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Taking a closer look at commercial leases

03 November 2018 by National Bank

Are you planning to set up a storefront for your start-up or SME? Before you even start looking at premises, it would be a good idea to consult a lawyer or notary, who can advise you and help you negotiate terms—especially if this is your first experience with commercial leases.

Your legal advisor will also help you analyze the document before you sign it. Commercial leases often run to 50 pages or longer! Investing in legal advice will help you avoid much more costly errors, as commercial leases involve numerous details that could affect the future of your business. Provincial housing authorities do not have jurisdiction over commercial leases. Building owners are therefore free to impose terms and conditions, provided they comply with the rules of public policy. The parties involved will have to turn to the courts to settle any litigation.

Gross or net lease

There are various different types of commercial lease: gross lease, net lease, double net lease and triple net lease. The property owner generally selects the type of lease that represents the least risk for him, while the tenant must agree to that lease in order to rent the premises.

Tenants who sign a gross lease must pay a fixed monthly rent that includes all fees, even if the landlord’s expenses increase. This type of lease could be used, for instance, for a convenience store on the ground floor of an office tower, which occupies only a small portion of the building’s floor space.

For a net lease, a base rent is set and the tenant contributes a share of the building’s expenses based on the number of square feet rented. These expenses include property and school taxes. A double net lease also involves paying a portion of the insurance based on the number of square feet. A triple net lease goes further still: the landlord sends all tenants a monthly or annual bill (as set out in the lease) for all the building’s expenses, from property taxes to snow removal, window cleaning and roof repairs. The amount is variable, and the bill is calculated based on the number of square feet occupied by each tenant. “If a business is planning to open a retail store that will occupy the entire ground floor of a building, it should keep in mind that the appearance of the façade could affect its sales. Therefore, it may prefer to assume its share of other expenses in order to have a say in the quality of maintenance and repairs,” explains Nicolas Brabant of BAA Corporate Lawyers.

Consider lease renewal and assignment options

Leases are often signed for an initial three-year period and generally include one or more renewal options. “When it comes to renewal options, your annual increase should be fixed or determined via a calculation clearly set out in the lease,” stresses Mr. Brabant. Far too many tenants accept clauses stating that rent is to be negotiated in good faith at renewal. But how can you guarantee your landlord’s good faith? If no amount or percentage is indicated, he could impose a significant increase if he sees that your business is doing well. This will leave you in a tough spot: either you accept the rent increase, or you move—which could result in a loss of goodwill and require you to cover the expenses associated with moving and setting up your business in new premises.

“Unlike residential landlords, the owner of a commercial property cannot reclaim the premises for his own personal use, unless a clause to that effect is included in the lease,” states Richard Drapeau, a notary whose office is in Sherbrooke, Quebec. “The owner also may not withhold consent to a request for assignment without reasonable cause, again unless a clause in the lease stipulates otherwise.”

Security deposit, personal guarantee and collateral mortgage/immovable hypothec

When the lease is signed, the building owner will request a security deposit (generally from one to three months’ rent). This deposit may be gradually reimbursed before the renewal date. Once a relationship of trust is established, no deposit is generally required. He may also request a guarantee from the administrators or directors of the company, whereby they consent to personally assume the tenant’s obligations if it should not be able to do so. The building owner may also wish to take out a collateral mortgage (immovable hypothec in Quebec) on assets and equipment kept on the premises. “This option is fairly uncommon,” says Mr. Brabant.

“In many cases, the assets in question have already been given as security to the bank, and the business may prefer not to have secured creditors in addition to the lender.”

Don’t forget to publish your lease!

While residential leases are governed by the provincial housing authority, there is no standard commercial lease, and almost any clause can be implemented.

“Yes, all clauses are permissible, as long as they do not contravene the rules of public policy,” clarifies Mr. Drapeau.

The property owner can, however, request that only a summary of the lease (duration and renewal options) be published, and that it be approved by the owner beforehand. Although the tenant can renounce the right to publish the terms of the lease, such publication protects the tenant in the event that the building is sold. The new owner will then be obliged to comply with the terms of the lease. Otherwise, the tenant can be evicted (after notice is given). It costs approximately $100 to register a lease, plus the fees to have a legal professional certify the accuracy of the information provided (as required under the Quebec Civil Code).

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Learn more:

Canada Business Network, Signing a commercial lease.

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