If you are a business owner who requires a physical location for your operations, you will either need to purchase a space, or more likely, enter into a commercial lease. A commercial lease will define every aspect of your relationship with your landlord, a relationship that could last several years. Therefore, the importance of the negotiation of this lease cannot be under estimated.
Commercial leases are governed by the Commercial Tenancies Act. Unlike the Residential Tenancies Act, which to a certain extent protects tenants from facing the consequences of a lease they may have failed to appreciate, the Commercial Tenancies Act offers less protection for tenants. The law assumes the negotiation that takes place with respect to a commercial lease happens between two sophisticated parties, knowledgeable in business practices. . As a result, there are far fewer consumer protections offered by the Commercial Tenancies Act and even those protections that are offered are not written in stone. In many cases, the contents of a signed lease will take precedence over the Commercial Tenancies Act. Parties are free to even contract out of the Commercial Tenancies Act and decide for themselves what remedies are appropriate in the case of default under the lease. As such, it is very important to take your commercial lease negotiation seriously – know your business needs, what you can afford, and what expectations you have of your landlord. Be meticulous and conscientious so that your business will thrive in its commercial location.
Questions you should ask and answer in your lease include: How much rent will you pay? Will utilities, general maintenance, etc., be included in my rent?
Rent is typically established in a commercial lease according to a cost per square foot per year. As such, know the standard of measurement used by the landlord. How are the closets and unusable space measured? Does the landlord measure from the inside of the walls or outside of the walls? Finally, how much of your rent is apportioned to public space such as hallways, bathrooms and mechanical areas?
Once you have figured the size and dimensions of the space you hope to lease, the next question to consider is what does your lease cover? For example,with a gross lease, you will pay a standard monthly amount and your landlord will be responsible for paying the expenses of operating the building, including taxes, insurance, maintenance and repairs. There are also various forms of “net leases” that require the tenant to pay a share of all or some of the carrying and operating costs of the building.
Be sure to negotiate and set the base rent payable for the entire term of your lease. Be sure you are clear on what, if any, additional rent you are responsible for as part of the lease.
Term of the Lease
A typical commercial lease term can last as long as ten years. Subject to negotiation, commercial leases may have options to extend the initial term as well. It is in the tenant’s sole discretion whether to exercise these options to extend. These options provide operational security in the event that, at the end of your initial term, you would like to remain in the space.
Unless you have negotiated rights under the lease to do so, the cost of terminating your tenancy early can be very high. Most commercial leases, however, provide for the ability to assign or sublet your lease. Ensure you are aware of whether or not your lease expressly provides for this right.
Use of Space
What do you need from your environment? Is the space suitable as is or will you need modifications, or ”fit ups”, to be completed before your business moves in? For example, do you need cubicles or to have the space divided into separate offices? Will you need a showroom, shelving, private bathroom (hence plumbing installed)? The cost and scope of these modifications should be negotiated clearly in your lease. It is also important to establish whether the landlord will financially contribute to these improvements. You should ensure it is clear between you and your landlord: what the modifications are; when they will be completed and what happens if the modifications are not completed on time. Will you be entitled to a rent abatement? Under what conditions can you walk away from the lease if the landlord cannot or does not provide what it has promised? Do not leave yourself in a position where you are bound to a location that cannot accommodate the needs of your business.
In addition, ensure that any circumstances or factors you have presumed to exist upon entering into a lease that are a key component to the success of your business will be maintained throughout the life of your lease. For example, if you have chosen a very busy office building to locate your coffee shop, with a view to being the only shop to supply the other tenants, make sure this exclusivity of use will be sustained through the term of your lease and have your landlord agree not to lease to any potential competitors. If the success of your business depends on generating walk-in clientele, make sure your lease allows you to post outside signage and that potential clients will have easy access to your unit.
These are just a few of the fundamental considerations when entering into a commercial lease. This article is by no means a comprehensive list of everything to consider and negotiate when entering into a commercial lease. However, it aims to set out some primary and practical considerations that should be the starting point for the lease negotiation.
Your commercial lease is like the “bill of rights” between you and your landlord for the term of your lease. Understanding how it works, what you are entitled to, what your obligations are and what you will need from your landlord is just as crucial to the success of your business as any of the other business decisions you will make.
Please contact us at Corestone Law for more information on commercial leases. We are happy to help you get the most from your commercial lease.