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Although reading a commercial lease can be difficult and time-consuming, the consequences of not reading it can be infinitely more unpleasant. Unfortunately, many contracts have provisions buried in the lease that may have unintended impact on you. The best thing you can do to prepare is to not be surprised. Here’s a list of typical provisions of an office lease. Understanding them beforehand is very important.

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Although reading a commercial lease can be difficult and time-consuming, the consequences of not reading it can be infinitely more unpleasant. Unfortunately, many contracts have provisions buried in the lease that may have unintended impact on you. The best thing you can do to prepare is to not be surprised. Here’s a list of typical provisions of an office lease. Understanding them beforehand is very important.

1. Common area maintenance (“CAM”) expenses (also known as “operating expenses”)

Landlords may try to use this provision as a “profit center”. An operating expense or CAM provision requires the tenant to pay the pro-rata share of the operating expenses incurred by the landlord in the operation and maintenance of the building. Unfortunately, landlords have expanded the list of expenses to include every imaginable expenditure. By doing so, some landlords have turned this provision into a profit center. Instead, the provision should only pass through to the tenant legitimate expenses relating to the operation and maintenance of the common areas. Carefully review the history of the building’s CAM charges for at least the 3 prior years. This will enable you to compare the amount of operating expenses and their annual increases to other comparable buildings to determine whether they are reasonable and to estimate what the charges might be in future years.

2. Repair and maintenance provision

Landlords may try to use this provision to require you to repair and maintain areas located outside the leased premises. Pay particular attention to any repair and maintenance provision that requires the tenant to repair and maintain items or areas that are traditionally the landlord’s responsibility. A typical lease will define repair and maintenance obligations with reference to the interior of the premises. However, depending on the definition of the premises, this may result in the tenant’s having to repair and maintain such things as plumbing, sprinklers, HVAC ducts, and the building’s structural elements. Try to make certain that the costs of the repair and maintenance for which the landlord is responsible cannot be passed on to you through, for example, the operating expense provision.

3. Real property taxes

An unsuspecting tenant may have to pay real estate taxes and special assessments for a period beyond the expiration of the lease. The real property taxes provision defines the respective obligations of the landlord and tenant for real property taxes. Landlords have expanded the definition of real property taxes to include any type of tax assessed against the property or the landlord or for doing business and are increasingly defining taxes to include future taxes of any sort, including rent taxes or income taxes. Be aware that your tax liability may increase dramatically if the landlord sells the property, particularly if the landlord has held the property for a long time and property values have greatly increased. You may wish to limit increases in real property taxes resulting from a change in ownership by, for example, having increases occur incrementally over time or being completely eliminated.

4. Compliance with laws

If you don’t appreciate the potential effects of this provision, you may find yourself footing the bill for earthquake retrofitting, asbestos abatement, sprinkler installation, or compliance with the Americans with Disabilities Act. This provision typically requires the tenant to perform potentially expensive replacements, alterations, or improvements of the leased premises to comply with existing or future laws and government orders relating to the leased premises. If the landlord is to bear the responsibility, you must curtail the landlord’s ability to “pass on” the cost of compliance through other provisions, such as the operating expense provision. If the tenant is to be responsible for compliance with laws, the landlord should represent and warrant to the tenant in the lease that the building is in compliance with all presently existing laws and limit the tenant’s responsibility for compliance with future laws to those items necessitated solely due to his or her particular use of the premises.

5. Assignment and subletting

Asking for permission to assign or sublet the premises may give the landlord the ability to terminate the lease. In the typical commercial lease, the landlord requires the tenant to get his or her consent prior to any assignment or sublet. Negotiate several exclusions from the consent requirements, including assignment or sublet for reorganization purposes and space-sharing arrangements up to a defined square footage (the latter has particular application to office leases or retail leases where the business is seasonal). Where the lease requires consent and the landlord consents to an assignment or sublet, the landlord may get to keep all rents paid by the assignee or sub-tenant in excess of the tenant’s fixed rent obligation to the landlord. Ask for at least a portion of this “excess” rent.

6. Subordination, non-disturbance, and attornment (SNDA) provision

If the landlord asks you for what amounts to a favor for the benefit of its lender, be sure to get something in return. This provision defines the important relationship between the landlord’s current and future lenders and ground lessors and the tenant in the event the landlord defaults on loan obligations or obligations to the ground lessor. A subordination clause typically readjusts the priorities that normally would result from general legal rules, by providing, for example, that any existing or subsequent lender of the landlord can elect to deem its deed of trust superior or junior to the lease, regardless of the date on which the lender’s deed of trust was recorded. An attornment provision generally obligates the tenant to recognize the foreclosing lender or ground lessor as the new landlord under the existing lease.

7. Tenant remedies (termination and abatement rights)

A lease containing waivers of tenant remedies may leave you with no place to turn if the landlord defaults in its obligations. This clause defines what, if any, remedies are available to the tenant in the event of a default on the part of the landlord. Many commercial leases cause the tenant, by accepting the terms of the lease, to waive a host of remedies provided by the law. Other leases fail to mention tenant remedies entirely. When negotiating a lease, ideally you would like to preserve your “repair and deduct” rights, so, if there is a problem, you can remedy the problem and deduct the cost from your rent. In most cases, the landlord will require a waiver of this right. You should, therefore, negotiate a lease that contains abatement and termination rights.

8. Termination, relocation, or expansion rights

If you haven’t read the lease carefully, you may be surprised to learn that the landlord has reserved the right unilaterally to terminate the lease or relocate you. A termination provision in favor of the landlord allows the landlord unilaterally to terminate the lease, usually on the occurrence of some condition. A relocation provision allows the landlord to relocate the tenant to other premises within the building. Ideally, do not agree to such clauses. If conditions require acceptance, make certain that you can only be relocated to a comparable location and position and that the landlord has to pay for all expenses related to the relocation, including the cost of moving the business and installing tenant improvements.

9. Damage and destruction

A trap for the unwary, this provision explains what will happen if the leased premises or the building housing the leased premises is damaged or destroyed. It typically provides that the landlord may elect, in its sole discretion, to continue the lease or to terminate it. In the case of continuation, the provision usually provides for an abatement of rent in the same proportion that the tenant’s use of the leased premises is impaired. Make sure that the abatement of rent language is fair. Some leases base it on the amount of square footage of the leased premises that is damaged or destroyed. This is unfair since sometimes the entire leased premises may not be usable even where the damage is to a small area. The ability to terminate should reside in both landlord and tenant. Otherwise, you may find yourself bound to a lease under which you are unable to use the leased premises for a significant time. This can throw a real wrench into your business plans.

10. Tenant improvements

Now you see them; now you don’t. If improvements are to be made to the leased premises prior to your occupancy, you must understand the economic impact of such improvements and know what you will get. Make certain that the obligation to pay rent and other charges do not begin until the tenant improvements are complete. Before entering into the lease, in an allowance arrangement, you should have final space plans and estimates for the work so that you are not exposed for the cost of improvements in excess of the landlord’s allowance or, at the very least, will know how much you will have to pay. Agreement should be made as to the disposition of the landlord allowance if the actual tenant improvements cost less than the allowance. The landlord would like to keep the unused portion of the allowance, but you should attempt to get the landlord to apply the allowance to the costs of other work that is your responsibility under the lease or work letter, pay it to you, offset it against future rent, or allow you to use some portion of it.

Source: Starboard TCN Worldwide focuses on providing clients with a full-service solution to San Francisco office space rentals. Team They work with many major multiple-market clients and excel at providing them with a single point of contact. Contact them at 44 Montgomery Street, Suite 1650, San Francisco, CA 94104; Phone: 415-765-6900