Office Contract: 6 Things to Consider Before Signing

It's more than just a space - it's a place where your business dreams can become a reality. But before you pop the champagne and toast to your future success, there's a crucial step standing between you and your ideal workspace: signing the lease agreement.

Whether you're renting office space or entering into any other type of arrangement, signing a contract is a pivotal step for businesses. Contracts outline the terms of your business agreement and can have significant consequences if not thoroughly understood and negotiated. Many people only realize how a contract can become problematic once the ink is dry and the consequences become apparent.

In this article, we'll give you six tips on how to protect your interests and build a good relationship with your landlord. These tips are based on our experience and the questions of our clients. They are especially relevant for long-term lease agreements. Flex-office lease agreements, as the name suggests, are more flexible and less binding.

1. Personal Guarantee

A personal guarantee is a clause commonly found in many lease agreements - especially in long-term ones. It states that you or the management are personally responsible for fulfilling the obligations of the contract if your company is unable to do so. Landlords often require a personal guarantee to reduce their risk - often because startups may not have strong financial credibility. Even if startups have received initial funding, they often need additional funding rounds within one to two years.

Why do landlords want this? Landlords are concerned that companies may become insolvent during the term of the lease - be it after one or three years - leaving them with high rental debts. A personal guarantee is intended to ensure that the founders are truly committed to the success of their company. Otherwise, the founder could face personal bankruptcy, which can have serious consequences in Germany. However, not accepting a personal guarantee could be a warning sign for landlords. But that doesn't mean you should necessarily agree.

Setting's Tip: Negotiate a higher deposit

There are strategies to avoid signing a personal guarantee. One option is to offer a higher deposit instead. If your company is currently short on cash, you could also propose rental deposit insurance.

Ask if the landlord accepts rental deposit insurance. Negotiating these aspects can help make the contract more advantageous for you. More on this also under point 4.

2. Eviction Commitment Declaration

With an eviction commitment declaration, you authorize the landlord to quickly arrange for eviction through a bailiff in the event of a lawful and immediate termination of the lease agreement. Some landlords require this as a condition for concluding a lease agreement, as legal processes can otherwise take a long time. Without such an agreement, the landlord cannot force you to vacate the premises immediately, which could lead to high rental losses and possible further damages (e.g., renovation costs).

Setting's Tip: Know the legal basis

An eviction commitment declaration serves as legitimate protection for the landlord to minimize rental losses. To obtain it, you must go to a notary, incurring additional costs that depend on the value of the lease agreement (rental amount and term). We recommend negotiating with the landlord for them to bear the costs of the notary or for both parties to share these costs.

3. Rent Reductions

Construction work in Germany is closely linked to rent reductions. In some contracts, especially when construction work near your office is planned in the future, there may be a provision waiving your right to rent reduction. This clause may be relevant if your contract coincides with construction work that could disrupt your business operations. It's important to look for clauses in your contract that establish rules regarding construction work.

Setting's Tip: Negotiate the terms

Do not completely waive your right to rent reduction, as there is a risk that the space may become unusable during extensive construction work. You should stipulate that the landlord can only object to rent reductions for legally recognized reasons. This protects your interests in case construction work significantly impairs your use of the space.

4. Deposit

We often receive questions about the usual amount of a deposit. The amount of a deposit often varies, but it usually equals three months' rent. The deposit serves as security for the landlord in case of damages or breaches of the contract by the tenant. But is it negotiable? We have two tips for this:

Settings Tip: Deposits are often lower for flex contracts

For flexible lease agreements, the deposit may sometimes be less than three months' rent. How much exactly depends on your negotiations with the landlord. Use your contract to get the best deal for you and your team.

Settings Tip #2: Consider rental deposit insurance

Some landlords accept rental deposit insurance instead of a regular deposit. But not all landlords are convinced, as in the event of a rental default or damage, it may take longer to receive the security from the insurer, or this may be a longer bureaucratic process.

5. Subletting or Finding a Subtenant

Subletting can be helpful for companies later on, especially in economically challenging times. If your contract allows subletting or finding a subtenant, pay close attention to the legal formulations, especially regarding the subletting process itself. This provision is important for the flexibility and financial security of your company.

Settings Tip: Landlord's Consent

To avoid future conflicts, it's good to have a flexible provision for subletting. We recommend including a clause in the contract stating that the landlord can only object to a subtenant or replacement tenant for legitimate reasons (e.g., creditworthiness).

6. Returning the Office

It's important to know your obligations regarding the condition of the space upon return. Usually, the landlord takes care of the structure of the building/office itself (the "shell and core" rule), and you as the tenant are responsible for the interior. In general, you should return the space in the same condition as you received it.

Settings Tip: Negotiate about renovations

If you plan to make improvements to the space during your lease term, negotiate with the landlord on how these changes should be handled at the end of the lease agreement. Do not agree to a clause that obligates you to restore everything to its original condition, as this can be costly.In summary, contracts, especially when they involve longer commitments, should be carefully reviewed. These six points can help you protect your interests and negotiate effectively. For complex contracts, you should always consult a legal expert. A well-negotiated contract can be the key to success.

Alternatively to long-term office lease contracts, a flex-office could be a good choice. Flex-office contracts are usually less binding and more flexible. And remember, Setting is here to advise you on your office decision! Don't hesitate to contact us if you have any questions.