Commercial office space is normally leased for terms of 5, 10, 15 years, and sometimes more. So, it’s important for business owners to understand the terms and conditions—and the potentially hidden costs and restrictions—of the lease before signing on the dotted line, and keep them in mind when looking for space.
In this article we discuss the different types of office leases, the main elements of a commercial office lease, and six things to watch out for when negotiating an office lease.
Types of Leases
There are three main types of commercial office leases that every business should know before signing:
Full-Service or Gross
With a full-service lease, the tenant pays a fixed amount every month and the landlord pays all bills, such as utilities, building maintenance, taxes, insurance, and common area expenses. Coworking space is an example of a full-service lease.
When changes are made to gross lease it becomes “modified”. Tenants who have a modified gross lease pay some items directly, such as utilities or janitorial, in addition to a fixed monthly amount. In other cases, the landlord may bill the tenant separately for these extra services.
There are three types of net leases: single, double, and triple.
Tenants with a net lease pay a fixed amount each month as the base rent. Then, depending on the type of net lease, there are extra monthly fees for the tenant’s pro rata share of property tax, building insurance, and common area maintenance.
- Single net: base rent + property taxes
- Double net: base rent + property taxes + building insurance
- Triple net (NNN): base rent + property taxes + building insurance + common area maintenance
With a net lease, tenants are also responsible for paying their own utilities for the space they lease.
Elements of a Commercial Office Lease
These are the main elements found in most commercial office leases. However, tenants should always ask for clarification if they’re not sure what a certain lease clause means:
- Lease term: the specific number of months, with a beginning date and an ending date.
- Base rent: expressed as price per square foot or a fixed monthly fee.
- Escalations: allow the landlord to incrementally increase the base rent, usually annually and as a percentage of the base rent.
- Common area expense: also known common area maintenance (CAM), this is the tenant’s share for shared areas such as parking, lobby, mail room, and public bathrooms.
- Rent abatement: known as “free rent”, an abatement is an incentive landlords use to get the tenant to rent space.
- Tenant improvements: or TIs, is an allowance paid by the landlord for the tenant to build-out and improve the office space being leased.
- ADA compliance: older office buildings may require the landlord or tenant to make improvements to the space to meet the requirements of the Americans With Disabilities Act (ADA).
- Sublease and termination clauses: allow the tenant to re-lease some or all of the space, and to terminate the lease early if proper notice is given.
- Renewal or extension clause: give the tenant the first right to renew the lease for another term without having to renegotiate the entire lease.
- Expansion and relocation clauses: give the tenant the option to expand if additional space in the office building becomes available, while a relocation clause lets the landlord move the tenant to a different office space at the landlord’s expense.
Six Tips for Negotiating an Office Lease
Office leases can also be different from one another, even for tenants in the same building. That’s because the terms and conditions are almost always negotiable.
Here are six of the biggest items to watch out for when negotiating an office lease:
- The landlord’s right to pass through unlimited CAM expenses instead of having a cap on them.
- Some states charge landlords a transfer tax if the building is sold, which may cause the tenant’s pro rata share of property tax to unexpectedly increase.
- The landlord’s right to terminate the lease early for any reason.
- The limitations or prohibition for subleasing all or part of the office space.
- Asking a tenant for personal guarantees.
- Require the tenant to return the space to it’s original condition by removing all of the TIs that were done to move in.
Important Things to Remember About of Office Leases
- Three main types of office leases are gross, modified gross, and net leases.
- Net office leases can be single, double, or triple net and pass through some or all of the building expense to the tenant.
- Common elements of an office lease include starting and ending date, base rent escalations, CAM, renewal and relocation clauses.
- Items to watch out for when negotiating a lease include unlimited expense pass-throughs from the landlord to tenant and restrictions on subletting.
- Commercial office lease terms and conditions are almost always negotiable.