Rent is often one of the largest expenses of a business. Unfortunately, many business owners do a poor job in negotiating their commercial lease agreement. This often results in unwanted tenant surprises, expenses, and obligations that a tenant was not expecting. By allocating time to properly negotiate the terms of a commercial lease agreement, commercial tenants can often negotiate better lease terms to better position themselves to succeed.
Unlike residential lease agreements that are in a prescribed form, as mandated by the Residential Tenancies Act to better protect residential tenants, there is no standard commercial lease agreement since every business is different. Although the Commercial Tenancies Act outlines the general relationship between commercial landlords and tenants, the specific commercial lease agreement between a landlord and tenant will dictate the terms and conditions of the leasing arrangement between the parties.
Essential Terms In a Commercial Lease
At a minimum, a commercial lease will have four essential terms: the parties; the premises; the rent payable; and the term.
The Parties: The landlord and tenant must be clearly indicated in the lease agreement, whether as an individual or, as often the case, a corporation. Care should be taken to ensure that the correct legal names of the parties are used.
The Premises: The leased premises should be clearly indicated and described. Often, the premises are described in terms of rentable area, in which case the method of measuring rentable area also becomes important.
Rent: Most commercial leases have a “Basic Rent” and an “Additional Rent” component. “Basic Rent” is usually set out as a rate per square foot for the use of the premises. “Additional Rent” consists of all other costs associated in leasing the premises including, the tenant’s proportionate share of common area maintenance, operating costs, utilities consumed in the premises, realty taxes applicable to the premises, insurance premiums, heating ventilating and air conditioning and all other costs that are the responsibility of the tenant that are associated in leasing the premises.
Term: The tenant will have exclusive possession of the premises during the term, therefore it is essential that the commencement date and expiration date of the lease are clearly defined in the lease agreement.
Of course, there are many other terms that form part of a standard commercial lease agreement including proposed use of the premises, insurance and indemnities, maintenance and repair, assignments and subleases as well as default provisions.
Lease Terms For Tenants To Ask For:
In addition to the essential terms as set out in landlords’ standard lease agreements, tenants should seek to negotiate additional provisions to put themselves in a better position in their lease agreement. A tenant’s success in negotiating these provisions will depend on the bargaining power of both landlord and tenant. Some examples of clauses that tenants may wish to negotiate for in their leases are as follows:
Landlord covenants, representations and warranties: Tenants should request landlords to represent that the landlord is the owner of the premises, or at the very least, that the landlord has the right and authority to enter into the contemplated lease agreement. Tenants should also seek representations and warranties from landlords that the leased premises is in compliance with all environmental laws, that there are no hazardous substances within the premises, and that as of the commencement date, all systems of the leased premises are fully functional and in good working order.
Quiet enjoyment and non-disturbance: What happens if a Landlord sells the premises or goes broke? A tenant should negotiate for “quiet enjoyment” and “non-disturbance” to ensure that the tenant may continue to enjoy the leased premises without interruption throughout the lease term regardless if the premises is sold to a third party or on account of the landlord’s impecunious circumstances.
Options to renew or extend: Tenants may request options to extend or renew their lease for an additional term or terms after the expiry of the initial lease term. An option to extend or renew will grant a tenant the flexibility to either vacate the premises after the expiry of the initial lease term or remain in the premises for an additional or extended term.
Favourable assignment and subleasing: A tenant’s needs may change over the course of a 10-year commercial lease. As such, tenants should try to negotiate flexible lease assignment terms in order that they may assign or sublet the lease to another third party without impediment at any time during the lease term.
Tenant inducements: Tenants should ask landlords for inducements to enter into lengthy lease agreements. These inducements may be in the form of a rent-free period or a leasehold allowance to improve the premises. Generally speaking, the longer the lease term, the more likely landlords will be agreeable to providing tenants with these inducements.
Review lease restoration provisions: Commercial leases often will require tenants to restore leased premises to their original condition at the expiry of the lease term. Restoration costs can be very costly and tenants often neglect to plan for these added expenses. Tenants should seek to minimize their restoration obligations in order that they may leave the lease premises in a “broom swept, neat and tidy condition only,” at the expiry of the lease term.
In summary, commercial tenants should take their time to carefully negotiate their commercial lease. In doing so, tenants will better understand all of their lease obligations prior to signing the lease and may also be able to negotiate more tenant favourable terms. This, of course, will help tenants set themselves up for long term success of their business.
If you, as a landlord or a tenant, require any assistance with your commercial lease, our lawyers would be happy to help.
At Mills & Mills LLP, our lawyers regularly help clients with a wide range of legal matters including business law, real estate law, estate law, employment law, health law, and tax law. For over 130 years, we have earned a reputation amongst our peers and clients for quality of service and breadth of knowledge. Contact us online or at (416) 863-0125. The material provided through the Mills & Mills LLP website is for general information purposes only. It is not intended to provide legal advice or opinions of any kind.