Taking a closer look at commercial leases
In this article:
- What are the laws governing commercial leases?
- What should be in a commercial lease?
- What are the different types of commercial lease?
How long is a commercial lease?
- Is a security deposit required when signing a commercial lease?
How do rent increases work with commercial
- Do I need to take out insurance as a commercial tenant?
- Is it a good idea to publish your lease?
What are the laws governing commercial leases?
Renting commercial premises is nothing like renting an apartment or house. Residential and commercial leases are governed by different rules and laws, which may vary from one province to the next.
For example, commercial property owners cannot retake possession of their premises for personal use the way residential owners can, unless it is spelled out in the lease.
Commercial leases may also contain finer points that can have an impact on your business development. Examples are provided below. That’s why it’s a good idea to analyze the provisions of your lease carefully and get legal advice before signing it.
Inquire about zoning and permits
Building owners generally check to see what kinds of businesses are permitted in their premises before they rent them out. But you can never be entirely sure. You may have to check on your own to see whether the municipality or borough lets businesses like yours operate at that location.
In many municipalities, a licence or occupancy certificate is required to open a business or industrial facility. Make sure you get any such documents before you sign your lease.
What should be in a commercial lease?
There is no standard commercial lease. Since all companies are unique, your lease should contain clauses designed for your specific needs. However, all leases must contain a description of the leased premises, the duration of the lease and the amount of the rent and must state
- the type of lease and how to renew it,
- the rules governing rent increases,
- the amount of the deposit (if required by the owner),
- the leasehold improvements to be made,
- the services provided by the owner,
- requirements with regard to insurance, and
- obligations about repair and maintenance.
In addition, depending on your line of business, an environmental clause may be included holding you liable for any environmental consequences of your actions.
Good to know: Any type of clause can be included as long as it does not violate a provision of public order
Again, it can be a good idea to consult a lawyer or notary specializing in commercial leases to help you understand the legal language and make the best choices.
What are the different types of commercial leases?
Depending on which expenses the tenant pays, commercial leases may be gross, net, double net or triple net. But no matter what you call a lease, what it actually says is the important thing in determining each party’s obligations.
The lessor will generally try to transfer as many obligations as possible to the tenant, but every clause in a commercial lease can be negotiated. Here’s a short description of the different types of lease:
- Gross lease: The tenant pays a set rent (usually in monthly instalments) that includes everything, even if the owner’s expenses rise. An example would be a convenience store on the ground floor of an office tower that occupies only a small part of the building.
- Net lease: Tenants pay a set base rent as well as additional rent for certain expenses such as property and school taxes, usually in proportion to the amount of space they occupy.
- Double net lease: Tenants also pay a portion of the building’s insurance, here again in proportion to the area they occupy.
- Triple net lease: The owner sends a monthly or annual invoice to all tenants, as set out in the lease, to cover all expenses related to the building, including such things as property tax, snow removal, window washing and roof repair. The amount is therefore variable, and the invoice is based on the proportion of space each tenant occupies.
- Percentage lease: The tenant pays the owner a set rent, and generally an additional rent, plus a percentage of the gross revenues generated by the business operating in the space they rent. This type of agreement is found in such places as shopping centres.
How long is a commercial lease?
Typically, the initial term of a commercial lease ranges from three to ten years. One or more renewal options are usually mentioned in the contract. It is important to determine when the lease comes into effect, as this date can also be used to determine the end date of the contract.
Good to know: Commercial leases can vary in length depending on a number of factors, including how much needs to be spent on leasehold improvements for the tenant.
Subletting or assigning commercial leases
Whether your business is outgrowing the space you have available or your premises are too big for your needs, you may want to sublet or assign your lease. Before you move, check to see if your lease allows it. It should specifically set out what the procedure is.
Note: Your lease may very clearly state that subletting is prohibited. The owner may also refuse the new tenant or subletter.
Termination of commercial leases
In most cases, you can’t get out of a lease, even if you have to shut your business for reasons beyond your control. It is therefore essential that you analyze the general economy and the specifics of your particular situation.
If you wish to terminate the lease before it expires (other than in the case of default by the owner), you must provide for this possibility and its terms in the lease before signing it. If there’s nothing in the lease, you have to work it out with the owner, and they may object. Lease termination clauses usually state how much notice you must give if you plan on leaving and whether there is a penalty to pay.
The owner can also decide to terminate your lease, but this must also be provided for in the contract. Consider negotiating to avoid situations that could threaten your business.
Is a security deposit required when signing a commercial lease?
The owner may require a security deposit at the time the lease is signed, typically one to three months of rent, possibly with a provision for it to be gradually paid back before the renewal date.
The owner may also request a bond from the company’s directors or officers or from a third party, who then undertake to personally assume the tenant’s obligations if the tenant cannot meet them.
How do rent increases work with commercial leases?
The lease must set out any increases in rent payable during the lease period or provide a calculation or method for determining such increases. For example, a clause that simply says “rent to be negotiated in good faith at renewal” does not protect you from a big hike.
Some commercial lessors will seek to protect themselves from the ups and downs of the real estate market by adding a clause about inflation. This allows them to increase their rent if, for example, maintenance or operating costs increase. Be sure to check what this clause means if it is included in your lease.
Do I need to take out insurance as a commercial tenant?
Generally, the owner should already have comprehensive insurance that protects against civil liability in common areas (entrances, stairs, elevators, etc.) and protects the building itself from hazards such as fire.
Tenants should have their own insurance to cover any damage they cause through their own fault or any damage caused to their property or the leased premises. The owner may require such insurance to protect themselves from possible claims.
You could also take out insurance covering “content and improvements” to ensure that your investment in the property is covered.
Inquire about the most common insurance in the event of
- a loss,
- general liability, or
- business interruption.
An insurance broker is undoubtedly the best person to analyze your situation and recommend what is right for you.
Is it a good idea to publish your lease?
To protect against possible termination of your lease by a new owner, it can be a good idea to publish your commercial lease in the land registry or registration office of the province where the building is located.
In Quebec, new owners of buildings containing commercial space can evict tenants unless their leases were published in the land registry via the Bureau de la publicité des droits du Québec (link to external site; page in French only) before ownership was transferred. The right to publish (by notice) a commercial lease is deemed to be of public order, and no clause in the lease can prevent the lessee from doing so. It is therefore generally recommended that you publish your lease.
In the rest of Canada: elsewhere in the country, the right to publish a lease is not mandatory and the landlord can therefore require the tenant to waive it in the lease. Additionally, posting a lease does not guarantee that a tenant’s lease is protected from termination by a new landlord. Several nuances are necessary and many factors must be considered. Seeking legal counsel on these aspects would be recommended.
Commercial leases are complex documents that can easily cause headaches for budding entrepreneurs. Be sure to read up about them and seek out advice to make the right decisions for your business.