Commercial office leases aren’t set in stone. Yet it’s surprising how many business tenants accept a lease the landlord gives them as-is. In fact, many people don’t even bother to read and understand – let alone negotiate the office lease – before signing on the dotted line.
Not negotiating an office lease can end up being a costly mistake. The monthly expense to rent office space is often the largest fixed cost that a business will incur month after month.
Unlike residential leases, the terms and conditions of a commercial lease can always be negotiated. Whether a business is renting coworking office space, traditional office suites, or anything in between, here are 10 profitable tips for negotiating an office lease.
1. Understand what the business really needs
Office space is divided into three categories, or classes:
- Class A office space is brand new with state-of-the-art features in prime business locations;
- Class B office space offers at-market rents in above average buildings;
- Class C space is older and still functional. Because it’s usually dated, and landlords are more motivated to rent, Class C office space is great for the bargain hunting office tenant.
Not every business needs to rent in a Class A building. The task of looking for available space to lease is much easier when a business understands what type of office space it really needs and the pros and cons of each.
2. Know the market and available choices
Commercial real estate owners have big egos and will do their best to convince a prospective tenant that their office space is the only game in town.
But the reality is that tenants always have choices.
By knowing the office market and the available options a business owner will find it much easier to separate fact from fiction and be in a better position for negotiating an office lease with the landlord.
3. Research the building, talk to the tenants, and investigate the owner
Some things to look into include:
- Asking Rents Are the asking rents at-market, below, or above, compared to similar nearby building classes?
- Wear and Tear Are there signs of neglect or deferred maintenance such as overflowing waste receptacles, dirty common areas, or unclean windows?
- Existing Tenants How long have the current tenants been renting, and will they stay where they are when the time comes for renewing their lease?
- Ownership Does the building owner own other office buildings in the market and what condition are they in?
- Problem Property Owner Are there any lawsuits or recorded judgments against the building owner or property management company?
4. Make a positive first impression
Office landlords look for good quality tenants that will bring value to their property.
A business that can convince a landlord that it is the best tenant for the office space – even if there are other vacancies in the building – stands a much better chance of getting the terms and conditions it wants when negotiating an office lease.
5. Know the best lease concessions for the business
When tenants think of lease concessions, the first that comes to mind is ‘free’ rent. While it’s always nice to get something for free, sometimes there are better options.
Other types of office lease concessions can include:
- Tenant improvements paid for by the landlord;
- Monthly rental rates that vary based on the seasonality of a business;
- Deferred rent if the business closes for vacation or holidays.
6. Understand the three types of office leases
Office leases comes in three different forms:
- Gross office leases where the monthly rent includes everything;
- Net office leases where the tenant pays for utilities, common area expenses, or load factors;
- Modified gross leases where the tenant – in addition to the monthly base rent – pays for some things but not others, depending on what’s negotiated.
Some office leases can be more expensive than others. Some of the costs in a net or modified gross office lease that can be negotiated include:
- Common area maintenance, pass throughs, and annual increases;
- Competitor clauses to prevent a business’s biggest competition from moving in next door;
- Options to renew an office lease with terms and conditions specified in advance.
7. Always get something in return
If a tenant makes a concession to the landlord, the tenant should always get something in return.
Negotiating the terms and conditions of an office lease isn’t only about money. Other items to negotiate when leasing office space are:
- Possession date;
- Personal liability;
- Common area expense caps;
- Free parking spaces and passes;
- Carpet cleaning paid for each year by the landlord.
8. Use a lawyer
The landlord had its lawyer draw up the office lease being presented, so why shouldn’t a business have its own attorney review the lease? An attorney specializing in contract law can point out items in the lease that the tenant may not be aware of.
9. Security deposit refund
Security deposits are collected by the landlord to help ensure the tenant’s adherence to all lease terms through the end of the lease. But since many office leases are for five or ten years is it really reasonable that a landlord keep the deposit for such a long period of time?
Tenants can negotiate in advance to have part of the security deposit returned if the rent has been consistently paid in full and on time.
10. Negotiate office lease options
Businesses can expand, contract, get sold, or sometimes go out of business. That’s why negotiating options into an office lease is always a good strategy.
Five common office lease options are:
- Early termination of the lease without penalty;
- Option to expand into available space;
- Renewal option of the office lease at previously agreed to terms;
- Option to sublease existing office space;
- Assumption of the existing lease by a new owner of the business.