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5 Things We Watch for in a Commercial Lease

5 Things to Watch for in a Commercial Lease

As a business owner, you are usually juggling multiple priorities at once. You have the weight of sales, marketing, and business development, and operations on your shoulders, not to mention solving problems and putting out (hopefully) proverbial fires that can arise out of nowhere. With physical premises for your business, you are also worried about everything from paying your rent and utility costs to accessibility to property damage. It’s enough to leave even the most successful business owners overworked and exhausted at times. 

Yet when you do have a commercial premises, your lease may be the most important document in your business. It outlines the terms of your relationship with your landlord and places serious rights and obligations on your business. The saying ‘the devil is in the details’ may sound cliche, but when it comes to commercial leases it can often be true. Remember that the landlord likely retained a lawyer to draft the lease, and these documents are usually long and complicated and give landlords the upper hand. 

We regularly review commercial leases with our longstanding corporate clients and wanted to point out just a few reasons why it’s worth consulting with an experienced lawyer before you sign your next lease.

 

Term and Renewal 

This may seem like something that’s clear-cut, but it may be a point of negotiation if the proposed terms do not work for you. Entering a 5-year lease for example is a serious commitment, so you will want to know exactly how long your lease runs and what your renewal options are (is there an option to renew, will the term renew automatically, will you be allowed to move to a month-to-month setup, etc.) If there is any delay in your possession of the space, will the rent be adjusted accordingly, or will you be able to cancel the lease if your business is impacted? It is also paramount to understand how you will be able to get out of the lease before the end of the term, should something unfortunate happen to you or your business. The lease will likely include a financial penalty should you need to exit early but you will want to know those numbers. 


Rent 

While we speak about rent as a fixed number within everyday conversation, that may not be the case within your lease. Aside from knowing the frequency and schedule of your expected payments, it is important as a business owner to know the formula used to calculate your rent, and how your rent can be expected to increase each year. You should also be aware of what space is included within the rentable area and how that will impact your rent increases. If your rent is calculated based on the rentable area and the landlord decides to add floors to the building which are unused by your business, will it still increase your rent because you are paying a portion of the ‘rentable area’? Your lease should be as clear as possible when it comes to your rent – any confusion will usually work against your interests as a tenant. 


Expenses 

A commercial lease should outline very clearly which expenses you will be responsible for as a tenant, and which expenses will fall within your landlord’s domain. The business’ utility usage (water, hydro, cable, internet, telephone) may be included directly within the rent or may be accounted for separately. Leases will often be ‘grossed up,’ which includes a portion of the common areas within rent, but as a tenant, you will want to be certain of exactly what of the landlord’s expenses you are covering and how much of those will be shouldered by your business. For example, is that gross-up rate calculated based on the building’s occupancy, and is there room for the landlord to vary that number if they do not have as many tenants as expected?


Use of Space 

The lease will discuss how the space can be used, but these uses must be in line with your business. Is the premises zoned properly to allow you to carry on your business? Is there anything within the lease agreement that would prevent you from growing or expanding your business into new areas? Is there anything within the lease that would prevent a competing business from opening nearby? Landlords will often have rights to a premises within a commercial lease, but business owners should be reasonably assured that they will have no issues in using the space for its permitted purpose and will have quiet and peaceful enjoyment for the duration of the term. For example, the landlord should not have the right to relocate you within the building, or at least not without your consent.


Improvements

Throughout your time as a tenant you may be seeking to make upgrades to the premises for the sake of your business operations. Depending on the type of improvement, it may be something that the Landlord gets to keep even after your term ends, and even though you paid for it entirely. Also, there may be a clause stating that when your lease is done, you may be faced with the cost of removing those improvements and returning the space to its original condition. This is a clause that can be negotiated, but only prior to signing off on a lease. Similarly, a lease should be clear about the expectations when it comes to improvements made by a landlord during the term of a lease. Will tenants be required to recover those expenses, even if their benefit from the change is minimal or non-existent? These items should also be explicitly set out in the lease language. 

For an untrained eye, a commercial lease may look like a boilerplate, but it can also be an absolute minefield. The language is intentionally designed to put landlords in charge, and this can cast unknowing tenants into really unfavourable positions during their tenancy. Not only can these issues turn into expensive disputes later on, but they can make it difficult or even impossible for you to operate your business.

At Pavey Law, we have years of experience in negotiating commercial leases for clients throughout the Cambridge, Kitchener, and Waterloo region. We understand that this region thrives on local businesses and want to do our part to help ensure that they can run smoothly. Contact us today to set up a consultation BEFORE you sign your next lease!