If you’re considering leasing office space—first of all: congratulations. Your business is growing and you’re ready to figure out the next step in terms of space and work environment. Secondly: be aware of the complexities of commercial leases and what they can mean for you. It’s critical to understand some basic aspects of commercial leases and what your options are before you enter into any agreement.
We covered the key terms you need to know before starting your search for commercial real estate awhile back. Here, we will go into the 4 main components of a lease. Keep in mind that many aspects of these agreements are strictly fixed, while others can be negotiated. There’s a wide degree of variation as to your responsibilities as the tenant, many of which have a big impact on your bottom line.
Basic Lease Information
This part of the lease is probably what you’re most familiar with, even if you haven’t leased commercial space before. This section specifies the Parties to the Lease, which will include the Lessor and Lessee, and may also include Guarantor, Assignor, Assignee, Sublessor and Sublessee.
This section also specifies the Premises of the Lease. Here you’ll find details about the location and what specific portion of the property is included in the agreement. In identifying square footage, commercial leases differentiate between actual square footage of the property and rentable square footage.
Basic information also typically includes the Term Dates of the Lease, and these may be presented as commencement date, rent commencement date, move-in date, or in terms of duration and expiration. This section will discuss the use of a Commencement Letter, which is often required in order to clarify these dates. In many cases, time frames can be related to completion of agreed-upon improvements to the property.
This section can be quite complex in a commercial lease. Rents rarely stay fixed for the duration of the lease, and they include other fees. In addition to base rent, tenants are usually required to pay some or all of the expenses associated with their premises, including operating expenses, real estate taxes, insurance, utilities or common area maintenance (CAM). These expenses usually fall within the definition of “Additional Rent” and they are also known as “Recoveries”.
Commercial rent may be paid annually or monthly, and may be paid per square foot. Rents are sometimes abated for specified periods, often while improvements and build-out are being completed. Rents for retail space can be based on a percentage of income, and the lease may make a distinction between Net Lease and Gross Lease.
This is the right of either the tenant or the landlord to alter the size and/or location of the Leased Premises or the time remaining in the Lease Term.
Options are granted via lease documentation and come in different types:
– Rights of First Offer
– Rights of First Refusal
These are sections dealing with standard components (Parties Premises, Term) as well as those that may be unique to the specific agreement. They can address such issues as:
– Breaking the Lease
– Attorney’s Fees
Heavy, right? A commercial lease can seem like a lot to commit to if you’re just getting your ship afloat, especially considering that terms typically range between 3 and 10 years. Luckily there are options available to provide a bridge between working from Starbucks and signing on for a long term agreement. Coworking and Office sharing give you the ability to create a professional work location without the expense and commitment of a commercial lease. It gives you some time to get established and familiar with your needs and how to meet them -good tools to have in negotiating your first commercial lease.
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