Commercial Lease: Important terms from the Tenant's Perspective
Updated: Feb 22
When a tenant signs a lease, he or she is entering into a complex legal contract usually for a significant period of time. The negotiated terms of the lease may have far-reaching effects, some of which may not be evident at the outset but which may become relevant under certain specific circumstances. An Offer to Lease between the Landlord and the Tenant is often the first step. The Offer to lease contains all of the major terms of the lease. Any terms essential to the operation of the business should be included in the Offer to lease. Important Terms to Include in an Offer to Lease or Lease:
The Offer to Lease and Lease should contain a clause allowing mutually agreed upon amendments between the Tenant, Landlord and their lawyers. Many offers to lease provide that the Lease will be in the Landlord's standard form. It is essential to have the right to negotiate all terms of the Lease.
Request a capital allowance from the Landlord for Tenant fitups to minimize costs at the start of your business operation.
The Lease should contain a non-disturbance clause. This becomes extremely important if the Landlord defaults on its mortgage and the mortgagee then takes over the operation of the building containing the leased premises. A non-disturbance clause provides that the mortgagee will not disturb the Tenant's possession of the premises. Without this clause, the mortgagee has the right to terminate the Lease upon six months' notice.
The Lease should contain a right for the Tenant to assign, sublet or share the leased space upon consent of the landlord, such consent not to be unreasonably withheld.
Require an option to extend the Lease at the end of its term.
Obtain a commitment from the Landlord not to the change the location in the building or shopping mall or, if this is not possible, then the Lease should include a clause that the alternate location will be acceptable to the Tenant and all costs of the move shall be borne by the Landlord.
Check the zoning to ensure that the business intended is a permitted use and whether there are other specific requirements under the zoning by-law eg. parking spaces.
Ensure that all negotiated terms of the Lease are set out in the Lease. Most contracts and leases contain a clause which provides that any oral representations or agreements outside of the written contract are not enforceable.
Rent in most commercial leases are twofold; base rent and additional rent. Base rent is based on a price per square foot of the space leased. Commercial Tenants then pay a proportionate share of realty taxes and operating costs as additional rent. The calculation used in determining the Tenant's proportionate share uses the Tenant's rentable area as the numerator and the rentable area of the building as the denominator. It is important to ensure that additional rent is based on a "true" proportionate share as many Leases contain a number of exceptions in the denominator which will increase the Tenant's proportionate share.
It is important to have the insurance clauses in the Lease reviewed by the Tenant's insurance broker. At the very least, the Lease should contain a clause whereby the Landlord's insurance policies specifically waive subrogation against the Tenant, its employees and those for whom the Tenant is responsible in law. Ideally, a reciprocal release of liability between the Landlord and the Tenant for any loss or damages to the extent of their respective insurance proceeds should be included in the lease.
The Lease should contain a clause which requires the Landlord to operate, maintain, insure, clean, supervise, rebuild, replace and repair the shopping mall or building as would a prudent owner of a similar building in a similar location.
If part or all of the building or shopping mall where the leased premises are located is damaged or destroyed, the Tenant should have the right to terminate the lease.
A commercial lease is a complex and comprehensive legal contract which should be reviewed by an experienced commercial leasing lawyer. Retaining a lawyer to protect your interest saves time and money in the long run.