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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
Albert M.
I am a New Jersey licensed attorney and I have been in practice for over nineteen years. My practice mainly consists of representing public entities (municipalities, school boards, etc) and businesses, both small and large. In that capacity, much of work consists of drafting, reviewing and revising contracts.
Jose P.
I am a corporate lawyer with expertise working with small businesses, venture capital and healthcare. Previously, I worked at large law firms, as well as head attorney for companies. I graduated from Harvard College and University of Pennsylvania Law School. I speak 5 languages (Spanish, French, Italian and Russian, plus English), visited over 60 countries, and used to compete in salsa dancing!
Briana C.
Legal services cost too much, and are often of low quality. I have devoted my law practice to providing the best work at the most affordable price—in everything from defending small businesses against patent trolls to advising multinational corporations on regulatory compliance to steering couples through a divorce.
Jo Ann J.
Jo Ann has been practicing for over 20 years, working primarily with high growth companies from inception through exit and all points in between. She is skilled in Mergers & Acquisitions, Contractual Agreements (including founders agreements, voting agreements, licensing agreements, terms of service, privacy policies, stockholder agreements, operating agreements, equity incentive plans, employment agreements, vendor agreements and other commercial agreements), Corporate Governance and Due Diligence.
Don G.
Texas licensed attorney specializing for 22 years in Business and Contract law with a focus on construction law and business operations. My services include General Business Law Advisement; Contract Review and Drafting; Legal Research and Writing; Business Formation; Articles or Instructive Writing; and more. I am able to draft and review contracts, and have experience with, contract law and business formation in any state. For more insight into my skills and experience, please feel free to visit my LinkedIn profile or contact me with any questions.
Meghan P.
I am a licensed attorney and a member of the California Bar. I graduated from the University of Dayton School of Law's Program in Law and Technology. I love IP, tech transfers, licensing, and how the internet and developing technology is changing the legal landscape. I've interned at both corporations and boutique firms, and I've taken extensive specialized classes in intellectual property and technology law.
Charlotte L.
I hold a B.S. in Accounting and a B.A. in Philosophy from Virginia Tech (2009). I received my J.D. from the University of Virginia School of Law in 2012. I am an associate member of the Virginia Bar and an active member of the DC bar. Currently, I am working as a self-employed legal consultant and attorney. Primarily my clients are start-up companies for which I perform various types of legal work, including negotiating and drafting settlement, preparing operating agreements and partnership agreements, assisting in moving companies to incorporate in new states and setting up companies to become registered in a state, assisting with employment matters, drafting non-disclosure agreements, assisting with private placement offerings, and researching issues on intellectual property, local regulations, privacy laws, corporate governance, and many other facets of the law, as the need arises. I have previously practiced as an attorney at a small DC securities law firm and worked at Deloitte Financial Advisory Services LLC. My work experience is dynamic and includes many short-term and long term experience that span across areas such as maintaining my own blog, freelance writing, and dog walking. My diverse background has provided me with a stong skill set that can be easily adapted for new areas of work and indicates my ability to quickly learn for a wide array of clients.
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