The first thing to understand is that when you negotiate an office lease, your landlord probably has the advantage. If you’re like most tenants, you negotiate a lease once every five or ten years and you put rent into the same category as other routine, current business expenses, weighing the monthly payment versus your cash flow.
The landlord is in a different position. Its business is leasing space, and buildings are its major asset. The landlord is highly motivated to plan for the long term and to write conservative leases that maximize the return on their assets.
A good real estate lawyer can help protect your interests, but often isn’t equipped to advise on business points. Legally acceptable arrangements can be bad business deals.
Here are some general points about the most important lease provisions that protect landlords at their tenants’ expense. (click here to read the whole article - Harvard Business Review)
Common rent miscalculations
Office space priced per "rentable" square foot often turns out to be much more expensive than tenants expect because landlords may include space that tenants consider unusable.
Rentable area is sure to include a portion of elevators, janitors’ closets, lobbies, stairways, and more.
Normally, you’ll be able to use only 75% to 90% of what you pay for. This difference, the loss factor, depends on three things: the physical configuration of your offices, your landlord’s method of measuring rentable area, and, increasingly, your landlord’s whim.
On lease renewal, the tenant may also find that the landlord has "remeasured" the space and now claims it’s much larger.
Operating expense lease clause
An operating expense clause lets your landlord recover normal out-of-pocket costs of running a building. Operating expenses listed in your bill should correspond directly to benefits you gain under the lease, and they ought to meet an objective standard such as GAAP (generally accepted accounting principles), not conventions particular to your landlord.
Landlords sometimes use the operating expense clause as a profit center. If you approve a catchall clause it can become a blank check. You may be billed for charges that have little to do with running a building such as penalties incurred because the landlord fails to pay taxes on time.
Hidden costs in the alterations, maintenance & repairs clause
Alterations. The alterations-and-improvements clause may give you a false sense of security. It may say that you can make whatever nonstructural change you like so long as you get your landlord’s permission, and that your landlord will be "reasonable." If you and your landlord disagree about what’s structural, it may declare you in default even if you think the changes you've made are reasonable. Consequently, you may be presented with the unpleasant option of paying a big bill at the end of your lease term or restoring so-called structural changes.
How best to resolve disputes with your landlord
Provide for dispute resolution in the lease. Here are a few guiding principles:
* Arbitration may be the best method to resolve disputes like disagreement over the fair market rent or whether a tenant’s use of space has caused more damage than normal wear and tear. Real estate experts are more qualified than the lay public to say who’s right.
* In certain disputes the tenant should have the right to withhold operating expenses – for instance, if the landlord fails to provide essential utilities or repair services.
* The tenant should have convenient access to documentation supporting the landlord’s bills and should be given reasonable time to audit the operating expenses. An independent CPA, not the landlord’s nephew, should prepare the statement.
* The landlord should share certain audit costs with the tenant.
* If it prevails in a dispute, the tenant should get a prompt refund with interest, plus reimbursement for out-of-pocket expenses and attorney’s fees.
An obvious but essential reminder: once you agree on a way to resolve disputes, follow the procedure to the letter. Paine, Webber, Jackson & Curtis, Inc. (the financial services company that was Paine-Webber’s predecessor) took its landlord to court over a dispute about operating expenses, but the case was tossed out by a judge without even a hearing. The company had neglected to start the proceeding within 30 days, as the lease required.
