5 Things a Tenant Should Know About Commercial Lease Agreements

While most tenants initially consider square footage and base rent as the most important fundamentals when securing commercial office leases, there are five additional principles which, if overlooked, could result in unaccountable costs.

1. Defining the base year is directly linked to the escalation clause, which addresses rent increases or the reapportioning of [a share of] the maintenance and operating expenses, taxes and insurance costs. Some agreements define the base year as commencing from the date the lease contract is signed, while others consider the base year to be in effect once the space is occupied. For example, a company that signs a lease agreement on September 30 may not take possession of the space until December 1. This two-month discrepancy can favor the landlord or the tenant, depending upon the base year definition.

2. While the assignment and sublet clause allows tenants a level of flexibility with regard to disposing of space or subleasing it to another party throughout the course of the lease term, the lease language may be so restrictive that it is virtually impossible to satisfy the requirements. Carefully review the procedures and understand the mechanism by which you can sublease space.

3. Option rights — also known as renewal and expansion rights — offer tenants tremendous flexibility. In contrast to rights governing the disposing of or subleasing of space, option rights address the opportunity to absorb additional contiguous or adjacent space in the same building. This is vital in order to retain growth flexibility or secure long-term tenancy.

4. Tally up additional fees before signing the lease agreement. Fees can cover a full range of building services, including overtime air conditioning fees, freight elevator charges and construction management expenses. Tenants should be mindful that these charges can vary from space to space in the same building.

5. Lastly, the amount of the security deposit and its term should be incorporated into the lease agreement. Some deposits are based on a tenant’s financial standing, while others are calculated based on the deal’s total transaction costs, including initial tenant improvements (also known as the tenant work letter); rent-free concessions; and legal, brokerage and other related fees. Be aware that while the deposit usually is commensurate with the lease term, there can be exceptions.