An office lease agreement is a formal contract between a landlord and an occupant who will be renting for purposes other than retail. In this setup, a standard office space would allow for client consultations, meetings, and a productive work environment. Like other leases, rent is normally calculated on a per-square-foot basis and would normally cost higher than residential leases. This is because offices are normally located inside a commercial property like a building.
Entering into this lease agreement has its pros and cons for both the landlord (also called the “lessor”) and the tenant (also called the “lessee”). Based on the nature of a typical lease agreement, either party may encounter challenges including but not limited to the following:
Income vs. Expenses
PROS: For a small-to-medium enterprise, renting an office space is considered a business investment because the leased premises raise the company’s credibility, especially when leasehold improvements are completed. The office space may then be used as a marketing hub where the tenant can convince clients and close deals.
CONS: However, if they aren’t wary of hidden expenses that come in addition to the base rent of office space lease agreements, renting one may be excessively costly. Especially in a commercial property, additional costs may be charged because of parking spaces, common areas, insurance, and maintenance of a shared space. Other computations that your landlord may have added to the rent can include prorated real estate taxes, due date penalties, and upkeep costs for the entire property, not to mention a security deposit that the property owner will hold for the entirety of the contract.
Base Rent vs. Yearly Increase
PROS: The first thing you would probably realize is that the landlord will almost always get the upper hand when negotiating an office space lease contract. Still, an office space lease is usually bound by a long-term agreement of five to ten years and allows the tenant to lock in the rate with a minimal yearly percentage increase.
CONS: Although the landlord may have a strong incentive to think long-term and write a conservative office space lease contract, they can get real estate agents to assess if the value of their commercial property. Once the current office space lease expires, landlords may strictly implement the termination date and deny the option to renew if this was not previously agreed upon.
Amenities vs. Restricted use
PROS: Though the tenant is obligated to pay additional property dues in an office space lease, their employees can use the common office space, which stretches from the lobby and the waiting area to the rooftop and cafeterias. This makes the office space lease more appealing to business owners who want the extra space without shouldering the entire cost.
CONS: Because certain areas in the property are shared, however, the administrative staff, as well as the security personnel, can be very strict when it comes to rules. For example, office space is only provided a limited number of parking slots, causing inconveniences on the part of visiting clients. If the tenant’s business model thrives from visits, they must then enter into a separate parking space lease contract to reserve slots.
Despite the cons attached to an office space lease, there are many benefits from renting a commercial property including additional income, fixed rent, and the extra space for shared activities.
For a growing company looking for professional office space, leasing a commercial property is the best option. An office space lease can either be brief or lengthy, varying from month to month to annual lease agreements. Longer rentals, which used to be for 25 years, are now down to just 3 to 5 years as businesses no longer target single-limit goals but rather aim to grow exponentially. So, they benefit best from a shorter office space lease duration that adapts to their business dynamics. In order to make sure which one fits you best, here are the types of leases that suit your office space lease needs:
This is perfect for startups or new companies, which are unsure of their business forecast. Through a short-term lease, the tenant will not be forced to be stuck in an unprofitable location. However, this type of office space lease arrangement should expect the base rental amount to shoot up at the end of each year as a result of market inflation.
In this type of office space lease, a business tenant can lock in a cheaper rent amount and a slower percentage increase. The downside to this lease is that the lessor usually requires a large down payment amount or security deposit.
If you need office space for a brief period of time to complete a new deal, you can consider entering into a licensing agreement with the lessor rather than signing a fixed lease. This is an excellent solution for both the tenant and the lessor, as it allows them to voluntarily end the contract without difficulty. However, if the premises become profitable for the business, the tenant may not be able to immediately renew the license agreement.
In a co-working setup, the landlord is responsible for all costs and services. The tenant has zero obligations except to pay the monthly dues or a fixed membership rate to the lessor or co-working business owner. However, this set-up does have its cons as the premises are shared with other businesses.
In a gross lease, the lessor shall be in charge of paying for real estate fees, insurance, and CAMs (Common Area Maintenance). Meanwhile, the tenant is for all utilities and amenities.
Modified Gross Lease
Costs are shared between a landlord and tenant in a modified gross lease. However, the division of expenses shall first be negotiated and written in the contract. The specific amount shouldered by the lessor and the lessee should be divided based on the terms in the office space lease contract.
Triple Net (NNN) Lease
In a triple-net lease, the lessor ensures that the foundation and basic features of the premises (e.g. roof and parking lot) are in decent condition. On the other hand, the tenant pays for real estate fees, insurance, and CAMs (Common Area Maintenance) as well as electricity and other facilities.
Unlike a regular office space lease, the lessee or customer does not need to sign a detailed legal document nor do they need legal advice. Co-working agreements are much simpler and the lessee is normally free to sign up for a “membership” that lasts for 30 days or less. If the lessee decides to pay for a longer package, the lessor usually gives discounts on the membership amount. This setup is particularly popular among freelancers, e-commerce entrepreneurs, artists, and small companies because it helps break away from the loneliness and monotony of working from home or in a coffee shop.
Looking for the perfect office space isn’t an easy task, but proper planning and execution will definitely help. If you’re new to leasing an office space, the process usually involves the following steps:
Step 1 – Set up a plan
When people come to an agent for the first time, they’ve usually already scoured the area for office accommodation. However, it is best to first assess your business needs by answering the following questions:
Step 2 – Look for a Rental Office Space
Finding an ideal office space is likely to be one of the most challenging tasks every lessee will face. Fortunately, there are online platforms that help speed up the process by publishing the premises’ rent amount, terms, and other default listing information.
Once you find a match, it is best to immediately visit the premises to inspect any structural damage and red flags such as noisy tenants and a problematic landlord-tenant setup. Before you sign an office space lease, have a trusted engineer or General Contractor (GC) inspect the space. Knowing this ahead of time will save you money, as well as help you negotiate with your landlord.
Step 3 – Present a Proposal
A commercial lease is not the same as that of a residential rental. Since office spaces typically need to be improved or overhauled, the lessee will first need to draft the layout of the space. Any change must be discussed in the landlord-tenant agreement along with other business-related matters. Though there are several contract templates which you can easily download and use, it is still best to first consult someone who can give sound legal advice. Once the owner and the tenant agree on the proposal and its terms, you can now proceed to the next step.
Step 4 – Seek guidance
Many companies venture on their own, assuming that they can successfully negotiate a contract without seeking technical or legal advice. However, seeking advice from experts or seasoned entrepreneurs can help you evade problematic situations.
Step 5 – Sign the Lease
When you’ve reached an agreement that both the owner and the tenant are satisfied with, you can now sign the lease contract. If you do not have a commercial lease template for your contract, you can download and use one of Formspal’s many free commercial rental templates.
Below are some of the most crucial points to include in your commercial lease agreement.
1. A list of all tenants’ names
As a result, each occupant is legally liable for all terms, including the entire rent and fair use of the premises.
2. Occupancy restrictions
To stop occupant accusations of unlawful entry or invasion of privacy, your lease contract should spell out access to the property. This protects your right to choose who enters your office, visits employees, and uses your company’s parking spaces.
3. The tenancy’s length
Office space leases are usually long-term and only end prematurely if either the landlord or tenant sends a written notice of termination or non-renewal. It is therefore important to write the dates when the occupancy started and when it is expected to end, keeping in mind what is best for your company’s plan.
4. How to pay the rent
To avoid misunderstandings and clashes with owners, include information like:
6. Servicing and repairs
The easiest way to avoid problems with rent withholding and other issues (especially over security deposits) is to spell out the repair and maintenance obligations divided between the lessee and the lessor. Apart from the rent, the lease term, release clauses, dilapidations, and service charges, should also be discussed in the contract.
7. Restriction on criminal activities by tenants
Contracts usually add rules to avoid unprofessional behavior of the lessee such as unnecessary noise, and most especially criminal activity. This minimizes your exposure to lawsuits from residents and neighbors, but it is important to get legal advice before permanently signing the contract to avoid loopholes in the fine print.
While animals are normally banned from commercial areas, many offices are becoming more and more pet-friendly. If you don’t want dogs or cats, make sure the contract expressly states so. If you should accept dogs, make a list of any special requirements, such as size or limit.
Any such regulatory requirements, such as limitations on the type of company or working set-up, should be stated in the contract or rental agreement. The leasing agreement should have important guidelines and regulations about parking and the use of shared areas.
Though finding your first office space takes a lot of work, you can use Formspal’s free agreement templates to ease the process. With a bit of forethought and a good business plan, you’ll soon find yourself transforming a space into your business’s driving force.