Perhaps you operate a small start-up business that has outgrown your home office. Maybe your company is mid-sized and is growing out of the office space you occupy. Or, you may head a large organization that needs an additional facility to support a new contract. Whatever your situation, you’ve realized that you need to lease some office space.
You are now in one of the most exciting and challenging parts of your growing company, acquiring an office space, but alos one that is priime for making expensive mistakes. An office space lease is usually the second biggest expenses after salaries for a business. There are ways that you can do it to get the best office for your business without compromising your budget or other aspects of your business’ growth.
You’ve begun the search for space. You may have used an online commercial office location service such as OfficeFinder.com, a local commercial real estate broker or you may have searched by driving by empty facilities. Whatever method you used, you’ve found the perfect option for your every need. It is in a strategic location, plenty of space for employees and clients, good security and good facilities.
During the process you have analyzed and understand your business needs for space, not only for the present but for the future too. You know how you will use the space, what are the amenities needed and identified your priorities.
Finally, you’ve decided. You are now ready to move on to the next phase of acquiring an office space, negotiating the best office space lease.
Understanding the Office Space Lease: LEASE 101
An Office Space Lease has three main forms:
Lease is an agreement between the property owner or landlord and the tenant. It has three forms:
- Full-Service Lease – the rent is all-inclusive. The pay covers all of the expenses associated with the property, such as insurance, maintenance, taxes and even janitorial services.
- Net Lease – the landlord charges a lower base rent for the space and all of the usual costs that related to operations, maintenance and use that the landlord pays. Net lease also comes in three types:
- Triple net lease – you share the three additional costs about the base rent. Taxes, insurance and maintenance.
- Double net lease – two additional costs are added on the base rent, taxes and insurance costs.
- Single net lease – some of the landlord costs will be charged to the tenant upon negotiation.
- Gross Lease – this could the most favorable lease for the tenant. The landlord shoulders all of the property expenses that would come across in a net lease.
To obtain a lease for the office space, you should have an experienced guide who will have your best interest at heart and who has negotiated many successful office space leases in the past. A tenant rep broker is a necessity. It’s a sure bet that the landlord or property management company offering the lease has plenty of experienced assistance to help them get an advantage. Shouldn’t you have an expert on your side too? After all, there is no cost to you for their services. It would seem to be a no-brainer.
Protect yourself by following some important guidelines
that can help you negotiate successfully.
Always remember that in negotiating an office space lease, the more knowledge and power you have, the better the outcome. Even with a tenant rep, you will need to stay involved. Find out about the space. Is anyone else looking at it? Has it been vacant for a long time. Aside from having a tenant representative or a broker, it is still important that you are hands-on with the search and you are aware of the important factors, factors that may somehow make a change on a burdensome leasing terms made by landlord throughout the lease process.
Once you’ve told the office property owner that you want to locate your business in their property, you are likely to be presented with a standard lease package. Do not sign any papers at this point but accept the lease for review. Explain to the landlord that you must review the lease with care so that you completely understand it.
Your specific needs are unique and may require significant changes in the office space lease during negations. Here are a few specific points that any tenant should look for in the standard lease package:
- An accurate description of the office space should be clearly listed in the lease.
- How much is the rent and exactly when is it due? Are there any late charges if not paid on the correct date?
- Is there a security deposit and how much is it? Under what conditions is this deposit repaid upon vacating the commercial office space and what conditions permit the landlord to refuse to return the security deposit?
- What is the lease period and are there provisions to facilitate lease renewal if desired?
- What are the terms in the lease regarding vacating the premises early? Do you have the right to move into another, larger office space owned by the landlord without penalty? Do you have any rights to rent additional space if your business grows more rapidly than anticipated?
- Is there a cleaning deposit for preparing the space for the next tenant when you vacate the premises and is this fee returned if you leave the premises in the same condition as upon delivery?
- Identify verbiage defining how much parking may be used by the tenant and what, if any, number of spaces can be marked as reserved.
- Review all references to use of common space. You should have the right to enter and egress at any time of day or night and access to all common spaces unless specific restrictions are contained in the lease. Also, watch out for clauses regarding common space upkeep or charges.
- The lease should clearly state what utilities are the responsibility of the tenant as well as what should be paid by the landlord. The same goes for charges for maintenance and repairs for any problems not the result of misuse or neglect on the part of the tenant.
- Is there are space in the lease or reference to an addendum where notes regarding the condition of the property at delivery may be noted.
- Is there any defined allowance for tenant improvements?
- What rights to signage are included in the office space lease?
- Does the lease provide for delivery of a punch list after tenant improvements are accomplished?
Some suggestions to help you become a little more of a lease-expert
Length of Lease and Renewal Options:
The initial office lease period should give you enough time to settle in and determine how this location works for your business but not so long that you must pay a stiff penalty if you decide to move on after two or three years. Try to negotiate a shorter-term lease with a renewal options. Keep in mind that your company’s needs may change, you might get sucked into an office space lease that is too big or small, or with a rent that is above-market if demand for space later drops.
Watch out for the clause that establishes the amount or percentage at which rent can go up and the specific periods at which this change can occur. Rent should not increase more than annually and should have a reasonable cap set on it so that the cost of leasing the office space does not become outrageous in a short period of time. Usually, landlords refer the annual increases on the percentage increases in Consumer Price Index or CPI, try to arrange for a CPI rent increase that does not set in for at least the first two years of the term. Then, you can try to have the cap on the amount of each year’s increase.
Be sure you and your office lease broker understand exactly what costs can be passed long to you or what percentage of those costs can be passed along. Examples can include property tax increases, specific repair costs not caused by your occupancy and the increasing cost of services to the building. Your rent increase should cover the costs associated with increased service costs or taxes and only those building repairs caused by you should be passed along to you.
Landlord’s Right to Early Termination
Check what verbiage is used regarding what, if any, rights the landlord has to terminate your office space lease early and what conditions must be met to justify such early termination. If this clause is too liberal in favor of the landlord, you could easily find yourself seeking different office space much sooner than your business plan set forth. This can be expensive and time consuming for your business and can be avoided with the right wording in this area of the lease.
Repairs, replacements and improvements:
Be mindful about the office space lease clause that says that the tenant must restore the property to its original condition. If this was mentioned to the agreement, try to state that it will be returned to in same condition at the beginning of the least EXCLUDING (1) ordinary wear and tear, (2) damage by fire and untoward incidents, loss or casualty not the fault of the tenant, (3) improvements approved by the Landlords.
Payment from Corporate Owners:
Watch out for verbiage indicating payment can be sought from the corporate owners rather than the corporation itself. While some office space owners like to have this protection in the event a business becomes financially insolvent, it does give a landlord too much recourse into the business owners’ private finances to allow entry into the final lease.
One-Sided Lease Provisions:
Be cautious about the landlords that use form lease agreement that can be one-sided. Negotiate on the provisions that are favorable to the landlord. Below are the common types of provisions that one-sided and landlord favorable:
- Passing on to the tenants, without limit, increased operating costs like property taxes, repairs and or insurance expenses.
- Landlords disclaiming responsibility for compliance with environmental laws or government act (e.g., disabilities acts)
- Requiring tenants to pay for tax increases
- Landlords reserving rights to terminate the lease at their convenience.
- Prohibiting subletting and assignments.
These are only a few of the clauses that an office space renter should be on the alert for. Turn to your office space broker for the best possible advice on all areas of the lease and lease negotiation process.
There are dozens of additional points that will stand out in the lease. Some of them may be points you do not understand. Make sure to highlight these for investigation. Another verbiage may better meet your needs. Highlight each portion of the lease that either is unclear, misleading or requires negotiation. These are items that you will need to cover with the help of your leasing team, especially your tenant rep.
When negotiating an office space lease or rental, you will find that the devil is hiding in the details and these can cost you lots of money over the life of the lease. Turn to your office lease broker, tenant represetnative, for experienced advice regarding how to negotiate out these demons before signing an office space lease. An old idiom says “God is in the details” which means that attention paid to small things has big rewards. In this case, your goal is to turn those devilish little hidden clauses into the best possible agreement with the landlord for your office space so that everyone can live with the lease for the life of the lease.
We are here to help. It is what we do every day. If you want an expert to help you get the right space with the best possible terms, contact us. We’d be happy to help