Six Key Issues to Consider When Entering a Commercial Lease

For a public-facing business, the choice of commercial premises is crucial.

However, finding the right location is only the first step toward a successful lease agreement. Every commercial lease transaction is unique, involving many moving parts and potential pitfalls for unprepared tenants. That’s why business owners need to assemble a team of experienced legal and real estate professionals who understand the market and can protect their interests at every stage.

One of the most basic elements of your commercial lease is its duration. There are no hard and fast rules about the length of a commercial lease, but ultimately, the decision usually forces business owners to trade off the flexibility of a shorter lease against the stability that comes with a fixed, known location in the community.

Newer businesses often opt for shorter leases to account for potentially contrasting fortunes in their early stages. On the one hand, shorter terms free up fast-growing firms to find bigger spaces when needed.

On the other hand, they also act as a hedge against the risk of business failure, since the corporation could be on the hook for outstanding rent for the remainder of the lease term. In addition, there is often an extra element of jeopardy for start-up founders, since landlords will often require some form of personal guarantee before entering a commercial lease.

Another fundamental term in any lease is the rent, usually calculated as a monthly amount per square foot of space.

However, that’s not the end of the story when it comes to the tenant’s monthly expenses: although some landlords will agree to “gross rent” leases where the tenant pays a flat rate to cover all incidental costs, most of the commercial leases that our firm deals with are what is known as “Triple Net” leases.

In these cases, the tenant assumes responsibility not only for the base rent, but also the operating and maintenance costs associated with the space, including gas and hydro, property taxes and insurance premiums. The landlord may provide an estimate for these incidental costs based on the numbers from the previous year, but it may or may not be a reliable guide. Tenants should budget for the possibility of an upward adjustment once they move into the space.

In a country as tightly regulated as our own, it’s not possible to operate any business out of any location.

A commercial lease will often state the zoning rules that apply to the landlord’s premises, but tenants should conduct their own due diligence to confirm that they will be allowed to use the property for their intended purpose.

If it turns out that the zoning stated in the lease was wrong, a landlord’s possible misrepresentations could boost a tenant’s subsequent claim for damages. However, it would save everyone a lot of trouble if the tenant investigates and discovers any errors ahead of time.

Making a commercial space your own can be an expensive undertaking for business owners. In addition to paying for furniture and equipment, tenants are typically responsible for any improvements and alterations required to bring their new premises up to scratch.

Depending on the nature of the work required, there may be some room for negotiation over a base rent reduction, since the value of these improvements stays with the landlord after the tenant vacates.

When a business becomes known for its location, a move across town is more than just a hassle: it’s an existential risk.

That’s why tenants may wish to consider inserting a renewal clause into their commercial leases, providing them with an option to extend the lease for a certain period once the initial term is up. In many cases, the only thing that would change on renewal is the amount of rent due under the lease, although it may take some negotiation before the parties can settle on a value for fair market rent.

If there is no agreement to renew, expired leases typically continue rolling on a month-to-month basis. However, provincial legislation gives commercial tenants much less protection than their residential counterparts, and landlords are relatively free to evict a business after providing the required notice.

There have been rumblings in the provincial legislature about new laws restricting the rights of commercial landlords to evict their tenants, but nothing concrete has come of them so far. We will be watching for developments on that front in the coming years.

If you would like help negotiating a commercial lease transaction or have questions, feel free to get in touch.

*This post is not intended to be legal advice and should not be taken as such. Please contact McConnan Bion O’Connor & Peterson if you have any questions regarding this post or require assistance or legal advice regarding commercial leases.