Don't Sign a Commercial Lease Without Reviewing These Four Key Lease Provisions
A commercial lease governs the relationship between a landlord and a tenant. If you own a business, odds are that at some point you will need to lease a premises for you business and will need to enter into a commercial lease. Commercial leases are significantly more complex than standard residential leases and if you don’t know what you’re looking at you may easily find yourself in a situation that you did not anticipate. In this post, we’re going to look at four key lease terms that you should be aware of when you’re entering into a commercial lease.
Use of Leased Premises
A use provision in a commercial lease may specify: (a) how a premises may be used; (b) which activities the tenant is prohibited from using the premises for; and (c) whether some or all of the permitted uses granted to a tenant are exclusive solely to that tenant.
As the use provisions defines how you can use the premises you’re leasing, the use provision should be strongly negotiated to ensure that you’re able to operate your business as you best see fit. As a tenant, you want broad permitted uses as it gives you flexibility to adapt to changes in your business and it makes it easier for you to assign or subtenant the premises to a new tenant should the need for you to do so arise.
It is just as important to examine any prohibitions on use that a commercial lease may impose on your use of the premises that you’re leasing. A typical lease will include restrictions on uses that:
- are illegal;
- interfere with the quiet enjoyment of other tenants;
- damage or otherwise lower the value of landlord’s property;
- create risks which the landlord’s insurer may be unwilling to insure or which would materially increase the landlord’s insurance premiums; or
- conflict with any exclusive rights granted to another tenant.
Whenever possible you should also try and negotiate an exclusivity provision in your lease. For example, if you’ve opened up a dental office in a commercial plaza, you will want to prohibit other dental offices from being opened in the same commercial plaza. This protects you from competition and improves the value of your location. Naturally, landlord’s are reluctant to grant exclusivity to tenants as such clauses restrict to whom the landlord may lease its real property. However, in the right circumstances, a landlord may be willing to grant such clauses to induce a tenant to lease a space form the landlord or to control the tenant mix at their real property.
Tenant and Landlord’s Work Prior to Commencement of Term
If you’re lucky, when you sign a commercial lease with the landlord, the premises that you’re renting are already configured in a manner that’s suitable for your business operations. Unfortunately, that’s not often the case. In most instances the premises are often in need of improvements and modifications to ensure that they are suitable for a tenant’s use prior to the tenant beginning operations from the premises. The improvements or modifications may be trivial, such as painted or replacing light fixtures or may be more complex and expensive such as adding or removing internal walls or installing the tenant’s machinery and equipment.
Any work that’s required may be done by either the landlord or the tenant.
A landlord may offer to do some of the work to induce the tenant to lease the space from the landlord. However, in such instances, the landlord often factors the cost of work to be performed by the landlord into the basic rent that will be charged to the tenant during the term and, as such, the tenant often pays the landlord back for the work during the term of the lease. This may still be beneficial to you as the tenant if you do not have the cashflow to make the modifications yourself and are prepared to pay higher rent month to month to have the modifications performed for you by the landlord.
Often, much of the work that is required will have to be done by you. When the work to be done is extensive, you will want to negotiate with the landlord to obtain possession of the premises prior to the commencing your business operations from the premises. This period before you commence operations at the premises is often called a “fixturing period”. If you require a fixturing period prior to commencing operations at the premises, you should try and negotiate with the landlord to make the fixturing period “rent-free”. Many landlords are willing to make such a concession to induce the tenant to lease the space from the landlord and because the landlord understands that you cannot operate your business from the premises (and, as such, earn money) while the premises is being fitted for your operations.
Removal of Improvements and Alterations at Termination of Lease
Often, tenant’s overlook whether they have to remove the alterations or additions that they made to a premises at the commencement of the lease. Overlooking such a provision can be quite expensive as restoring the premises to their “original condition on possession” can become quite expensive. As a tenant, you will want to negotiate for no or minimal restoration obligations for the premises at the expiry and termination of the lease. While you may not wish to restore the premises to its original condition, it is often desirable for a tenant to be able to remove their trade fixtures from the premises on termination of the lease. As such, you will want to ensure that you negotiate a provision with the landlord that will allow you to remove your trade fixtures from the premises.
Assignments, Subleases and Changes in Control
Another key provision in a commercial lease is the assignment, sublease and change in control provision. This provisions places restrictions on a tenant looking to assign or sublease the premises to a new tenant or to prevent a change in ownership of the tenant if the tenant is a corporation.
As a tenant, you want to be able to assign, sublease and change control with minimal restrictions as the ability to assign, sublease or changing control is a way to permanently or temporarily exit all or part of your tenancy obligation before the end of the lease term.
A landlord wants to control who is using their premises and often increases conditions into the lease to restrict a tenant’s ability to assign, sublease or change control. In most commercial leases, the lease provides that a tenant cannot assign, sublease or change control without the prior written consent of the landlord. In such instances, you will want to ensure that the landlord cannot unreasonably withhold or delay its consent to an assignment, sublease or a change of control. In Ontario, a landlord cannot unreasonably withhold consent unless the lease expressly provides that it may do so.
While this post highlights some of the key provisions to keep an eye on when negotiating a commercial lease, there are other key factors which may have an impact on your commercial lease. We would be happy to assist you in negotiating a commercial lease. If you have any questions or would like to retain us to review a commercial lease, please feel free to contact us or call us at 647-977-7749 to schedule an initial consultation.