The Different Types Of Office Leases

Understanding the terms and conditions of a commercial office lease is crucial for business owners, as leases typically run for 5, 10, 15 years, or more. Before signing, it's essential to be aware of potential hidden costs and restrictions. Let's explore the types of office leases, key lease elements, and six negotiation tips.

The Different Types Of Office Leases

Types of Leases

Full-Service or Gross Lease:

• Tenant pays a fixed monthly amount.

• Landlord covers all bills, including utilities, maintenance, taxes, insurance, and common area expenses.

Modified Gross Lease:

• A variation of the gross lease.

• Tenants pay some items directly (e.g., utilities) in addition to a fixed monthly amount.

Net Leases (Single, Double, Triple Net):

• Tenant pays base rent plus extra fees (property tax, building insurance, common area maintenance).

• Responsibilities may include paying utilities.

Elements of a Commercial Office Lease

• Lease Term:

  • Specifies the duration with a start and end date.

• Base Rent:

  • Expressed per square foot or as a fixed monthly fee.

• Escalations:

  • Allows incremental annual increases as a percentage of the base rent.

• Common Area Expense (CAM):

  • Tenant's share for shared areas like parking, lobby, and bathrooms.

• Rent Abatement:

  • "Free rent" incentive used by landlords.

• Tenant Improvements (TIs):

  • Allowance for the tenant to improve the leased space.

• ADA Compliance:

  • Ensures compliance with the Americans With Disabilities Act.

• Sublease and Termination Clauses:

  • Allows subleasing or early termination with proper notice.

• Renewal or Extension Clause:

  • Gives the tenant the first right to renew the lease.

• Expansion and Relocation Clauses:

  • Options for tenant expansion or relocation.

Six Tips for Negotiating an Office Lease

• Limiting CAM Expenses:

  • Negotiate a cap on common area maintenance expenses.

• Transfer Tax Awareness:

  • Be aware of potential increases in property tax due to building sales.

• Landlord's Early Termination Right:

  • Understand and negotiate limitations on the landlord's right to terminate early.

• Subleasing Restrictions:

  • Be cautious of limitations or prohibitions on subleasing.

• Personal Guarantees:

  • Be mindful of requests for personal guarantees from tenants.

• Restoring Original Condition:

  • Understand requirements to return the space to its original condition, removing tenant improvements.

Key Reminders:

• Three main types of office leases: gross, modified gross, and net.

• Net leases can be single, double, or triple net, passing some building expenses to the tenant.

• Common lease elements include dates, base rent, escalations, CAM, and renewal clauses.

• Negotiate terms, as they are almost always flexible.

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