Save money by negotiating and understanding different lease options
Many businesses experience the “joy” of entering into a lease for office space. Although the lease may be presented to the tenant as a “standard form,” leases are negotiable and should be carefully reviewed and negotiated by legal counsel. The use of a form lease does not prohibit the tenant from negotiating changes to be included in a separate addendum to the lease form.
Prospective tenants should understand that there are different types of office leases. Unfortunately for the lay person, the provisions that comprise the various types of leases are not universally accepted so there are different variations as well as different names for those variations. The same term can mean one thing to a particular landlord or tenant and something slightly different to another landlord or tenant. The slight difference in interpretation can end up costing the landlord or tenant unanticipated money which is why experienced lawyers often get involved.
Types of leases
Before the lease is drafted and when the tenant and its broker are negotiating the business terms of the lease in a term sheet or letter of intent, the tenant should understand that there are several different types of office lease. Often, different aspects of the various types of leases get mixed and matched to create the specifics of a deal but there are three common forms of office lease:
This is the type of lease least frequently offered by a landlord. A gross lease sets forth one total monthly amount to be paid by the tenant which covers all rent, utilities, property taxes, insurance, operating expenses or common area maintenance (CAM) charges and other amounts incurred in operation of the leased premises.
Tenants like gross leases because the all-inclusive rent provides certainty for budgeting. However, landlords rarely offer gross leases because they cannot predict the amount that would cover all cost increases over the lease term. If the price of fuel or electricity skyrockets the landlord will have to pay the difference, which is not acceptable if the landlord wants to stay in business.
Modified net lease
The most frequent form of multi-tenant office lease is known as a modified net lease. Under this form, all tenants in the building pay their respective “proportionate share” of property taxes, CAM and insurance premiums or of the increase of such costs over a base year. A tenant’s proportionate share is generally calculated as the total square footage of the building divided by the square footage of the leased premises.
There are generally two types of square footage: rentable square feet and usable square feet. Often the rent is based on the square footage of the leased premises, so the tenant’s counsel should understand the difference. Usable square feet is the number of square feet that a tenant actually occupies. But there are other parts of the building that all tenants use or benefit from. These parts are known as common areas and include hallways, stairwells, elevators and lobbies. Common area square footage is divided among all tenants on a prorated basis and each tenant pays a portion of the landlord’s CAM charges. “Rentable square feet” is calculated when these amounts are added to usable square feet.
Triple net lease
A third type of office lease is a triple-net lease. This lease type is often utilized for buildings that will be entirely leased to one tenant. That tenant wants or has agreed to take over nearly complete control of the building. The tenant’s responsibilities under a triple net lease include non-structural repairs and maintenance, hazard insurance on the building and property taxes. Because the tenant is covering these costs (which would otherwise be the responsibility of the property owner/landlord), the rent charged in the triple net lease should be lower than the rent charged in most other types of office lease.
Cynthia Brooks Bullock is a partner at the law firm of Archer & Greiner P.C., which offers a full complement of legal services. She is a commercial real estate attorney who is experienced in drafting and negotiating office leases for landlords and tenants. Cynthia is also experienced in purchases and sales of real estate, mortgage financing, and all other forms of commercial real estate leasing. She can be reached at firstname.lastname@example.org or (201) 498-8542.