While new business models, fresh ways of working, and an increasingly tech-enabled ecosystem have shifted the workplace needs of companies, one thing remains crucial throughout the disruption: the commercial office lease.
A commercial lease is a binding agreement between landlord and tenant which sets out both parties’ obligations. The lease spells out terms and clauses for both landlord and tenant, so you, as the tenant, can better understand exactly what you’re entering into. Seeking out advice from trusted partners throughout your entire lease expiry process is smart, but when it comes to commercial office lease, advice from a tenant representative or legal advisor can help to ensure your lease agreement is favourable and fair.
What’s in a commercial lease agreement?
All commercial leases include what is known as ‘essential terms‘. As the name suggests, these terms are essential to the contract, and without them, it may not exist at all. Essential terms are things like payment of rent, names of the parties involved and a description of the premises to be leased.
Outside of the essential terms, there are a number of clauses that can be included when it comes to your office lease. In this post, we will unpack six commercial lease clauses you can’t afford to NOT know about.
The option to sublease part of your property to a third party can be helpful if your company’s space requirements are likely to change over the course of your lease. For example, if your business is downsizing, subletting some of your space can support cash flow by making use of unused floor space.
The option to sublease will need to be written into your lease agreement from the outset. Know that your original lease remains in effect even when a new sublease has been signed.
Repairs and maintenance
Maintenance and repair obligations should both be set out in your commercial lease. Generally, as a tenant, you are responsible for the ‘rented premises’ like floors, walls, and fixtures, and are therefore required to repair and maintain them during your lease.
On the landlord side, maintenance and repairs to the structural parts of the premises, building systems, and common areas like lobbies or the lifts are usually included. Check your lease carefully though as sometimes these items can be inserted under the tenant’s obligations.
Ending the lease early
Including a ‘break clause’ allows you to terminate the commercial lease earlier than the specified term. Most break lease clauses include a notice period where you must let your landlord know of your intention to break the lease.
If your lease agreement doesn’t include a break lease clause, and you end up needing to leave your lease earlier than the anticipated term, you may be required to buy out the term of your lease, assign it to a third party or otherwise negotiate an early exit with your landlord.
Make good’ clause
A ‘make good’ clause is a standard inclusion in many commercial leases. The make good provision is negotiable but basically requires the tenant to return the premises back to their original condition, regardless of any improvements that have been made during the lease period.
Before you sign on the dotted line, ensure the make good clause is clear for both parties and you understand your obligations at the end of your lease. You’ll need to consider this additional cost when you decide whether to move at the end of your lease.
Furthermore, complete a thorough condition report including photos and videos of the office at the start of your lease. This will help you to avoid nasty surprises at the end of your lease agreement by providing clear evidence of the original condition of the premises.
The ‘rent review clause’ explains the process for increasing the rent as the term of the lease proceeds and is common in many commercial leases. The common methods of rent review include:
- ‘Fixed percentage increase review’ that specifies a fixed rent increase on designated dates during the lease term.
- CPI rent review is directly correlated to movements in the CPI (Consumer Price Index).
- Market rent review that reassesses your rent in relation to the state of the financial market. Ensure you are aware of the type of rent review clause your lease includes and that it suits your business requirements.
An ‘option clause’ gives the tenant the option to renew their lease at the end of the initial lease term. Usually, the option needs to be exercised within a certain time period (eg. six months before lease expiry), and the tenant must not have breached any terms in the contract during the lease period. An option clause isn’t mandatory, so check your lease before signing.
As you can see, a commercial lease is complex and, as a legally binding document, you want to ensure you’ve got all the bases covered. But the lease terms are just one part of the lease expiry process. To negotiate the right terms for your needs, you need to consider every aspect of the process and develop a robust workplace strategy. For more commercial lease advice and to learn more about choosing the right workplace design partner for your strategy.
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