In Part 1 of my blog, “Negotiating a Lease as an Office Tenant,” I discussed provisions that should be included in a letter of intent with a landlord once a tenant identifies a potential site to lease office premises.  In this Part 2 I will address the provisions that must be included in an office lease.

First and foremost, the Lease should identify the parties to the lease, the premises to be leased, including a graphic depiction of the space which should be attached as an exhibit, and the rentable square footage of the space.  Assuming the space is in a multi-tenant office building, the rentable square footage will most likely include a multi-tenant core/common area factor, which represents a percentage of the common areas of the building, such as the lobby, the restrooms, and the hallways, the utilities associated with those items, and the like, all of which are used by all of the building’s tenants. This percentage will be included in the rentable square footage of the premises even though, if the tenant measured the space within the perimeter walls of the premises, the square footage would be less than the “rentable” square footage.

Improvements

The lease should state whether the tenant is taking the premises “AS-IS” or if the landlord will make improvements to the premises.  If the landlord is providing tenant improvements, the description of those improvements should be attached as an exhibit and, if there will be an allowance for above-building standard improvements, paint or carpeting, that should be specified in detail.

It should also state whether the landlord will provide any financial incentives that can be used toward rent abatement, for tenant improvements, or for the cost of moving into the new space, and it should state that any unused portion of any allowance can be applied toward rent.

Cost of Rent

The “term” of the lease (i.e., the length of the lease) needs to be specified, as well as any renewal options.  The rent must be clearly identified for the original term including annual percentage increases, and if there are any renewal options, the way that renewal rent will be determined.   

Some leases are full-service leases, meaning that the monthly rent covers all of the costs in leasing the premises.  Other leases pass through the landlord’s costs, including common area maintenance costs (referred to as “CAM”), real estate taxes, and insurance, as “Additional Rent.”  CAM generally consists of the costs to the landlord for operating, maintaining, repairing, replacing, lighting and cleaning the building, utility costs, management fees, and depreciation (which should be on a straight-line basis for only capital expenses incurred by the landlord which reduce CAM). 

For leases that are not full-service, a tenant’s responsibility to contribute toward CAM, taxes, and insurance is based on the percentage of its leased square footage in comparison to the total square footage of the building.  If the first floor of the building consists of retail space tenants, they generally share in the cost of real estate taxes and insurance with the upper floor office space tenants; however, generally the retail space tenants’ share of CAM will be a different percentage (e.g., retail space is generally accessed directly from the street so retail space tenants get no benefit from maintaining the building’s lobby and should not pay any CAM associated with the lobby).

How these costs are passed through varies by landlord (or sometimes among leases in the same building).  They can simply be passed through each year based on the total of CAM, real estate taxes, and insurance.  Or they can be based on a base year, where the landlord absorbs all of those costs during the tenant’s first Lease Year and then the tenant pays its share of the increases to those costs during each remaining year of the term.  A third method is known as an “expense stop,” where the landlord agrees to pay all costs up to a specified amount and the tenant pays its share of increases above that amount during each year of the term.

Terms of Use

A provision that states what the premises can be used for will be included in the lease; it will almost always require the landlord’s consent to use the premises for anything other than what is specified.  Tenants should seek the broadest classification possible. In addition, retail tenants can ask for an “exclusivity” provision that prevents the landlord from renting retail space to another competing business.   

Every lease, whether office or retail, must contain a “Covenant of Quiet Enjoyment,” which should provide that so long as the tenant pays the rent as required by the lease, the tenant will be able to enjoy the premises disturbance or hindrance from the landlord or other tenants.

Insurance

The lease will also specify the various insurance coverages that the tenant and the landlord must have. Note that many landlords require tenants to carry property insurance on the improvements made to the space and covering personal property, furniture, fixtures, and equipment.  This is to insure (pun intended) that following a casualty, tenants have adequate insurance so they may replace property that is damaged and can reopen when their premises are restored.

Almost every lease requires the tenant to have insurance that contains a waiver of subrogation.  Tenants should ask that the landlord’s insurance also contain such waivers.  (Without them, after the injured party’s insurance responds to a damage claim, it can step into its insured’s place and sue the party that caused the damage.  Almost all insurers are willing to do this. If a landlord refuses, a work-around is to have each party name the other as an additional insured on in its insurance; insurance companies do not sue their own insureds.)

All leases should provide rent abatement if there is a casualty that prevents the tenant from using its premises, but some leases deny abatement if the tenant caused the casualty.  Also, as to casualties, a critical provision to look for is how long the landlord has to restore the premises before the tenant is entitled to terminate the lease.  Many leases specify 180 days, but this can be negotiated to 90 or 120 days. Tenants should know whether that restoration period begins on the date of the casualty or the date the insurance company settles the landlord’s claim – which sometimes can take months.

Defaults

All leases have a section detailing the landlord’s rights if the tenant defaults under the lease.  When entering into a lease, attention should be given to whether tenants have the right to notice and an opportunity to cure before the landlord can commence eviction proceedings and other remedies. Most leases do not provide for notice and an opportunity to cure monetary defaults (on the theory that “You know when the rent is due”), but when asked, some landlords will agree to give tenants notice of non-payment and five days after receipt of the notice to pay the amount in question.  In reality, however, unless a tenant consistently fails to pay rent on time, the landlord will generally call and ask where the rent is – but tenants should not rely on this.

Non-monetary defaults are events, such as a subletting or assignment without permission, filing of bankruptcy, abandonment of the premises, or the failure to comply with the covenants and conditions, a tenant must comply with per the lease terms.  Landlords will generally agree to 30 days’ notice and opportunity to cure (although some landlords will limit that to 15 days), but tenants can ask that they be given such additional time as is necessary to cure a non-monetary default that cannot be cured within 30 (or 15) days so long as they commence to cure the default within 30 (or 15) days and diligently prosecute it to conclusion.  Most landlords will agree although some landlords will still impose an outside date of 90 or 120 days. 

Tenant-Friendly Provisions

Other tenant-friendly provisions include requiring that the landlord can only evict a tenant through legal proceedings and that it cannot use self-help of any sort (such as a lock out or removal of the tenant’s property from the premises).  Although some states require it, it is important to include a provision requiring the landlord to mitigate its damages by, for example, seeking a replacement tenant.

Landlords will always require tenants to seek their consent before subletting or assigning the premises to a third party. This right can be softened by having the landlord agree not to unreasonably withhold, condition or delay any request for consent.  Some landlords will include a provision that if tenants seek to sublet all or a portion of the premises or assign the lease the landlord can, in lieu of granting consent, terminate and recapture either the portion of the space to be sublet or the entire premises.  In such instances, the lease should provide that the tenant has the right to withdraw their request and remain in possession.

Leases always permit the landlord to enter the premises for a variety of reasons.  Tenants can ask for prior notice for any non-emergency entry and for the landlord to minimize any disruption to the conduct of the tenant’s business while it is in the premises.

Final Thoughts

The foregoing is not an all-inclusive list of lease terms, only those terms which, in my opinion, are the most important. Leases can run from anywhere between 20-100 pages and memorialize one of the most financially significant decisions a business owner will make.  Our commercial real estate attorneys represent both landlords and tenants throughout the leasing process and stand ready to help.

This blog was authored by the team at Press, Dozier & Hamelburg

Press, Dozier & Hamelburg partners with businesses to achieve their goals, and represents families and individuals, often when they are most vulnerable. Our attorneys deliver valuable insight and counsel in the areas of business law, employment law, litigation, commercial real estate, estate planning and administration, and business succession planning. We provide all of our clients with personal service, emphasizing responsiveness, sensitivity, and respect. We are located in Bethesda and serve Maryland, Virginia and Washington, D.C. 

Note: The content in this Blog is for informational purposes only and should not be acted upon without first consulting legal counsel.  It is not intended to constitute legal advice.