1 october 2019
You’ve finally found the gem you’ve been looking for. You meet the landlord to draw up and sign the lease. All is good. Fast forward a couple of months later. Your heating doesn’t work and the owner won’t fix it because “it’s your responsibility”. The taxes went up and the owner passed the increase to you. And that meeting room you thought you could use, isn’t included in the lease. If you only you’d read the contract thoroughly and knew what to pay attention to. That’s what this blog is for.
How long will the lease run?
A lot of you believe that a lease of 9 years is mandatory. But this isn’t the case at all. In most countries the length of the lease is negotiable. You should use that possibility. There’s a well-documented tendency for flexibility i.e. shorter leases. Shorter leases mean flexibility in terms of square meters or amenities.
Try to negotiate a lease of 3 to 6 months. This will prevent you from getting stuck with too little or too much space when your business grows or downsizes.
What is the rent? And will the rent rise?
The rent should be the most straightforward item of a lease. You could try and negotiate rent but most of the time the rent’s fixed. Additionally, you should expect a fixed rise over time. Commonly, rent rises according to the Consumer Price Index, or any other index of inflation. This gives a clear and unambiguous expectation in terms of rent.
Keep in mind that some landlords include escalation clauses. A common type of escalation clause builds in regular step-ups in rent throughout the lease. Others pass on prorated increases in taxes, heat, maintenance, and other direct costs.
There are numerous cases where landlord and tenant end up in a conflict because of unexpected rises. That’s often due to assumptions on the part of the tenant or careless negotiations. The best way to prevent this is to make a list of costs and fees that can be added to the rent. Similarly, create a list of costs for which you are not responsible.
How about repairs?
In contrast to a house rental, the landlord can charge you for a lot of repair costs. You might end up having to pay for all repairs. Here, too, you should take a close look at the draft contract that the landlord has submitted to you. Try to take only the small repairs for your account. Try and have your landlord pay the large repairs and the costs linked to wear and tear or force majeure. An alternative would be to include an extensive list of possible repairs in the rental agreement and determine each time who is responsible for them.
What’s the size of the office space?
Square meters seem pretty clear-cut. But the size of the office space is often subject to disagreements and misunderstandings. It’s common practice that the office space is based on the distance from outer wall to outer wall. But this can vary. The size difference between the two types of measuring may be as much as 30%. So know beforehand what you sign up for and determine the dimensions of the office space in detail.
Are there Common Area Maintenance costs?
Every tenant of a building has to pay a percentage of the common area maintenance costs. Your fee is based on the percentage of the building you’re renting. Make sure the percentage is based upon the overall size of the building. Some landlords calculate the percentage based on the occupancy rate of the building.
Unlike rent, common area maintenance costs can ambiguous and confusing. They might include costs you could imagine beforehand. Check to make sure you're not paying for things like the landlord's marketing efforts or legal fees associated with negotiating leases with other tenants.
Also beware of any administration fee of more than 3 percent, benefits for the landlord's employees, and build-out costs for other lease units. You can and should negotiate CAM terms.
Am I responsible for capital expenditures?
Major structural expenditures in a commercial lease are often up for debate. This includes expenditures such as roof, foundation, HVAC and other major repairs and replacements. The obligations can vary from lease to lease but. try to avoid signing any lease that puts. The burden of these costs to you.
If you can’t avoid those costs, aim for compromises. Say, if you’re responsible for the roof repair replacement, negotiate a deal where he/she strikes the “replacement” and where you’re obligated to merely maintain the roof once or twice a year. Or you could propose to be responsible for all general repairs up to an annual maximum amount.
Can I assign the lease?
Is your lease assignable? What happens if you want to sell your business? Or if you want to move to another office. Could you have someone else take over the lease?
Find out and make sure you can.
The reasons why you'd do that vary: Say that you’re not happy with the terms of your contract. Or if it’s too big of a cost for you. Some businesses try to assign a lease to get out of it. Or if you'd want to sell your business. Usually, you can assign a lease. But A landlord might want to renegotiate the terms with the assignee. And this could make or break a sale.
Request that the landlord removes the clause that allows him. To renegotiate the terms with a possible assignee. If he agrees: great! You have to be prepared that the landlord will still want the right to reject the assignment if the new tenant isn't financially acceptable.
Can you have a sublessee?
What if your office is too big but you still want to have your business there? Could you sublet it? It’s a common practice, but a surprising number of landlords don't allow subleases. Negotiate with the landlord before you enter into the lease if you think you might want to take on a sublessee at some future point in time.
Is there any flexibility in the lease?
If the landlord refuses to allow subleasing, but you still want to find an agreement with him, claim flexibility. Aim to include a clause in the lease that allows you to increase or decrease the sqm you rent. Be prepared to compromise, you might have to accept a slight increase in rent, but if you play your cards right you shouldn’t.
Is there a way out of the clause?
An out clause determines the terms by which you can get out of the lease in particular circumstances. For instance, if you outgrow the space or if you can’t continue to operate in the space. Establish an elaborate list of situations in which you can get out of the lease, without a penalty.
Are there any penalties?
If you do cancel your lease prematurely without an agreement, you'll probably have to pay a penalty. The amount you'll have to pay depends on what you agreed with the landlord. Try and limit the amount a couple of months instead of the rest of the duration of the lease.
Does the lease have an arbitration clause?
Include an arbitration clause in your lease. That’s an agreement in which both parties agree. To settle any disputes through arbitration rather than litigation. Check the lease contract to see if the arbitration clause is mandatory. Make sure you have a right to participate in selecting the arbitrator.
Do I have to renegotiate in case of renewal?
Once your present lease expires, a landlord has no legal obligation to offer the same space to you. Unless you've agreed on a renewal formula and have a clause that guarantees you'll get first rights to the office space, you'll probably end up paying the prevailing market rate to stay on. Your landlord will be much more likely to renegotiate with you if you lease 25 percent of a property than if your space is 3 percent.
Consider hiring a lawyer to review the document before you sign it and to help you with the negotiations. This is particularly useful if the renegotiations reach a deadlock. An attorney can help you decide when to cut and run and when to go for it.
These questions will help you exclude the most common surprises that can occur after you've signed a lease. Here's how you can find the perfect office for your company.
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