5 Things to Watch Out for in Your Commercial Lease

Spencer AndersonJul 4, 20202 min read

You’ve finally finished the negotiation process for your new office space. There’s been some back and forth, but you’re pretty happy with the lease agreement and excited to start moving the furniture in. You sit down to sign the document, but realize there are all these fees you didn’t realize needed to be paid. “What’s an [insert crazy transaction fee here]? And why am I just finding out about it now?”

You don’t want surprises during the signing of your lease. Here are five questions you should ask about your next lease agreement. These will ensure those “surprises” are kept to a minimum and help you be sure you’re not being taken advantage of.

1. Who pays what operating expenses?

With regard to operating expenses, lease types range from “triple net” (NNN) to “full service.” In a triple net lease, the tenant (in this case, you) directly pays the three “net” operating expenses (insurance, property taxes, and common area maintenance charges) on top of rent. In a full-service lease, all additional operating expenses are rolled into one rent payment for the tenant. While the full service may be easier, be sure to check that the landlord isn’t double-dipping. You should pay the proper expenses for the portion of the building you’re leasing – nothing more.

2. What are acceptable transaction/commission fees?

Because leases can get complicated and involve many parties, hidden fees are easy to build up. Watch out for transaction fees that feel egregious: commissions, legal fees, and document preparation, copy, courier, and notary fees can add up quickly.

Services like Pallas charge flat fees for lease execution services and can help you avoid high, percentage-based commissions fees.

3. How would I go about subletting my space?

With the COVID-19 pandemic and businesses rethinking how they use physical space, many tenants are reducing their needs and considering subletting their excess space. Many lease agreements have restrictions on how you sublease, so be sure to understand what those are and negotiate more favorable terms, if necessary.

4. What’s the “Rentable square feet” vs “Usable square feet”?

You are unlikely to use the entire square footage that is listed on the property, which makes the actual price you pay per square foot higher than what’s listed on your lease. Check the property to see how much of the space is actually usable, so you know the price per square foot is actually a good deal.

5. Will my rent increase next year?

Many lease agreements include “escalation clauses,” which allow the landlord to increase your rent by some percentage each year. Shorter-term leases shouldn’t need this type of clause. Longer-term leases may justify some rent increase to keep up with inflation, but make sure to check that it isn’t too high. A reasonable rate can be anywhere between 1 and 3 percent, but the rates can also be as simple as a flat dollar increase to as complicated as being tied to inflation via the CPI. Ask about it and be sure you read the relevant section in the lease.

Transparency is becoming more and more important to both tenants and landlords. We all want to have agreements that feel fair to all the parties involved. Pallas Property offers a few different services to make the commercial leasing process simple and fair. These include an ideal lease generator that’s both tenant-friendly and landlord-fair as well as lease execution services that enable you to avoid a lot of transaction fees and better understand what your lease actually says.

WRITTEN BY

Spencer Anderson