Denver Business Journal, July 25, 2003
Today’s office lease’s origin comes from old English
The purpose of the office lease is to define the relationship
between a Tenant and the Owner of an office building by resolving
to mutual satisfaction the conflicting needs of both parties. The
modern office lease had a dignified origin. An illustrious old
English law, the Statute of Frauds, required that agreements between
a Landlord and Tenant for a term of 1 year or greater must be in
writing and signed by the individual or company to be charged.
The modern lease is more than a contract whose terms and conditions
are interdependent. Today, Lease provisions are independent of
one another. If one party defaults in one part of the Lease this
does not allow the other party to take an action to offset the
default. In other words, unless it is specified in writing, the
Tenant cannot withhold rent if a Landlord fails to provide one
of the services agreed to in the lease.
In today’s office building it is expected that the Landlord
will provide a continuous flow of services to the Tenant which
will include air conditioning, light, water, restrooms, elevator
service, janitorial services, security and access through the common
areas. Tenants can expect certain services from the Landlord and
there will be remedies provided in the lease if the Landlord fails
to provide these services.
Two Types of Leases
There are two basic types of leases today. These are known respectively
as a Gross, or Full Service Lease and a Net Lease. These two kinds
of Leases are identified by the way that the services provided
in the building are computed and paid. In Colorado, rental rates
are quoted as per square foot per year. Thus, as an example, a
rental rate for 3,000 square feet based upon a full service contract
or Gross Lease will be quoted as $19.00 per square foot per year
or $57,000 per year (a $4,750.00 per month installment). In a Net
Lease the basic rent is quoted on a per square foot per year basis
with the additional costs billed separately.
Understanding Triple Net
Depending on the provisions of a new lease, the Tenant may be
asked to pay for some or all of the services of the building in
addition to a rental rate for use of the demised premises. If the
Tenant pays for real property taxes only, he has signed a net lease.
However, if the Tenant agrees to pay for repair and maintence costs
in addition to real property taxes and insurance he has signed
a “triple net” lease.
In all these cases, the Tenant is billed separately for the cost
of services agreed to in the lease, in addition to the base rental
rate. For example, in a true triple net lease the Tenant may have
negotiated a rental rate of 15.00 per square foot per year. In
addition the Tenant will be billed for other expenses which in
some cases can amount to an added $5.00 to $6.00 per square foot
per year. This type of lease is used more often in the small, older
buildings found outside the central business district or in industrial
It is especially important when considering a new lease to understand
that costs to be paid for by the Tenant include all building expenses
unless this is negotiated and the costs are specifically itemized.
For example, when a Tenant assumes the payment for “all maintenance
costs” he or she must understand that this can include repair
for a caved in floor, a flooded basement due to a burst pipe, or
repair to a roof.
The Full Service Approach
Under a full service lease the Tenant pays a base rent which is
for the first year of occupancy. The owner pays all the expenses
involved in providing the services to the building.
In the modern office building, the cost of operating the building
or services are estimated and adjusted to reflect any increases
at the end of each year after the base year or first year of occupancy.
These escalations are passed through to the Tenant. For example,
a Tenant leases a 3,000 square foot office in 1998, the base year,
in Building A for $20.00 per square foot per year full service
or Gross. The space is 2.5% of the total building square footage.
The cost of services in Building A for 1998 was estimated to be
$600,000. Let’s assume that the actual cost of services for
1998 was determined at the end of the year to be $750,000. The
Tenant would then be billed the difference between the estimated
expenses and the actual expenses based on his prorata share. In
this case the actual dollar amount to be paid would be 2.5% of
$150,000 or $3,750.00.
In Building B, which might be a more inefficient facility, the
Tenant’s pro rata share might be 5% and the actual operating
expense increased by a higher dollar amount. This would result
in a higher rent to the Tenant. It would be important to know and
understand these differences between buildings A & B.
The Capital Improvement Clause
In addition to the operating expense pass through, a Tenant may
be asked to pay for capital improvements to the structure. These
expenses are necessary to maintain the various systems in the building
and often result in controlling operating expenses. For example
a new roof would be an essential capital improvement whereas a
Tenant might argue whether replacing the common area carpeting
with marble is necessary for the continued functioning of the building.
Especially in these tighter economic times, understanding the
type of lease being negotiated and how the rent is to be paid is
an important economic consideration for any Tenant.
Paulette Wray, principal of Wray & Associates, a Denver-based
tenant representation firm, has 18 years of commercial real estate