Most who own a company, know leasing an office space can be a tedious process with lots of moving parts. From the initial building tours to the final stages of moving in, there are many steps in between that need close attention. One of these steps, is the negotiation of the Lease terms and all the provisions within.
In my previous life, as an in house Landlord rep broker, I negotiated hundreds of leases on behalf of the building ownerships. More often than not, the Leases were skewed in favor of the Landlord and the Tenants were unaware how many of the deal points in the Lease could or would affect them down the road. Below are several areas that Tenants need to be aware of and should negotiate prior to signing a new Lease.
Early Possession - Push for at least 30 days here. The standard amount is two weeks, but some landlords will allow longer so long as you don’t interfere with construction. The reality is, cabling for phone and internet can take longer than anticipated and getting the local network providers to hook up service can be a two week minimum. If possible, you don’t want to be paying for the space while you are still getting set up for business.
Calculation of Operating Expenses – Make sure the building is grossed up to at least 95% occupancy for the factoring of the Operating Expenses on your lease. If you don’t do this, and there is a large vacancy in the project, you as a tenant could potentially be burdened with an above standard percentage of the buildings expenses.
Free Rent – Markets vary nationally, but it’s common in most major cities to see landlords offering months of free rent depending on the length of Lease term. To help a Landlord bite off on this proposed condition, a Tenant should offer to extend the term of the Lease by the number of months given in free rent up front. (ie: a 36 month Lease with 3 months of free rent becomes a 39 month Lease). That way the Landlord makes up these months on the back end but you benefit from reduced cost as you get your new operations off the ground.
Relocation – Most Landlord Leases have a provision where the Landlord is allowed to relocate your company within the building or sometimes within the owner’s portfolio, so long as they pay for a portion of the moving costs. This can prove to be extremely disruptive and costly to your operation – especially if your space has any truly “unique” qualities in your mind. Strike this provision in the Lease, at least for the initial term. If the Landlord stands firm and will not agree to strike, increase the penalty and Landlord costs such that they are severely discouraged from taking such action.
Right to Hold Over – Upon the expiration of your Lease term, you may find your company in a situation where you need to hold over for a little more time. Maybe your new space is not ready, or a project is in the works and a move would be too disruptive at this point in time. Whatever the reason, the hold over provision in your Lease will dictate what you have to pay to stay past your expiration date. Most Leases will state that a hold over without Landlord’s consent will charge the Tenant 125% to 150% of the base rental. Negotiate lowering this amount to something more palatable, like 105% of base rent for 60 days from lease expiration. Thereafter, the Landlord could increase the percentage to a heavier amount, but by this time your company should have accomplished its goal with regard to the move.
The items listed above, are just a few areas in the Lease that need your attention. There are many more terms that need to be negotiated on your behalf and every lease in commercial real estate will present unique challenges depending on the circumstances of the space, the building and your specific needs.
A combination of an experienced real estate team and attorney are advised to help in this undertaking. As part of our service at TenantBase we help guide you through the business issues of the lease to support your operations and provide flexibility.
Not only are these provisions important on your initial lease they also need to be taken into consideration on an existing lease prior to renewal.
If you have an existing lease you have a question or concern with - send it over for a free lease review to firstname.lastname@example.org. Our team will take review in the context of the current market, highlight key dates and provisions, and can discuss any needed action.