Various differences exist between an office lease and a regular residential lease. Office lease agreements, also known as a commercial lease agreement, often have fewer legal protections, have varied terms from business to business, negotiable terms, and the time period covered, which is definitely shorter than a residential agreement. If you are looking to rent office space for your new business, then consider drafting your own office lease agreement with the help of this article acting as your helpful walk-through. You may also see agreement samples.
An office lease agreement is a business contract between a business owner and a landlord for the rental of office space. Renting is common for new businesses because it costs less in the capital. An office lease agreement is also more complicated as it entails negotiable terms, which is why it is important to know the different complexities involved in making one.
Elements of a Good Office Lease Agreement
1. Rent Amount: The rent amount of an office lease is calculated by the square footage of the space. Depending on what the landlord and the tenant, or the company, agree on, the rent amount can be appended with costs for tax, insurance, repairs, maintenance, and utilities for the building.
2. Rent Increases and Security Deposit: Annual increase on rent is pretty common in office leases, which is why it is important for the company to negotiate a cap on these percentage increase to still have manageable costs in the future. The security deposit should also be taken into account when negotiating the increased cap, including its terms of return.
3. Rent Terms: For new businesses, it is wise to choose a short-term lease and have an option to renew. A lengthy term can prove to be risky especially that small businesses are more prone to change.
4. Property Description: Your office lease agreement should contain an apt description of the office space being leased. This includes the number of bathrooms, common areas, pantry, and parking facility.
5. Lease Clauses: There are two important legal clauses that should be present in your office lease agreement, and these are the use clause and the exclusivity clause. Use clause refers to the list of activities that the company can conduct within the building premises, and they are implemented to protect the property from any untoward incident and damages. On the other hand, exclusivity clause inhibits a landlord from renting office space to a company’s competitor.
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Steps to Make a Great Office Lease Agreement
1. Identify the parties and property: Before you discuss anything in your office lease agreement, name the parties involved first and set up the parameters of the property. The landlord is the owner of the building while the tenant is the owner or founder of the business. Make sure to give the complete address of the building, including the floor on which it is located, and a short description of it.
2. Lay out the terms of the lease: For your first provision, set up the starting date when the agreement will become effective and the end date when the contract will be terminated. Commonly, office lease agreements run more than a year. Specify how much is the rent and how often it must be paid. Also, include the security deposit then company needs to pay to secure their lease in the office.
3. Draw the line of payment: State which utilities the company will have to pay and identify the ones that the landlord will be responsible for. These items can be the payment for electricity, water, janitorial services, and other utility payments. This is an essential part of an office lease agreement. Both the representative of the company and the landlord must have a sit-down session first to discuss these terms of payment as this has been commonly the root cause for expensive legal services.
4. Formulate a dispute resolution: In every legal agreement, it is always necessary to form a process that will be followed whenever disputes arise between the company and the landlord. In this process, you will determine the forms of notice you will be provided with each other, the need for mediation, and the limit to the damages that can be claimed.
5. Explain the conditions of termination: A legal agreement may be difficult to get out of since it is a binding agreement, but you can always set conditions that will trigger the rental termination it even before the agreed end-of-contract date. Changes will come to your business, may it be the need to close it down or to transfer to another location, and you have to be prepared for these changes to assure a smooth transition. Take note of the financial consequences that you may incur under these conditions.
Tips for a Great Office Lease Agreement
- Seek an attorney to help you with your commercial lease: Once you are done drafting your office lease agreement, get a legal professional to read through what you have written. This is to make sure that you will be able to avoid problems with your landlord in the future.
- Provide a renegotiation clause: Have your landlord agree with a provision that enables you to renegotiate certain aspects of your lease, such as the property rent rate, to make your leasing more flexible. Your landlord may ask you to lengthen the term of the agreement as a bargain, but it will prove to be useful for you in the end.
Types of Office Lease Agreements
- Gross Lease: In this type of office lease agreement, the company pays an all-inclusive rent that already covers the office space, electricity, maintenance, and other expenses concerning the use of the property. Gross lease is very tenant-friendly in a way that the company will only have to worry about paying the landlord the monthly rent and the landlord assumes all the other building responsibility. Gross lease also tend to set an electric bill threshold for the tenants, so if ever the company surpasses this energy limit, the landlord charges the excess to the company.
- Net Lease: While the gross lease puts a lot of convenience to the company, the net lease speaks otherwise. This type of office lease agreement entitles the company to a rent payment that is only for the office space, and all the other utilities, especially the janitorial services, will have to be paid on top of the monthly rent. While it allows flexibility for the company, this kind of agreement is actually landlord-friendly, as all the benefits of the pay propel the profit of the landlord.
- Modified Gross Lease: This type of office lease agreement is a marriage of gross lease and net lease. It exists as a compromise for the convenience of the company and the landlord. In a modified gross lease, the company pays rent that is inclusive of all office space services and utilities except for the janitorial services and electricity. Some other items can also be excluded from the lump sum rent, as long as the company and the landlord agrees to it.
Office Lease Agreement Template Sizes
Office lease agreement templates are available in sizes of US legal (8.5 inches by 14 inches), US letter (8.5 inches by 11 inches), and A4 (8.27 inches by 11.69 inches).
Office Lease Agreement FAQs
Why does an office lease agreement have fewer legal protections than a residential lease agreement?
Businesses owners who rent an office space are certainly used to legal agreements and contracts before. State lawmakers tend to assume that they can detect legal loopholes and provisions of deceits for themselves which results in less legal protections for office lease agreements. Fewer legal protection also means that an office lease agreement is more open to changes and flexible for the business that an entrepreneur is putting up.
Is it advisable to do a long-term lease?
Landlords may entice you with an offer of an office space that would span for around 3 to 5 years. But this is not advisable, especially when you are just starting your business. Startup companies are prone to changes, especially to growth. It often happens that after just a year, the company will need additional space for its employees and, thus, will spend more to rent another space in the building. For best office lease terms, have it span for only a year or two.
In finalizing your office lease agreement, don’t forget to ask the landlord for the right of assigning and subletting the space to another tenant. This can prove useful in cases where your business closes down or relocates as it lets another tenant come in to use the office space and cover the rent for you.
Even after the office lease agreement has been signed by both parties, keep open communication with your landlord, especially when you need something that is vital to your business success. After all, entering an office lease is like engaging in a business partnership, your company and your landlord need to work out differences to meet a mutual agreement that paves way for the benefit of both.