Six Things to Know When Negotiating an Office Lease

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Negotiating the terms of a commercial lease can be a lengthy process, but it's a necessary one to ensure that you're treated fairly when it comes to the terms and fine print of the lease. A lease signing isn't always a cut-and-dried process; like anything, there likely needs to be some discussion of terms by both parties, particularly if this is your first lease with the landlord. However — even if this lease is a renewal, you should still negotiate terms to ensure your continued satisfaction of using the space. Pay attention to these six important things to know as you enter the negotiations phase.

Have a True Assessment

Generally speaking, it's a good idea to involve a broker in your lease negotiations process and to also look at data, like what 4SITE by CORT provides, to ensure you're optimizing your space and making the most informed decisions when it comes to lease renewal. Keep in mind that your landlord is approaching these negotiations with his or her maximum profits in mind, so you should do the same. To do this, you want to find your real total cost. A suggestion is to:

  1. Start with the annual rent.
  2. Add annual increases (fixed escalations).
  3. Add annual taxes. The sum so far represents your annual cost.
  4. Multiply the annual cost by the lease length to get your adjusted total cost.
  5. From your adjusted total cost, subtract your free rent.
  6. Subtract your tenant improvement capital.
  7. Now you have your real total cost for the length of the lease.

Free rent in a commercial lease refers to the first few months of a lease, where your landlord may offer you the space free of charge as you move. Your landlord may also offer you capital to improve the space. If neither of these fields apply to you, you can skip them.

Using this type of formula can help you decipher what you're actually paying for the space. However, it's important to note that the lowest rent is not always the best deal. If it looks too good to be true, it likely is. Explore potential reasons why this may be, such as location, age or condition of the building and lack of amenities.

Involve a Lawyer in the Process

If you're unfamiliar with lease signing processes, it's typically best to involve a lawyer who's experienced in the commercial real estate field. Just like doctors, lawyers often have expertise in certain fields, and not all lawyers are experts when it comes to commercial real estate. If you have a go-to family lawyer, that attorney may not be the best choice to take to a lease signing. It's a better option to choose one who has experience with the pitfalls of commercial leasing.

If it's more cost-effective, you can have an attorney walk you through all of the steps then attend the lease signing yourself. However, it's a common problem to not have the final draft of the lease match the letter of intent (LOI), so you need a keen pair of eyes to catch those types of things.

It's also recommended to use a broker and data-driven knowledge, such as the type 4SITE provides. Signing a commercial lease is a big decision, and making the most informed choice before you sign is imperative.

Make Sure the Price Is Fair

Very often, commercial tenants are well aware of what a common residential rate is, but a commercial rent is uncharted territory. Research similar vacancies in the area, and find out what their asking price is for rent. You'll want this information handy when it comes time to negotiate the rent price. If your prospective landlord is asking for a higher rent than you believe the space is worth, then ask for a lower price with your data in hand.

Another thing to consider as you negotiate price is a rental cap. It's likely that your landlord will raise rental prices through the duration of your lease. Having a clause in the lease agreement that prevents this protects you as a tenant. Negotiate security deposit prices and conditions of its return tpp, as these are all important matters upon lease expiration. 4SITE can help you make an informed decision if your lease is expiring and you're on the fence when it comes to lease renewal.

Be Aware of All Costs

Hidden costs likely exist throughout your lease agreement, which is why you need another pair of eyes to help you examine the document. It's important to know whether your lease is a gross lease or a net lease. A gross lease means all costs are included and a net lease means that the tenant is responsible for things such as maintenance and upkeep. If you're responsible for maintenance and other costs, you can negotiate a cap on how much you're willing to pay for these services. You want all of the information on these specific costs up front and in writing, detailed very plainly in the lease.

Default and Termination Negotiations

The termination clause is one of the most important parts of the lease. If you default on the lease, you want language in the lease that allows you ample time to fix the problem before you are evicted unnecessarily. You may also want to negotiate penalties that would occur, should you decide to leave before the term of the lease. Landlords are typically not fond of early termination, and this can be a tough part of the lease to negotiate, but you do want protection against default if possible.

Ask for Benefits and Inducements

Don't be afraid to ask for clauses that will directly benefit you and won't hurt your landlord in the process. For example, if you suddenly need to move and don't want to break the lease, having a clause in the lease that allows you to sublease gives you the freedom to move while still paying the lease. It's also important to ask for a clause that prevents the landlord from having a tenant with a business similar to yours, such as two coffee shops in the same plaza. You can ask the landlord to make improvements to the property before you move in as well. This way, you don't have to invest your own capital in the property.

There's a lot to consider as you negotiate an office lease, but with data from 4SITE by CORT on your side and the ability to review your lease closely, you can make an informed decision so that you can get the commercial space that works best for your needs.