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.
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.
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.”
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.”
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).
For more tips on business finance, sign up for the National Bank newsletter.
Canada Business Network, Signing a commercial lease.
Any reproduction, in whole or in part, is strictly prohibited without the prior written consent of National Bank of Canada.
The articles and information on this website are protected by the copyright laws in effect in Canada or other countries, as applicable. The copyrights on the articles and information belong to the National Bank of Canada or other persons. Any reproduction, redistribution, electronic communication, including indirectly via a hyperlink, in whole or in part, of these articles and information and any other use thereof that is not explicitly authorized is prohibited without the prior written consent of the copyright owner.
The contents of this website must not be interpreted, considered or used as if it were financial, legal, fiscal, or other advice. National Bank and its partners in contents will not be liable for any damages that you may incur from such use.
This article is provided by National Bank, its subsidiaries and group entities for information purposes only, and creates no legal or contractual obligation for National Bank, its subsidiaries and group entities. The details of this service offering and the conditions herein are subject to change.
The hyperlinks in this article may redirect to external websites not administered by National Bank. The Bank cannot be held liable for the content of external websites or any damages caused by their use.
Views expressed in this article are those of the person being interviewed. They do not necessarily reflect the opinions of National Bank or its subsidiaries. For financial or business advice, please consult your National Bank advisor, financial planner or an industry professional (e.g., accountant, tax specialist or lawyer).