Various Items for Consideration in the Context of Commercial Leasing
While location and rental rates are vital considerations when evaluating the desirability and suitability of available commercial space and tend to be the main areas that tenants focus on, there are a number of additional issues for tenants to consider prior to signing an Offer to Lease and/or a more fulsome Lease Agreement for commercial space. Leases are among the most important contractual agreements that many businesses enter into, not only because of the length of a typical lease term, which can be anywhere from 5 to 15 years, but also because of the importance of having appropriate space from which to carry on operations at a rental rate that is consistent and affordable. Commercial lease arrangements can be fraught with potential liability for the unknowing or naïve tenant.
Set out below is a list and brief description of some issues and items that commonly arise, either in leasing situations or in the leasing documents themselves, that tenants ought to consider prior to signing lease agreements. It is not intended to be an exhaustive list of issues that arise in a commercial leasing context and anyone who is considering signing an Offer to Lease or a Lease itself is well advised to seek professional legal advice. For a more detailed discussion on each topic below, please click on the title of each topic.
Offers to Lease and Standard Form Lease Documents
Offers to Lease contain the basic terms of the proposed leasing arrangement between the parties such as rental rate, the size of the premises being leased, the term of the lease, etc. A common mistake made by tenants is the belief that once these basic terms are agreed upon, the important items have been dealt with and there is little or no concern about the remainder of the terms which form party of the larger more fulsome Lease Agreement. However, there are a number of additional items which will be included in the Lease, including the items discussed below, which, if not properly considered and negotiated, may cause the tenant to assume significant unexpected liability.
The most common type of leases for commercial space (whether office, retail or industrial) are (i) “net” or “carefree” leases which essentially allow the owner of the space to pass on most of its costs of owning, operating, repairing and maintaining the space down to the tenant; and (ii) gross leases pursuant to which the tenant pays a fixed annual rental amount regardless of any increased costs incurred by the owner in owing, operating, repairing and maintain the space during the lease term.
The tenant must ensure that its proposed use of the premises is allowed by the landlord and by applicable zoning and municipal by-laws.
In a “net” lease context, the tenant generally pays all of the landlord’s actual operating expenses relating to the premises being leased as well as a share of the landlord’s operating expenses for the whole of the building and/or Complex. These costs are in addition to the base rent (i.e. the stated dollar amount per square foot of rentable space) payable by the tenant.
Review Operating Expenses/Audit Rights
The tenant must ensure that the Lease provides it with the right to review all of the items comprising operating expenses, usually on an annual basis. Depending on the negotiating strength of the tenant, it should try to include a right to audit the landlord’s books and records relating to the operating expenses to ensure that the landlord’s calculations are correct and that the tenant is not being charged for items that have, by agreement of the parties, been excluded from the tenant’s shares of operating expenses.
Landlords sometimes offer, or tenants can sometimes successfully negotiate, a payment by the landlord to the tenant to enable to tenant to build out the premises for its particular purposes. Tenant improvement allowances may be in the form of cash payments, rent free periods or subsidized rent.
Landlord standard form leases often contain a clause which allows the landlord to relocate the tenant in the event that the landlord wishes to renovate or reconstruct the building or the premises where vacant possession of the premises is required. Once a lease containing such a clause is signed, the tenant will be forced to relocate to substitute premises of the landlord’s choice and will (usually) be responsible for the majority of costs associated with the move.
Maintenance and Restoration Obligations
At the expiration of the lease term, the tenant will often be required to leave the premises in the same condition as it was at the beginning of the term, reasonable wear and tear only, excepted. The tenant is often required to remove its fixtures and improvements and to make good any damage caused by the installation or removal of these items. Of course, this can be quite expensive for the tenant and an expense that most tenants do not budget for. If possible, the Lease should be amended so that the tenant’s obligations on the expiration of a lease term are limited to leaving the premises in a clean and broom swept condition and at the same level of maintenance and repair as it was subject to during the term of the Lease.
Right to Transfer the Premises
If the tenant wishes to cease use of the premises for any reason, whether it be because of insolvency, going out of business, corporate reorganization or simply relocation of its operations, if the term of the lease has not expired, the tenant will have to assign the lease or sublease the premises to a third party. The vast majority of standard form leases prohibit a transfer without the landlord’s prior consent.
Environmental Matters
Many leases contain language that make the tenant responsible for all costs relating to the clean up of any hazardous substances or other environmental. Remediation costs can be high and the tenant should carefully review, and amend, the lease to ensure that it is only responsible for any environmental contamination caused by it or during its tenancy as a result of its negligence.
Events of Default
Leases usually contain a wide range of events that constitute a default under the lease and provide the landlord with a wide range of remedies. Each event constituting a default should be carefully reviewed by the tenant, and amended as necessary to ensure that the tenant is entitled to receive reasonable notice of any default as well as a reasonable period of time within which to cure such default.
Including an option for the tenant to extend its lease term after expiry of the original lease term is beneficial for both parties, because if exercised, it saves the landlord the trouble of searching for a new tenant, and it saves the tenant the trouble and expense of searching for new premises, moving and negotiating a new form of lease.
For more information on commercial leasing matters, please contact Laila Parvez at (416) 368-0491 or by email at lparvez@businesslawyers.com.
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