Demand for laboratory space in the commonwealth has been growing at a steady rate. According to the Massachusetts Biotech Council, biotech companies have increased their number of employees by 100 percent in the last five years. This strong demand has resulted in vacancy rates for biotech/lab space that are still in single digits in Cambridge and Boston, and together with resulting higher rents, provides a substantial motive for developers to undertake laboratory projects in the current economic climate.
Striking the business deal with a laboratory tenant, however, is only half the battle. Many issues of critical importance to tenants and landlords are decided in the period after the parties sign the term sheet. As a result, actually negotiating a lease for the space may take 30 to 90 days, or more. There are some common issues that may come up during that period.
The provisions governing the construction and ownership of tenant improvements are of particular significance in a laboratory lease negotiation. Laboratory build-outs typically cost $100 to $170 per square foot (more, if animal facilities are required), a cost that is likely allocated between the landlord and tenant in the form of a tenant improvement allowance. The landlord is willing to make a significant investment in the improvements for two reasons: first, it will attract higher quality tenants at higher rents; second, the space will be more valuable to a replacement tenant when the term of the lease in hand expires.
One way the landlord will protect its investment is to require that the tenant leave the premises in a condition useable for laboratory purposes at the conclusion of the term. Consequently, the parties will have to negotiate exactly which improvements and laboratory equipment remain in the premises. Some scientists become so attached to their laboratory benches, in a figurative sense, that they want to take them with them when they leave the space. That may be fine with the landlord so long as the tenant replaces the “heirloom” with similar equipment.
Another mechanism used by landlords to protect their investment is to insure the tenant improvements under the building’s casualty policy. The tenant may have no objection if it is more economical for the landlord to carry the insurance and pass through the cost to the tenant than it would be for the tenant to buy the insurance. If the tenant insists on carrying the insurance, however, the landlord, to better protect its investment, will pay particular attention to the insurance requirements in the lease and will want to control the rebuilding of the improvements in the event of a casualty.
The complexity of laboratory build-outs heightens the emphasis on work letter issues in lease negotiations. Typically, the tenant will do the construction. The work letter must balance the tenant’s need for design flexibility against the landlord’s desire for design oversight as well as provide the landlord with the ability to coordinate tenant work with landlord work or tenant work in other parts of the building. For example, highly specialized aspects of laboratory construction work are often done by non-union contractors. The landlord will need to ensure that labor harmony is maintained in the building during the fit-out phase.
The scope of the build-out also drives the laboratory tenant’s need for particular appurtenant rights in the building. For example, laboratory users will typically require rooftop rights to house their mechanical equipment, such as supplementary air-handling units. The tenant will also need rights to vertical shafts for extensive venting to the roof. In addition, the tenant will require ancillary space on a lower level in the building for its pH rooms (to neutralize effluent being discharged to the municipal sewer) and, where applicable, its animal facilities.
As a result of these extensive ancillary rights, the laboratory lease must carefully allocate usage and rights in these appurtenant tenant areas to avoid problems with equipment interference and to ease the coordination of tenant activities. The tenant, for example, will typically maintain its rooftop equipment, but the landlord will benefit from a lease provision requiring the tenant to use the landlord’s contractors for related roofing work and to obtain assurances that all roof warranties are not affected by the tenant’s work. In addition, the landlord will reserve the right to relocate the tenant’s rooftop equipment in the event that equipment interferes with base building systems or another tenant.
Another common concern in laboratory lease negotiations is the landlord’s right to enter “sensitive” areas of the premises unaccompanied. This begins with the tenant’s usual insistence that it clean its own space and, in light of the potential liabilities, landlords are generally happy to oblige. It continues as a discussion about the typical lease provisions permitting a landlord to re-enter the premises, such as for repairs and maintenance, and how the tenant will police those occasions with respect to high security areas. Naturally, the landlord will want to eliminate barriers to access in the event of an emergency.
Environmental Concerns
A laboratory lease must also address the fact that many of the environmental hazards that can arise from a tenant’s particular use are not currently regulated at a federal or state level in the same way as, for example, oil is under Massachusetts General Laws c.21E. One approach to dealing with environmental issues in a laboratory lease is to incorporate by reference “best laboratory practices” as set forth in publications such as the Office of Health & Safety’s publication “Biosafety in Microbiological and Biomedical Laboratories”. Another is to require periodic reporting of the types and quantities of materials being used in laboratory processes. Sorting out responsibility for hazardous mishaps at a multitenant building and financing concerns each require some level of understanding about sources and types of materials being brought on site.
Merely accounting for tenant operations during the term, however, may not be enough to fully satisfy a landlord’s lenders and future building tenants regarding environmental matters. If a landlord plans to re-lease built-out space with the ventilation infrastructure that accompanies it, the landlord needs to assure the incoming tenant that all vents and shafts are free of any uninvited microbiological guests. The outgoing tenant, who will be required to indemnify its landlord even after the term ends for environmental matters arising from its use, will be similarly motivated to minimize contingent liabilities arising from its occupancy. The end result of this confluence of concerns is a common laboratory lease requirement that tenants “decommission” the space before it is surrendered. Furthermore, the tenant may be required to provide the landlord with an appropriate report from an environmental consultant to confirm the work has been done satisfactorily.
If you are a tenant or landlord betting on the continued demand for laboratory processes and products, you should make sure that you understand the special needs of the industry today and plan your lease negotiations accordingly. If you wait until the term sheet is signed to think about these issues, you surely will have waited too long.
