Updated: January 23, 2019
Searching for office space for rent and commercial real estate can be as fun as cuddling with a rattlesnake. It finally all comes to an end when you’ve found your dream space and the landlord hands you a lease, right?
Sure…you think it’s over, but then you think to yourself, “how do you know if I’m getting screwed here or if I’m getting a good deal?”
Great question!
A good rule of thumb is to always consult a real estate attorney before signing an office space lease or commercial real estate agreement to make sure you’re covered from a legal standpoint. Not every business owner can afford to hire an attorney, so make sure to do as much research online before signing the office lease. On the other hand, to make sure you’re getting a good “deal” — you should connect with a local commercial real estate market professional like a Tenant Rep Broker or one of our free Digsy Experts.
Disclaimer: Please keep in mind that per Real Estate Law, we cannot provide legal or tax advice. We can provide you with some guidelines on business points to negotiate or look out for when a landlord hands you a lease. You should always seek legal counsel when it comes to legal documents in commercial real estate.
In my 12 years helping 100s of businesses sign commercial real estate lease agreements, here are some tips on things to look out for when signing a commercial real estate lease. Not all of the section headings below (ie. “Commencement Date”) will have the same naming convention, but as you read through, you should be able to identify similar headings in your lease.
Let’s get started:
1) Commencement Date
This is the date when you start paying rent on your new space. Make sure that the clock only starts ticking only when you move in. Make sure that the landlord has the correct date of when you plan to move in and start paying rent.
2) Delay in Possession / Delivery
This relates to the commencement date and when you actually get possession of the space you leased. If your landlord is performing construction of Tenant Improvements (TI’s) in the space or waiting for a tenant to move out before being able to deliver the space to you, make sure that the lease states the maximum amount of time you can wait until it is delivered. If the maximum time goes beyond the amount of time you can wait for the space to be delivered, make sure that you are able to cancel the lease so you can find adequate space suiting your timing needs. We’ve seen too many tenants sign a lease and not get the space in time, then being hung out to dry without the ability to cancel the lease to find new space for their business
3) Rent
Make sure that the correct price of the rent is outlined in this section. Keep in mind that Landlords are human and everyone makes mistakes. So it’s up to you to make sure they have the correct pricing listed (based on the rental rate you agreed to and the square footage of the space you will be leasing).
4) Base Year
This one is an interesting one. If you’re leasing office space, a base year has to do with the operating expenses of the building. If you’re renting the space on a Full Service Gross (FSG) basis, that usually means that everything from the base rent to the operating expenses is included. However, the “Base Year” is the limit the Landlord will pay for operating expenses. If expenses exceed the base year, you will be responsible for your pro-rated share of the excess expenses based on the percentage of the building your company occupies. The limit is usually determined by the total operating expenses incurred by the building at the end of the calendar year stated in the Base Year section of the lease. For example, lets say the operating expenses at the end of 2015 were $2 million, and the end of 2016 the operating expenses were up to $2.5 million, and you occupy 2% of the building — well then you will be responsible for paying 2% of the $500,000 operating expense increase. Base Years are common in Office Space leases. Suggestion: If you are signing a lease late in the year (say in the month of August), a good idea is to ask the landlord to push the Base Year listed on the lease to 2016. That way you can get a full year and some months of occupancy in the building before your base year expense limit is determined. You can also lookup the meaning of Base Year or any other terms here.
5) Guarantor
Unless you’ve agreed to personally guaranty the lease, make sure that this section is stricken out. Sometime landlords will forget you didn’t agree to this and if your name is included in here and your company be unable to pay the rent, then the landlord will come after the rental payments from you personally. So make sure they have the correct information here.
6) Condition of Premises
If you are leasing a space that needs clean-up or any kind of Tenant Improvement (TI) work to be done, make sure that this section outlines exactly what work the landlord will need to complete prior to you taking possession of the building. The last thing you want is to be under the impression that some work will be done by the landlord and the lease states that you are taking the building “As-Is”. Make sure to cross your T’s and dot your I’s on this one.
7) Warranty
If you’re taking over an existing building, make sure that the warranty section outlines how long the landlord will make sure things like the HVAC (air conditioning / heating), plumbing and all machinery work for. Usually you’ll see anywhere between 90 to 120 days. Just make sure that whatever it is, you are comfortable with it.
8) Property Taxes
Property taxes get computed into the operating expenses of the lease. If the property taxes go up, the amount operating expenses will increase. One thing we’ve seen some tenants do is ask the landlord to limit the amount of property tax expense that gets passed through to them if the property taxes go up. Some tenants have even gotten away with asking the landlord to not increase their expenses at all. You should always ask the landlord if they can help you make sure that your expenses don’t go up. You’d be surprised how some landlords are okay with this (but not all). If they can’t fully protect you from these operating expense increases, ask for them to cap them at a certain amount.
9) Late Fees
In California we’ve seen late fees as low as 10%. However, anything that start climbing above that could be considered onerous depending on the State of residence. You can always ask the landlord to keep your late fees low. However, keep in mind that negotiating late fees could send the wrong signal to the landlord. The landlord could interpret that you are planning to be late on your rent, which doesn’t set the tenant and landlord relationship going in the right direction. So proceed with caution.
10) Security Deposits
Many leases we’ve seen say that you will get your security deposit back within 90 days. However, we’ve seen tenants negotiate this period as soon as 30 days. The faster you get your money back, the easier your life will be. The last thing you wanna do is keep tabs on with the landlord for 3 months after you’ve vacated the property trying to get your money back. It is extremely helpful and beneficial if you can shorten the amount of time for you to get your security deposit money back.
11) Use
This part of the lease states what your business can use the property for. If you have a unique use or property requirements (ie. dental office) make sure the lease states that you can use the space for your specific use. You will not want to sign and commit to a lease where you cannot run your business the way you intended.
12) Insurance Premiums
In California we usually see these insurance requirements to be $1m per occurrence and $2m in aggregate. If you see more than this, try asking the landlord to lower them. That way you can save money on your insurance bill.
13) Relocation / Substitution of Premises
This one can be a really problematic one for your business. Most likely you already spent a lot of time and energy trying to find the perfect space for your business, and this section can bring everything crashing down. This section of the lease gives the landlord the ability to move you out of your space and relocate you to another space in the building. Many leases state that the landlord must relocate you to comparable space, but let’s face it, if you have a good view and great floor plan, what are the chances that you’ll get the same type of space? Not many. So if you can, get the landlord to strike out this section. If you’re a small tenant, you won’t have much leverage to achieve this, but it is always a good thing to at least ask or try. Also, if you have to move to another part of the building, you will need new business cards, stationary and maybe even re-wire the suite for your telephones, internet and networking equipment. It is always good to make sure that these costs will be taken care of by the landlord if they require you to move to another part of the building.
14) Assignment & Subletting
Business is a risky endeavor and sometimes things don’t go the way you plan. If you find yourself in a predicament and need to sublease your space to another business, make sure that your lease states that you can sublease or assign the lease to another entity. The key thing is to make sure that this section says that the landlord cannot unreasonably disagree to let you sublease the space. If the prospective subtenant has good financials and can pay the rent, then the landlord should allow you to let them sublease from you. Also, make sure that the lease states that the landlord must give you a “yes” or “no” response when requesting a lease anywhere within 30 to 60 days from your request. You don’t want to be waiting indefinitely for an answer. This could cause your prospective subtenant to leave and go rent a space elsewhere.
15) Holdover / Holding Over
This is one of those sections that is designed to discourage tenants from staying in a space passed their lease expiration — that’s why it’s called, Holding Over. Landlords have a lot of logistics issues when trying to find a tenant to rent a space that you will be vacating. Therefore, landlords want to make sure that they don’t lose any tenants if a tenant doesn’t move out of the space in time. If you end up holding over in your space, landlords could charge you any amount they want and it’s usually a pretty hefty fine. Most commercial real estate leases we’ve seen in California say that you will be charged anywhere from 150% to 200% of your rent as a penalty if you hold over. This amount can be negotiated, but keep in mind that landlords will reduce it only to the amount that they feel will motivate you to move out quickly. A good rule of thumb is to ask the landlord to lower it to 125%.
16) Signage
Make sure that any signage items you negotiated with the landlord are stated in this section. If the landlord agreed to pay for your lobby directory signage and your suite entry sign make sure it is clearly stated in here. Also, if they offered you any exterior signage — whether it is monument signage, building top signage or building eyebrow signage, you will want to make sure it is listed here. Signage can be great for a business, so make sure you protect your rights to signage in the lease.
17) Operating Expenses / Utilities
We’ve talked about operating expenses earlier. This section further states which expenses are the responsibility of the tenant (you) and which are the responsibility of the landlord. If you’ve signed a Full Service Gross (FSG) lease that says the landlord will pay for Electricity, Janitorial and other Utilities — make sure they are clearly outlined here. Believe it or not, there have been some tenants that believe the landlord pay for their utilities only to find out they were not listed on the office lease and they have to pay for the utilities themselves. This can an expensively rude awakening.
Thoughts
At Digsy, our free commercial real estate listings marketplace also provides free assistance from local commercial real estate experts who also help negotiate all of the points listed above so they you are protected. Sometimes, they negotiate even more items than the ones listed above depending on the unique requirements of a business owner to make sure their business operates smoothly once they’ve moved in.
Many business owners are busy and don’t have time to find Office, Warehouse or Retail space, even more so, spend time negotiating business points on a lease. If you’re one of them, Digsy can help you not only save time finding the perfect space of your business, but also negotiating with the landlord on your behalf, so you can focus on growing your business. You can try Digsy — free of charge here.
If you have any questions, please leave them for us in the comments section and we or one of our commercial real estate experts will reply promptly.
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January 3, 2017 at 10:40 am
I appreciate the information on things to avoid in an office lease agreement. I agree that one of the places that you really want to save money is through the insurance part of the agreement, I would imagine that insurance can be a huge expense if not taken care of properly. My cousin is looking into leasing a smaller commercial office, I will be sure to share this information with him. http://www.hi-reit.com/lease-with-hartman/dallas/