Lease lesson

Entering into an office lease in China can be as simple as walking into a building and chopping a short document. When everything goes as planned, an office lease may not be looked at or thought about until its expiry date nears. However, the true test occurs when there are hiccups in the tenant-landlord relationship. And if a lease has not been carefully drafted, a hiccup can become a major problem.

Tenants often lose sight of the fact that the “Standard Premises Lease Agreement” document represents a landlord’s wish list. If not appropriately modified, such a lease may not serve the interests of a tenant when issues arise. On the other hand, a sophisticated tenant will often request changes to the standard lease document that, if not fully understood, may cause unforeseen difficulties for the landlord as well.

Negotiations are needed, and companies should consider approaching an office lease with the same vigor, careful analysis and attention to detail that they would their business operation.

Starting early
Companies should review their occupancy situation at least 12-18 months prior to a lease’s expiry date, allowing enough time to review all available options. In markets with rapidly rising rents, it may be advantageous to renegotiate lease terms at the earliest possible date, so as to lock into a lower rate.

It is also helpful to both parties when a tenant understands and can express clearly what it wants and needs from the office space. In this way, the landlord can better assist to accommodate them.

Lease negotiations typically focus on issues of base rent and concessions. Foreign multinational corporations often expect to receive the same lease terms and concessions that they would get in their home country. However, China’s system has its differences.

It is also common in markets like the US for landlords to waive the deposit or request a deposit in the form of a Corporate Guarantee or Letter of Credit. But in China this is exceedingly rare for even the most financially sound companies to avoid the standard three-month cash deposit.

Market knowledge is possibly the most important aspect of setting proper expectations and reducing frustration. It is essential to know general office space market conditions and to have a keen awareness of the subtle dynamics of each market. Landlords are typically willing to make some concessions in any lease negotiation, but the number of concessions will decrease in proportion to the vacancy rate in the market. This is one of the primary reasons that a tenant will seek out the assistance of a real estate professional, which will not only help find the ideal office space, but also assist in lease negotiations.

Blind spots
A host of other concerns remain that are often overlooked, misunderstood or under-negotiated, even by sophisticated landlords, tenants and their real estate representatives.

Insurance is often the most overlooked area within a lease agreement. Before signing, an insurance agent or broker should review at least three sections of the contract in particular: insurance requirements, indemnification and the waiver of subrogation.

Many landlords are reluctant, or simply refuse, to make changes to anything pertaining to insurance within the lease agreement for the same reason that a tenant often neglects to pay due attention to it – a lack of understanding. A landlord’s lease agreement is a standard document drafted by his or her legal counsel, so a landlord may only expect commercial terms, such as the amount of rent, lease commencement and expiry dates, to change. Therefore, a tenant should understand what is contained in the lease and prepare for contingencies.

Technical due diligence should be conducted by either an in-house engineering and IT team or through professional consultants. Tenants often make assumptions about a building’s infrastructure only to realize later – after the lease is signed – that the building cannot support their system requirements. Agreed technical provisions should be included as an appendix to the lease.

 A lease is a legally binding contract and enforceable by law; therefore, every lease must be reviewed by a qualified lawyer. An in-house lawyer can be used, but he or she may not be familiar with a local market or Chinese law. Instead, it is recommended that an experienced local law firm be used. As prevailing leases in China are written in Chinese, translations are necessary. A local law firm can assist with the translation and negotiations of the Chinese contract.