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If you’re running a brick-and-mortar business, your office lease cost is a major expense. If you ask business owners, many of them will tell you that rent is their biggest expense, right after salaries.
However, most business owners don’t take time to understand and negotiate their commercial lease. They simply sign what the landlord gives them, instead of asking for more favorable terms.
Before signing a lease, remember that your landlord might have an advantage.
Maybe the office location is excellent, but the lease contract lasts five or ten years. This means you have only one chance every 5-10 years to review terms.
In this article, you’ll learn more about office space leases and contract negotiation. Let’s take a look!
Office Lease Defined
An office lease is a legally binding contract made between a tenant (lessee) and a landlord (lessor). These agreements may be negotiated and signed by agents or representatives of either party.
The office lease agreement grants a tenant specific rights in relation to the building. It also outlines the duties of both landlord and tenant regarding the occupation of the space.
Most office space leases stretch for 5-10 years, but some landlords prefer to set yearly renewals for leases. It’s possible to have a break clause at the midpoint of the lease duration. This is only possible if the lease agreement states it as part of the terms.
Types of Office Leases
The rights and responsibilities of tenants and landlords in office leases are determined by the type of lease they agree to. Different types of leases offer different benefits, and they may be suited for different businesses. You should consider your business type, location, operations, and other needs to decide which type best suits your purposes.
Type 1: Single Net Lease
This is the simplest commercial lease type, also called the ‘N’ lease. Here, the tenant pays base rent and takes care of other expenses related to the property.
Some of these expenses include:
- Insurance and taxes
- Property and building maintenance
- Utilities
Net leases have varying degrees of responsibility for tenants. Most commercial leases do not apply the single net lease structure.
Type 2: Double Net Lease
In the Double Net or ‘NN’ lease, the tenant pays the base rent, building insurance, and associated property taxes. The landlord pays for maintenance, utilities, and other related costs. NN leases are often used in multi-tenant settings.
The double net lease places the responsibility of structural maintenance on the landlord. Building insurance and property taxes are prorated to all tenants according to their square footage.
Type 3: Triple Net Lease
The triple net or ‘NNN’ lease system is popular among commercial landlords. In this agreement, the tenant pays the base rent, property taxes, utilities, insurance, and maintenance.
The tenant also pays for standard property repairs related to the commercial space. The base rent of NNN office space leases is usually lower because the tenant pays most of the other costs.
Type 4: Bondable Net Lease
This is a variant of the NNN lease. It places ‘all imaginable risks’ related to the property on the tenant. Suppose a fire occurs because of an electrical fault in the building. The tenant is responsible for the rebuilding effort and would have to keep paying rent until the building is renovated/repaired/rebuilt.
It’s impossible to terminate bondable net leases for any reason before their end date.
Image via Pexels by Pixabay
Type 5: Full Service Gross Leases
In this type of commercial lease, the tenant pays a fixed amount of rent every month/year. The landlord then covers all other operational and maintenance expenses, such as insurance, utilities, property management, and taxes.
Type 6: Modified Gross Lease
This type of lease is similar to the full-service gross lease, but the tenant is partially responsible for any increments in the landlord’s operating expenses. Therefore, if property taxes or utilities increase beyond the costs written in the agreement, the tenant pays for a portion of the increase.
Type 7: Percentage Lease
In a percentage lease, the tenant must pay a base rent plus a percentage of the business's gross profits. This commercial lease is commonly used by retailers and restaurants. Both parties agree to the percentage before signing the lease.
Percentage leases are calculated using a ‘natural breakpoint.’ The natural breakpoint is the base rent divided by an agreed percentage. The percentage of rent payable is found by calculating the annual base rent by the agreed percentage.
Key Terms of Office Leases
The length and terms of office spaces leases vary from building to building. Some have month-to-month leases, while others can have lease terms exceeding 20 or 30 years. Some common terms include:
- Fixed end dates – the lease dictates the date when the tenancy agreement ends. The lease terms remain during the lease period, and neither party can give the other notice before the end date.
- Automatic renewal – the agreement is set to automatically renew after a given period, e.g., yearly. The terms of the lease remain unless either party gives notice or asks to renegotiate the terms
- Lease options – the tenant agrees to occupy a building for a fixed period. However, they have the option to renew the lease for another fixed period after expiry. The landlord may add a rent escalator to increase the rent for the second lease period
Negotiating an Office Lease
If you are looking for new office space, it's critical to take time and master office lease contract negotiation. Lease agreements have many terms and clauses, but it's possible to find a middle ground that benefits both parties. Real estate lawyers can also help to interpret various clauses and negotiate for better terms.
The following are the steps to follow:
Step 1 : Learn about leases – read some lease agreements to understand the terms. The best way is to look at your old lease agreements to understand the terms, expenses, rent paid, and other details.
Step 2 : Research the market – find out the base rents in the area, rent increase norms, types of leases, lease durations, and common landlord concessions
Step 3: Outline your needs – decide what you’d like to ask for based on your research above. Remember, you should ask for a little more to settle on what you want when negotiating.
Step 4: Write a Letter of intent – the LOI isn’t legally binding, but it’s an important initial step in moving your contract negotiation forward. You present the LOI to the landlord and their team to begin negotiations.
Step 5: Negotiate – your team and the landlord's will go back and forth until you reach a middle ground.
Step 6: Sign the Lease – the real estate lawyers will go back and forth to settle the legal terms of the agreement. Once agreed, both parties will sign the lease.
Getting Help with Your Office Lease
It’s vital to consult reputable property lawyers when considering or negotiating your office lease contract. They’re complex legal documents, and a commercial lawyer can help you understand and negotiate the best terms for your business.
Do you have any questions on commercial leases and need to consult an expert? Post a project today on ContractsCounsel and get bids from reputable real estate and commercial lawyers.
Meet some of our Office Lease Lawyers
Diane D.
I am the Founder and Managing Attorney of DMD Law, PA. and have 20 years' experience. I also am a business-oriented, proactive, and problem-solving corporate lawyer with in-house experience. My firm's practice focuses on ensuring the legalities of commercial transactions and contracts. I am adept at reviewing, drafting, negotiating and generally overseeing policies, procedures, handbooks, corporate documents, and contracts. I have a proven track record of leading domestic and international companies by ensuring they are functioning in complete compliance with local, federal and international law. The firm's goal is to simplify the law and provide clients with the confidence and information necessary to make their decisions.
Amber M.
Amber Masters has over 9 years of experience as a contracts attorney, helping small businesses with an array of agreements, such as purchase agreements, master service agreements, and employment contracts. She has an extensive background in employment agreements for dentists, doctors, and other health care professionals. She is a highly rated and acclaimed estate planning attorney and personal finance expert, who has been featured on CNBC, NBC, and Yahoo Finance. She successfully launched and sold a fintech startup and can empathize with the issues small and mid-size businesses face. Licensed in Oklahoma and Arizona.
Moss S.
Over 30 years of experience practicing commercial real estate and complex business litigation law.
Joshua B.
Josh Bernstein has been serving real estate and corporate transactional clients since 2002. His experience is varied, and he enjoys working on and puzzling out novel and complex corporate and real estate matters. Josh’s experience includes, among other things, the following: representation of public companies in connection with SEC reporting and compliance work (proxies, 10-K’s; 10-Q’s; 8-K’s, etc.); representation of public and private company securities issuances (including private placements, and other similar offerings); assistance in structuring and drafting joint ventures, both for investors and operating partners, and including both real estate and corporate ventures; handling public and private company mergers and acquisitions; and asset sales and dispositions; assisting clients, big and small, with real estate acquisitions, sales and financings; managing large-scale and multi-state real estate portfolio acquisitions, dispositions and financings; complex condominium creation, structuring and governance work, including: commercial condominiums, use of condominiums as a land planning tool, wholesale condominium property acquisitions and dispositions, and rehabilitating failed or faulty condominium legal structures to make ready for sale; development of restrictive covenants and owners’ association documents for master-planned communities; compliance with federal statutes governing real estate sale and development (including, without limitation, the Interstate Land Sales Full Disclosure Act, the Housing for Older Persons Act, and the Americans with Disabilities Act); representation of real estate lenders, for both improved and unimproved property, and including numerous construction financings secured by real estate; assistance with commercial leasing; from both the landlord and tenant side, and including condominium leasing; training residential home and condominium sales staff for compliance with applicable local and federal law; and workouts of all kinds. When he’s not busy lawyering, Josh may be found watching 80’s commercials, flying a single-engine plane, playing poker, or trying to be a good dad.
September 14, 2023
Rachel B.
I am a new attorney who is licensed to practice in Connecticut and Massachusetts. I am waiting for bar admission to North Carolina. I have over 20 year of experience working in both the public and private sectors. I am a fierce advocate for my clients and am committed to delivering solutions for clients with excellence.
September 15, 2023
Christopher X.
Recent law school graduate with an undergraduate degree in biomedical engineering degree passionate about the intersectionality of law and life sciences. Admitted to New York and New Jersey Bar. Ability to add value in a pharmaceutical or biotechnology entity and provide a unique perspective to multiple disciplines.
September 17, 2023
James H.
Attorney James is an experienced Attorney, Federal Law & Tax Specialist, Corporate Counsel, Tax Lawyer and Mediator. Experienced in Contract Drafting, Corporate Formation, Corporate Governance, Federal Administrative Law, Regulatory Compliance, Tax Settlement, Tax Planning, Merger/Acquisition, Business Law, Collection, Insurance Claims, Employment Law, Immigration, Non-Profit Governance Licensed Corporate Counsel in State of Delaware Supreme Court Bar #900646 Attorney: US District Court of the District of Columbia, Washington DC Federal Bar #DE0003 US Bankruptcy Court of The District of Columbia, Washington DC Federal Bar #DE0003 Tax Advisor: IRS Registered Tax lawyer/PTIN, PTIN (over 10 years experience) US Federal Agencies, Boards and Commissions, Federal Administrative Law and Regulatory Compliance Business law services: Administrative Law, Business Law, Collections, Bankruptcy, Corporate, Employment, Regulatory Compliance, Corporate Counsel, Immigration
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