. While the concerns of tenants and landlords can be in tension with each other, the large variance in such concerns from landlord to landlord and tenant to tenant necessitate that the parties adopt a cooperative attitude toward the lease negotiations in order to achieve a mutually beneficial agreement. With lengthy experience and know-how in the field of biotech lab leasing, the attorneys at Sheppard, Mullin, Richter & Hampton can provide invaluable insight to landlords and tenants alike in assessing their concerns and addressing them in the lease agreement.
Of course, before entering into a lease negotiation, both landlord and tenant have many issues to consider. These considerations are not the main focus of this article, but it will be useful to run though some of them quickly in order to effectively paint an overall picture of the lease negotiation process.
Tenants will want to consider such early issues as site selection, programming and financing. Site selection factors often include proximity to major universities, and thus a highly educated workforce, proximity to other biotech companies, and proximity to venture capital firms. Tenants will also want to keep in mind that regulatory procedures may delay their operations. For example, pursuant to the Public Health Security and Bioterrorism Act of 2002 and the Agricultural Bioterrorism Act of 2002 (together, the “Bioterrorism Acts of 2002”), biotech companies will have to obtain authorization from the United States Department of Health and Human Services for possession of “select agents”: biological agents and toxins that have potential to pose a severe threat to public health and safety.
Landlords also have many issues to consider before entering into lease negotiations. Chiefly, landlords should do a detailed due diligence of potential tenants. Included in this examination should be (1) the financial status of the tenant, looking particularly at the “burn rate” (the rate at which a new company uses up its venture capital); (2) the risk of failure of the tenant’s business plan; (3) the environmental risks associated with the science and materials the tenant will be using; and (4) the effect the tenant’s occupancy will have upon the building, and in multi-tenant situations, upon the operations of other tenants. Finally, as with the tenant, the landlord will want to consider possible regulatory delays. For example, laboratories have to be registered with the Center for Disease Control and inspected by the Department of Health and Human Services pursuant to the aforementioned Bioterrorism Acts of 2002. Furthermore, a biotech lab facility must be approved by the Food and Drug Administration (FDA) before going operational. The time from when the landlord decides to build to the time regulatory approval is complete can be up to four to five years. The delays on both the tenant and landlord sides need to be taken into account by both parties.
Issues and Clauses to Consider During Lease Negotiations
After evaluating the particular needs of both landlord and tenant, the parties to a biotech lease need to consider how those needs will manifest themselves in the following issues and clauses, among others:
3.Security of Tenant’s Obligations
4.Use, Regulations, and Hazardous Materials
5.Services and Utilities
6.Assignments and Subleases
7.Age of the Facility
1. Tenant Improvements
Tenant improvements in biotech labs far exceed those in standard commercial spaces. While general commercial leases usually provide for tenant improvements in the $30-$40 per square foot range, they generally run from $150-$300 per square foot in biotech leases. In fact, if a vivarium, animal colony or pilot plant is added, the tenant improvements can be over $300 per square foot for those areas. Thus, carefully working through the various issues associated with tenant improvements is of paramount importance in drafting a biotech lab lease.
The fundamental questions with regards to tenant improvements that need to be answered by the parties during lease negotiations are the following:
(1) Who will construct them;
(2) How much they will cost;
(3) Who will pay for them;
(4) Who will prepare the plan for them, which includes the architect, the contractor, and significant subcontractors;
(5) What will be the standards for approving the plan;
(6) How to handle changes to the plan;
(7) What will be the commencement date of the construction;
(8) Whether the rent commencement date will start before or after completion of tenant improvements; and
(9) Whether the facility, after tenant improvements, will be able to comply with state and federal regulations.
Typically, these and other issues surrounding tenant improvements are 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. Typically, the tenant will formulate a plan for the design and construction of tenant improvements and submit it to the landlord, who will return it with objections. The landlord will want to both keep tenant improvements to a minimum, and also make them as general as possible. This is because when the lease term is over, renovation costs will be higher for the landlord in formulating a new lease agreement with a new tenant if the prior tenant’s improvements were very specialized to its needs. 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 general improvements. The question of whether generalized improvements will be characterized as tenant improvements should be solved by carefully crafting a definition of “tenant improvements” in the lease that does or 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. The more the landlord pays either outright or through a tenant improvement allowance, the more that landlord is gambling on the success of the tenant company. Thus, 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 (unless it can argue that the improvements are general, in which case the landlord may have to pay outright). 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), so the tenant will want to see if it can obtain financing at a lower cost from another source. Landlords traditionally pay very high interest on funds they borrow, and would pass such costs on to the tenant. Therefore, paying for a large portion of the tenant improvements through a tenant improvement allowance is unlikely to be a winning strategy for both parties (since it will expose the landlord to more risk and the tenant to higher financing costs), unless the tenant is a very new or debt-ridden company that will have a hard time finding better financing elsewhere.
Inasmuch as tenant improvement allowances are used to finance tenant improvements, the parties need to take into account various considerations as to the use of said allowance. First of all, the parties will need to agree as to which costs the tenant improvement allowance may be applied. Typically, the landlord will be responsible for costs associated with the building shell, and so the tenant improvement allowance will not be applied to those costs. Similarly, the landlord is usually responsible for costs associated with the main building system – including electricity, water, and HVAC (Heating, Venting and Air Conditioning) – costs associated with common areas, and costs associated with exterior improvements like landscaping, hardscaping and parking facilities. Furthermore, the tenant may also want to include soft costs, such as the costs of consultants, in the tenant improvement allowance, while the landlord will want to put a cap on how many such costs can be met by the allowance. Also, if the landlord is in charge of construction, it will want to reimburse itself for construction management fees – typically high in biotech lab build-outs – from the tenant improvement allowance. Furthermore, how and when the dollars will be used needs to decided. Typically, the landlord will want tenant improvement dollars used first or placed in an escrow account, though it may consider a letter or credit or other security for payment of tenant’s construction costs if the tenant will perform part of the build-out. Finally, the parties need to consider whether and how excess tenant improvement costs will be added to the tenant improvement allowance.
Because tenant improvements in biotech lab leases are often very time-consuming, the agreements surrounding them should be structured in such a way as to minimize delays. Both the landlord and the tenant will want the tenant improvements to be finished as soon as possible: the landlord so it can begin collecting rent and the tenant so it can begin conducting its business affairs. Since consultant teams for the tenant and landlord will typically be large in biotech build-outs, the work letter needs to clearly assign responsibilities and liabilities for construction risks so that arguments between the teams do not cause delays. Likewise, the tenant and landlord need to come to an agreement on the definitions of “force majeure” (events outside of the parties’ control that cause delays in construction), “tenant delay,” and “substantial completion” so as to avoid disagreements down the road. Specifically, the tenant will want to make the definition of “tenant delays” as narrow as possible, because the tenant will be obligated to reimburse the landlord for excess shell construction costs incurred because of tenant delay. Also, the parties need to decide whether the rent commencement date will be the date on which the tenant improvements begin construction, on which improvements are substantially completed, on which the tenant begins to conduct its business affairs on the premises, or otherwise.
Finally, in designing the tenant improvements, the parties must consider whether the facility will be able to comply with health safety regulations in the form of FDA inspections, National Institutes of Health guidelines for recombinant DNA work, CDC Select Agent and Toxin regulations, and others.
2. Operating Expenses
Standard biotech lab leases are triple net, meaning that they require the tenant to pay for its share of property taxes, insurance and operating expenses. Since biotech labs require a lot of flexibility in terms of ongoing renovations and changes to the property, the definition of operating expenses is a key point of inquiry in a biotech lab lease. The two basic issues here are (a) what is included in operating expenses and (b) how much of them the tenant is required to pay under the lease.
A number of factors go into the determination of the tenant’s share of the operating expenses, and the landlord will try to include as many costs as possible in this figure. Included are the cost of utilities, administrative fees, and taxes. As to the property management fee, the tenant should ensure that it is fixed to the tenant’s gross revenues (usually at a rate from three to five percent), and not to gross rents. The tenant should also demand a detailed accounting of what the tenant receives for its property management fee. The landlord will also want to include repair and renovation costs in operating expenses. If the tenant accepts this, it should make sure to provide for capital expenditures to be amortized over the life of the item repaired or replaced instead of over the term of the lease. A final important consideration here is whether to include environmental clean-up costs, a consideration which may vary according to the relative danger of environmental damage occurring as an incident of the tenant’s business and according to the age of the building (the tenant would not want to pay for environmental clean-up of past tenants’ damages).
Usually an operating expenses provision will require the landlord to provide an annual statement of the operating expenses, the tenant’s share of such operating expenses, and how much of them the tenant paid. The tenant may want to bargain for a right to audit the Annual Report if the tenant believes it be inaccurate.
3. Security for Tenant’s Obligations
Due to the high level of risk biotech lab landlords take on as a result of such factors as the volatility of the business, the high cost of tenant improvements and build-out, and possible environmental damage, landlords of biotech labs demand more security out of the tenant than do general commercial landlords.
The type of security offered may come in a variety of forms. First, the landlord may demand a security deposit, typically in an amount equal to six to twelve months of base rent. In setting the amount, the landlord should ensure that there is enough money in the security deposit to cover up front lease costs such as brokerage fees and the tenant improvement allowance as well as the cost of evicting the tenant. For landlords that require a reservation fee, they should consider whether or not to include that fee as part of the security deposit.
The tenant may not want to provide security in the form of a cash deposit though, because that would tie up a significant amount of the tenant’s capital. Instead, in order to retain the capital as working capital, the tenant could get its bank to issue a letter of credit to the landlord. A letter of credit typically costs about one percent of the amount of the letter per year, and requires the tenant to have sufficient collateral or creditworthiness. A letter of credit may also be advantageous from the perspective the landlord, because cash deposits are usually viewed by bankruptcy courts to be the property of the tenant’s bankruptcy estate, whereas letters of credit are viewed to be an independent obligation of the issuing bank. Thus, a letter of credit is less likely to be tied up or refunded to the tenant in a bankruptcy proceeding. Furthermore, the amount of a security deposit that the landlord may recover from a defaulting tenant in a bankruptcy proceeding may be capped by the bankruptcy court at one year’s rent; whereas the amount of recovery from a letter of credit might exceed that amount.
The tenant may be able to lessen the amount of security it has to provide by getting its parent, if any, to issue a guaranty. If the landlord assents to such an agreement, it should make sure that the guarantor waives certain statutory rights and that the appropriate court can assert jurisdiction if the landlord has to assert a claim under the guaranty.
The tenant may also bargain for a provision reducing the amount of security it has to provide if the tenant meets certain standards of financial health. If the landlord assents to such a provision, it should retain the right to audit the tenant in order to ensure that the tenant continues to meet such standards. Because audits may be costly and time-consuming, the tenant should provide that the landlord can only exercise such a right a limited amount of times per year.
Additional security may be obtained in the form of lease bonds – which are similar to letters of credit but are obtained from a surety company instead of a bank – or completion bonds. Also, landlords generally hedge against risk by insisting on longer lease terms. Usually, a biotech lab lease will run from ten to fifteen years, instead of the normal three to seven year range for office and R&D leases. The tenant may want to bargain for an early termination provision in the lease because of the uncertainty in the biotech market. If the landlord assents to this, it should ensure that a such a provision is accompanied by a liquidated damages clause.
Finally, the landlord may want to include a provision stating that if the tenant falls below certain standards of financial health, such drop in financial status amounts to default and allows the landlord to collect on the security deposit, letter of credit, or guaranty. This would afford the landlord some flexibility in replacing a tenant about to default due to business failure.
4. Use, Regulations, and Hazardous Materials
Because biotech tenants almost always use some hazardous materials — even radioactive ones — provisions relating to use, regulations, and hazardous materials need to be carefully considered by both parties. Generally speaking, both parties will be wary of assuming responsibility for environmental damage they did not cause. However, 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 conduct due diligence in order to determine the status and history of the space to be occupied. Such due diligence should include 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. These environmental examinations are helpful because they will help determine whether any environmental damage had its roots during the tenant’s occupancy of the site.
The landlord and tenant also need to consider the representations and warranties that they make in the lease agreement concerning hazardous materials. Generally, the landlord will want to limit the risk it runs of being liable for the tenant’s possibly damaging use of hazardous materials. The tenant, meanwhile, especially in an older building, will want to limit the risk of assuming liability for pre-existing use of hazardous materials on the premises. Thus, the landlord should ensure that the tenant warrants and represents that it will comply with all applicable environmental laws and regulations, specifically referring to 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, for its part, should ensure that the landlord represents that no hazardous materials have been released on the premises prior to the lease commencement date. Indeed, it may have to bargain for such a representation, since in California it is required to do so by the Health and Safety Code. In making this representation, the landlord should qualify it with the phrase, “to the best of the landlord’s knowledge.” Also, the tenant 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.
After the due diligence and the representations, the landlord will still want to reduce its risk of loss and liability resulting from environmental damage. Thus, the landlord should bargain for exculpation, reporting, notice, remediation, and indemnity clauses. The exculpation clause would be similar to a traditional non-recourse provision limiting the extent of the landlord’s liability under the lease to the landlord’s interest in the building. The reporting and notice clauses would require the tenant to submit periodic reports about environmental damage on site, and notify the landlord if any hazardous materials laws were broken or if any contamination of the premises were discovered. The remediation clause would shift the burden to the tenant to clean up hazardous materials on the premises. In making such a clause, the lease should specify the definition of “clean” and the standards by which such a clean-up would be measured. The landlord should keep in mind that if the standards are too high, they may be too expensive to meet and would likely not be covered by an insurance carrier for either party. The indemnity clause would specify that the tenant indemnify the landlord from liability for all costs, losses, damages, fines and expenses associated with clean-up of hazardous materials attributable to the tenant. The tenant, meanwhile, should also insist on an indemnity clause in which the landlord indemnifies the tenant for all such clean-up costs relating to pre-existing hazardous materials as well as those relating to hazardous materials used by other tenants in a multi-tenant setting. Because there is a possibility for argument here as to which party should indemnify the other, the indemnity clauses should (a) clearly state the standard under which indemnification will be triggered, such as gross negligence or passive negligence, and (b) limit the amount of circumstances under which each party will be liable for the indemnification to the other, such as for cases of hazardous material migration and waste stream separation. Finally, because of the worry that environmental damage caused by the tenant could be discovered only after the expiration of the lease, the indemnity clauses should state that they survive the expiration of the lease agreement.
Insurance will be another matter of concern. Aside from carrying pollution insurance itself, the landlord should require the tenant to carry pollution insurance as well, though the lease should address the possibility of the tenant being unable to obtain such insurance if it becomes prohibitively costly or simply unavailable. 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. Finally, the landlord will want to provide that if the landlord’s insurance goes up because of the tenant’s failure to stick to the permitted uses in the lease, the tenant will have to reimburse the landlord for the increase in the landlord’s payments.
The landlord will want to be clear about the activities that the tenant will conduct on the premises, while also avoiding the duty to obtain the permits and approvals necessary for the tenant’s use of the premises. Thus, 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. In making such a list, the tenant should be aware of a recent trend among landlords to put ethical restrictions in their leases, such as prohibitions on stem cell research.
Finally, the landlord may want to bargain for a right to conduct testing and inspections on the premises to ensure that the tenant is complying with the lease’s provisions about use and hazardous materials. If the landlord insists on such a provision, the tenant should ensure that the procedures and conditions for such testing be clearly laid out, so as to avoid interruption in the tenant’s business affairs. Further, aside from protecting the security of its work, the tenant has an interest in keeping its operations secret so as to safeguard its intellectual property rights in its work. Thus, the landlord’s rights of entry onto the premises may be limited to situations in which the landlord has a reasonable basis to believe that the tenant’s activities have caused environmental contamination of the premises. Also, the tenant should ensure that the lease provides for sufficient advance notice and that the landlord will be accompanied by the tenant’s employees while on site. Finally, the tenant may require the inspecting landlord to sign a non-disclosure agreement.
5. 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. This is important to do because some of the tenant’s idiosyncratic needs, such as high numbers of electrical outlets, floors that dissipate static, or office rooms with positive HVAC pressure to keep out dangerous lab gases, will have to be addressed during build-out. 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. Typically, such equipment is kept in a service yard, which may or may not be measured as part of the “premises” for the purposes of 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. However, the tenant should also bargain for a provision, especially in large operations, that the landlord will be liable for interruptions in utilities caused by the landlord’s negligence or willful misconduct. Such a provision would be important because of the financial losses that the tenant could incur should the utility service fail. Likewise, the tenant should insist on a provision requiring the landlord to give notice before it shuts down a utility. 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.
The next question to consider is 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. Separate metering may be cost-prohibitive, and traditional pro-rata share concepts would not work well here because use varies widely and because the utility costs are high. 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. The landlord may also want to create separate licenses for extra equipment so that the landlord can stop utility service selectively if it feels that the use of such equipment has become excessive.
Another issue with respect to services and utilities is which party will bear the burden of replacing and renovating building systems. In most commercial leases, this duty falls on the landlord, but in biotech spaces, the tenant may want to assume this responsibility so as to ensure that their lab activities are not interrupted by repair work and that their intellectual property rights remain secure. If the burden falls on the tenant, the landlord should bargain for a provision requiring the tenant to give notice of things needing repair. Also, the parties need to consider which maintenance work would count as repairs and which as alterations. Likely, the tenant will want the ability to make alterations, such as additional locks on doors, as well as repairs. The landlord should ensure that at least major alterations and repairs are subject to its approval. The tenant on the other hand should insist that such approval will not be unreasonably withheld.
Finally, janitorial issues also present special concerns in biotech leases. Though landlords typically furnish this service in commercial buildings, the tenant in a biotech lease may want to provide for such services itself because of risk management, hazardous materials, and confidentiality issues. The landlord should retain some control over the quality of the tenant-provided services, however, and should still be able to bill the tenant via operating expenses for janitorial services in common areas of multi-tenant buildings.
6. Assignments and Subleases
Part of the flexibility that biotech tenants usually want in a lease is the ability to assign or sublease part of the rental premises. The landlord, however, should limit this ability as much as possible because of the inherent risks in leasing to biotech tenants mentioned elsewhere in this article.
The most important restriction the landlord will want to place on assignments or subleases is a requirement to obtain landlord consent. This will usually operate in the form of a required notice given by the tenant to the landlord. Such notice will provide details about the proposed subtenant, such as its planned use of the premises (including planned use of hazardous materials), its relationship to the tenant, and its financial status. The landlord will want to ensure that the subtenant is able to pay the rent, and may apply a net worth test to the subtenant to determine this. As part of this net worth test, the landlord may require additional guaranties or security. The landlord will also want to ensure that the subtenant does not cause great damage to the property, and so will consider the effects of the subtenant on building systems, as well as the subtenant’s use of hazardous materials. The tenant, for its part, should insist that the landlord’s consent is not unreasonably withheld. Finally, if the landlord does refuse consent, it may provide for recapture rights allowing it to terminate the lease for the premises proposed to be subleased. Thus, the tenant should bargain for a provision allowing it to rescind the proposed sublease after the landlord’s refusal so as to avoid losing those premises or for reimbursement of the unamortized cost of tenant improvements made to the premises by tenant. The tenant should also ensure that the recapture right is limited to the proposed area to be subleased.
If the landlord consents to a sublease, a few issues should be considered. First, the landlord should require that the tenant continue to be responsible for the rent on the premises subleased. Second, if there is bonus rent, or rent to the tenant above that which the tenant pays to the landlord on that subleased area, then the landlord may require the tenant to share such bonus rent with the landlord. The tenant should provide that the bonus rent calculation exclude costs associated with finding a subtenant, such as changes to the subleased premises, marketing fees, design fees, legal fees and costs paid to the landlord, brokerage commissions, and improvement allowance. The landlord and tenant should also consider whether the value of the tenant’s alterations should be taken into account when determining bonus rent.
7. Age of the Facility
Landlords of older biotech labs face a special set of considerations in renting out their facilities to new tenants. Generally, while landlords of older facilities may be able to offer prospective tenants lower base rents than they would find in new facilities, the operating expenses for an older facility would be higher because of higher replacement and renovation costs. Much work may need to be done on older facilities to upgrade their infrastructure and repair possible damage from old tenants.
As biotech facilities age, they can face many industry-specific problems. First, the drainage systems may degrade, causing breaks in lines which may lead to contamination of soil by both old and new tenants. Second, HVAC systems may deteriorate. Water-cooled systems especially tend to erode with time, leading to potentially contaminated airflow on the premises. Third, older facilities may present more health and safety issues than new facilities. Mold and contaminants in the system can become airborne hazards, and deionized water systems can become contaminated, rendering them basically worthless. Further, fume hoods need to be inspected and landlords and tenants alike should examine the facility for prior specialized improvements involving highly regulated materials. Such improvements can impact the facility’s ability to obtain FDA certification.
In order to deal with these issues, landlords and tenants need to carefully examine the history and condition of the facility. Tenants seeking FDA certification will have to determine whether the structure will support certification without significant investment. Landlords and tenants should also verify that all previous radioactive materials licenses have been removed, because the presence of such licenses may delay future occupancy. Finally, if renovation is required, the tenant should ensure that the noise, vibrations, dust and other disturbances from such renovation will not interfere with the tenant’s operations. For instance, the tenant may require the landlord to install HEPA (High Efficiency Particulate Air) filters at the landlord’s expense during any renovation.
Thus, despite the lower base rent, new facilities may be cost competitive with the old facilities because of lower operations costs. However, landlords and tenants can work together to make a mutually beneficial lease of an older facility if they carefully account for the risks and costs attendant in such facilities.
Instead of relying on traditional form leases, parties to a biotech lab lease need to consider the specific needs of each party in order reach a mutually beneficial agreement. The attorneys at Sheppard, Mullin, Richter & Hampton have the experience and know-how to guide landlords and tenants through this complicated process, allowing them to work together to achieve their respective goals. See the following page for a list of our development and commercial leasing attorneys who can provide guidance in this area.