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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.
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
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.
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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.
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