Commercial Lease Agreements

For any business owner, securing commercial real estate is a critical step. A commercial lease agreement establishes a legally binding contract between a commercial landlord and a tenant (your business). Commercial leases outline the rights and responsibilities of both parties throughout the lease term. Whether you’re opening a retail store or an office space, understanding the intricacies of a commercial lease is crucial. These contracts can be incredibly complex and signing without a thorough review can lead to unanticipated challenges down the road.

• Net Lease: This type of lease requires the business tenant to pay a portion of the building’s operating expenses. These expenses can include property taxes, insurance, and building maintenance. The portion is often based on the square footage of the rented space.
• Triple Net Lease: This type of lease requires the tenant to pay for all of the building’s operating expenses. This is typically used when the tenant is the sole renter in the entire building and there are no other tenants involved to split up the costs of operating expenses.
• Gross Lease: This type of lease stipulates that the landlord is fully responsible for all of the building’s operating expenses. However, as with any lease, there can still be hidden costs in a gross lease.
• Modified Gross Lease: This type of lease requires the tenant to pay a portion of the building’s operating expenses after an initial period. For example, your obligation to pay a portion of the building’s expenses may start after the first year of the lease.

Commercial leases are less regulated and offer less protection than residential leases. In BC, they are not governed under the Residential Tenancy Act but instead fall under the Commercial Tenancy Act. This legislative framework offers much less protection to tenants, as it tends to view commercial leasing as a business activity involving sophisticated individuals. There is also greater room for negotiating the terms and conditions of a commercial lease and the duration is typically much longer.

Here are some key elements that you will find in your commercial lease agreement.

• Rent: This clause details the amount of base rent payable and any additional costs that are included in the rent. This can include building insurance, property taxes, utilities, and maintenance costs which can add up quite significantly.
• Term: Commercial leases typically last from three to five years, sometimes even longer. This creates a long-term relationship between the tenant and the commercial landlord.
• Deposit: This clause details the amount of the security deposit, if the deposit is applied to rent, and whether it can be withheld by the landlord.
• Permitted Use: This clause explains what the commercial space can be used for by the tenant. In particular, what business activity is permitted. It is important to note that the tenant may need to obtain the landlord’s prior written permission before they can use the space for a different purpose.
• Maintenance and Repairs: This clause outlines who is responsible for maintaining and repairing the space. Specifically, who will bear the cost of this, what condition the space should be kept in, and what needs to be maintained (e.g., plumbing fixtures, electrical wiring, heating, ventilation, etc.)
• Damage: This clause details what happens if the space is damaged or destroyed (e.g., who is responsible for repairing the space or whether the commercial lease will be terminated).
• Insurance: This clause sets out who is responsible for obtaining and paying for the insurance as well as what type of insurance and coverage amounts are required.
• Transfer/Assignment: This clause explains whether the tenant can transfer or assign the lease to another party, whether the landlord’s consent is required, and on what conditions the landlord may refuse to provide consent.
• Extensions: This clause details if the lease can be extended, for how long the lease can be extended for, and what the terms of the extended lease will be. Specifically, the clause explains how the rent will be determined if the lease is renewed.
• Default: This clause sets out what constitutes a default of the lease and what remedies the landlord has in the event of a default (e.g., seizing and selling the tenant’s, accelerating the rent, or suing the tenant).
• Exclusive Use: There may be a clause that protects the tenant by having the landlord agree to not permit other tenants in the building to conduct business activities that are similar to yours.
• Tenant Improvement Allowance: There may be a clause where the landlord provides an allowance for the tenant to improve or upgrade the space for their use. For example, installing new floors, walls, paint, etc. There are usually conditions involved so ensure to read this clause carefully.
• Release: There may be a clause that releases the landlord from any liability for death, injury, or damage to the property.

In the commercial leasing process, the parties first enter into an Offer to Lease or Letter of Intent to Lease. This will include a summary of the main terms and conditions. At this point, the tenant will be given a period of time to review all of the terms and conduct their due diligence. This is when the tenant has a chance to engage a commercial leasing lawyer to review the Offer to Lease and the proposed lease itself. Once the Offer to Lease is accepted, it will be used to draft the final commercial lease and the main terms and conditions will be incorporated into this commercial lease.

It is important to note that standard commercial leases provided by the landlord are drafted in a way to protect the commercial landlords’ legal rights. This is why careful review is necessary. Ensure that you fully understand exactly what your obligations are. Ask yourself the following questions: Can you manage the rent and the additional costs (e.g., property tax, insurance, maintenance costs, etc.)? Will your business outgrow the space before the term ends? How can you terminate the commercial lease? Are you allowed to assign the commercial lease to someone else? In commercial leasing, these are just some considerations you should have in mind, as a business owner.

Moreover, is there room to negotiate lease terms? This will depend, in part, on the bargaining power you have in relation to the bargaining power of the commercial landlord. If you can negotiate, what items should you prioritize?

Commercial leases are complex. Before signing a lease, it is paramount to ensure that the commercial lease agreement aligns with your business needs and capabilities.

A commercial lease lawyer can review the fine print and help you negotiate your commercial lease. We can provide a detailed review of the commercial lease to determine if there are any red flags. We can also give you a clear idea of your legal rights and obligations under the commercial lease, so that you can make an informed decision regarding whether or not to move forward. Set up a free consultation to discuss your legal needs today.