When you're looking for your next office lease, realize that your landlord is a savvy professional. After all, if he wasn't, he probably wouldn't own an office building. With this in mind, watch out for certain lease terms that might seem reasonable but that are, instead, highly advantageous to him. If you see any of these six provisions, talk with your broker and negotiate carefully.
1. Unreasonable Lease Lengths
The concept of a long lease might seem pretty fair when you first think of it. After all, if you sign a long lease, you won't have to worry about moving and your landlord might even cut your rent or give you a few extra freebies. However, that long lease comes at a high hidden cost if you end up needing to move. Don't you hope that your business will be much bigger in seven years than it is today? If so, are you sure that a ten year lease is a good idea. Shorter leases cost you a little bit more but give you a great deal more flexibility.
2. Full Service Leases with Expense Stops
A full service office lease with expense stops is one of those seemingly favorable structures that we warned you about. Your landlord will explain it as a deal where you make one payment that covers everything but that, if expenses go up, you just have to pay your fair share of the increase. This is true.
However, if expenses go down, guess who pockets the savings. The landlord. And with volatile energy prices and new high-efficiency building systems lowering occupancy costs, those savings could be coming. You would do better to pay a lower triple net rent and be exposed to expense increases and decreases.
3. Inflexible Assignment and Subletting Clauses
Once your landlord decides to lease to you, they probably won't want to let you go. However, one of the most important tenant protections in any office lease is the ability to assign or sublet space. That lets you find someone else to take it over and pay some or all of your rent for you if you no longer need it. Look carefully to ensure that your agreement gives you relatively generous rights to find a replacement tenant if required.
4. Restrictive Office Lease Rules
Look carefully at the building rules that are usually attached to your proposed office lease. Some requirements -- like not bringing dangerous chemicals into the office -- are reasonable. Others, like building hours that leave you without air conditioning on weekends in summer or vendor restrictions that end up costing you additional money, aren't.
5. FMV Options
While renewal options are always nice to have, they aren't all created equally. An option that is set to reset at fair market value or, at times, 95 percent of FMV, seems fair but actually leaves you with more risk than you might expect. Fixed options (like those that go up a preset amount) limit your exposure to market rents skyrocketing. Plus, if rents drop, you can renew without using the option. A fair market value option could leave you with no choice but to pay much higher rents.
6. Full Buildings and Conflicting Expansion Rights
An office lease in a full building is a crap shoot. If your space is perfect today, but you outgrow it, you could end up with no expansion space. Even worse, you could find yourself squeezed by other tenants that already have a pre-negotiated right to occupy vacant spaces on your floor. Ensure that you have rights to adjacent spaces -- and that no one else does.
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