5 Key Issues in Biotech Leasing

While there are commonalities in concerns on the landlord and tenant side in all leases regardless of the use, biotech leases differ from general office leases.  When negotiating a lease for a biotech user, the landlord and the tenant need to consider a variety of issues that are unique, or more critical, as a result of such use.

• Build-out.  Tenant improvements for biotech users are typically extensive, often specialized and always expensive. These lease deals usually involve large tenant improvement allowances. Where tenant is completing the work, landlords will want clarity on the scope of the improvements as changes can impact and require changes to building systems. Laboratory users generally have a higher demand for fresh air and supplemental HVAC needs.  Tenants need to be sure that the building systems can meet their demands or insure that supplemental needs can be met (such as by securing roof rights to accommodate additional HVAC requirements). If landlord is completing the build-out, tenant will want to be sure that landlord has experience with lab construction and tenant will want to retain involvement in the development of final plans and the construction due to the specificity of these projects.
• Security Deposits.  Biotech companies can be high risk tenants for a landlord.  Biotechnology is a volatile business with many failures. Many smaller biotechnology companies are start-ups with no track record, no financials, no tangible assets and unclear future success.   Given the foregoing, coupled with the expensive build-outs and potential environmental risks, landlords should seek substantial security deposits.  Letters of credit may be preferable to landlords as they are less vulnerable in a bankruptcy situation and may be desirable to a cash strapped start-up (provided they have sufficient credit to secure a letter of credit).  Landlord can provide for the security deposit to burn down after the tenant proves financial health. If possible, Landlords should seek a parent guaranty.
• Hazardous Materials.  Given the nature of the chemicals often used by biotech tenants it is critical, for both landlord and tenant, to establish a baseline at the beginning and the end of the term.  For landlords it is critical to obtain a decommissioning report from its departing tenants wherein industrial hygienists confirm that testing established that no hazardous material remain in the premises.  Landlords will also want to insure that radioactive users have obtained any necessary Department of Public Health sign-offs. Landlords should insist on having the decommissioning reports prior to surrender of the space.  The decommissioning process can take some time, however, and tenants may not want to shut down operations early to allow for decommissioning so they should consider this decommissioning period when negotiating the term and the move to a new location. Both parties are concerned with assuming responsibility for environmental damage they did not cause, so establishing the baseline at term commencement is critical. The biotech lease should provide that tenant must comply with all environmental laws and regulations and that all chemicals must be used in accordance with good medical or laboratory practice.  In addition to these standard provisions, landlord must require tenant to provide chemical lists so they know what is being used in their building.  Landlord should maintain these lists after term expiration in the event there is a question down the road about the source of later discovered contamination.  With tenants using more volatile hazardous materials, landlords may consider adding “just in time” purchasing requirements in the lease which provide that certain chemicals are only brought into the building when needed and are not stored there indefinitely.
• Confidentiality.  For a biotech tenant whose main asset is often its proprietary research or product development, security and risk-management concerns are paramount.  While landlords want to retain access rights to the premises for various reasons, biotech tenants often insist that such access must be on prior notice, subject to tenant security requirements (and possibly a nondisclosure agreement), and will only be permitted in the presence of a tenant representative. Tenants may seek to limit landlord’s access to certain areas if entry could impact a costly clinical trial.  Landlords will want to insure that entry by landlord is always permitted if there is a reasonable basis to believe tenant has caused contamination or in the event of a default. Tenants may seek to keep the decommissioning reports confidential as others may glean information from these reports based on the combination of chemicals being used.  Landlords should avoid such confidentiality requirements as the decommissioning report is a useful tool for the landlord to provide to future tenants as evidence of delivery of a clean space.
• Animal Use.  Allowing for a general laboratory use in a lease may permit a vivarium.  Landlords should determine during lease negotiation if animal testing is anticipated and what types of animals will be used.  Animal testing can bring on noise and odor issues,  unwanted public attention to landlord’s building and, potentially, security issues.  Landlords will want to limit the movement of animals in and out to after-hours. Public companies may want to explore side letters to document vivarium uses to avoid public filing of leases regarding animal testing.