What Should Be Included in a Commercial Lease?

What Is a Commercial Lease?

A commercial lease is a binding legal agreement between a landlord and a commercial tenant which allows the tenant a real property interest. Statute and common law provide some rules protecting tenants from landlord interference and ejection, but these existing rights and rules are subject to the contractual terms in each particular lease. 

What Can You Negotiate in A Commercial Lease?

Negotiating

Before negotiating, tenants should visit the premises in question and discuss with the prospective landlord basic business tenancy terms. Based on those and standard terms, the landlord will draft a contract that is often pro-landlord. As a tenant, you will need to your know needs, and then negotiate to have those needs met. For example, if you are 

• An industrial tenant that is manufacturing, pay extra attention to environmental factors, employee parking, and loading and unloading areas;

• A retail tenant, focus on customer parking and outside signage; or 

• An office tenant, focus on electricity, cleaning, and other charge-based services.

 You will then negotiate with the landlord to come to a balanced agreement. Parties do not have an obligation to negotiate in good faith in pre-contract formation stages. Thus, tenants must do their due diligence by investigating the landlord, financial transaction, and leased property, and any defects to ensure their interests are protected. 

Bargaining power

The extent to which tenants can negotiate is dependent on their limited bargaining power. However, a tenant has more bargaining power if they are

• Established - a brand name or large tenant with the ability to draw customers to the leased space

• Creditworthy – able to reliably pay rent   

• Large – seek to rent a large portion of landlord’s property

• Long-term renters – seek to rent for a longer period

What Should a Commercial Lease Include?

Commercial lease types are innumerable: industrial/warehouse, office, retail, ground, multi-tenant industrial unit, stand-alone commercial unit, and more. While some provisions are type-dependent, all commercial leases should include the following:

• Names of parties and addresses

• Legal description of the leased premise 

• Rent (breakdown – (triple) net, gross, semi-gross)

• Duration/term/renewal rights

• Use(s) of the premise

• Transfer rights 

• Party obligations 

Names of parties and addresses 

Ensure the correct spelling of the legal names and addresses of the parties. Tenants, or their counsel, should confirm the identity of the landlord and determine whether the landlord is on the title. 

Description of premises

You should ensure that the described leased premise matches the area you need to use. For example, you will need to contract your rights to any elevators, shared common rooms, and/or parking garages that are necessary to carry on your use in the leased premises. 

Rent 

Rent is essential to lease agreements. Tenants usually pay a portion of the landlord’s owning and operating costs (known as additional rent) in addition to the basic rent amount. Operating costs are usually composed of taxes, maintenance, and insurance. The types and portion of the landlord costs paid by the tenant determine whether the rent type is net, gross, or semi-gross. In net leases, tenants pay basic rent and their share of the additional rent; this is the most common type of commercial lease. In gross leases, tenants pay a fixed basic rent and no additional rent. In semi-gross leases, tenants pay basic rent plus some other costs. Depending on the financial risk you are willing to assume and the extent you seek certainty in the amount owing, some rent types may better suit your situation. If you are unsure which type is best for you, consult a lawyer. Be as clear as possible in your description about rent: what, where, when, how, & who. If the premise is or will be renovated, then you may seek to include provisions about a rent-free period and/or a leasehold improvement allowance to cover renovations. 

Duration 

The lease should include commencement and expiry dates and, potentially, an option to renew or extend the lease. In the event the landlord seeks to terminate the lease, you may wish to negotiate for a longer notice period, limitations on when the landlord’s right to terminate the lease may be executed, and compensation for early termination. In the event you wish to terminate the lease, you should contract for this right. For example, if you cannot do business without a building permit, you may make the lease conditional on the permit or include a right to terminate the lease early if said permit is not issued or renewed.

Use

You will want to ensure the use clause allows you to operate your business. Generally, landlords do not guarantee the leased premises is, or that the landlord will make it, suitable for the tenant’s use. Even more daunting, landlords often include a provision you cannot terminate the lease just because the leased premise is unfit for your use. Thus, you must carefully contract to the contrary to include assurances in the lease that protect you from, for say, defects. If you are concerned that your landlord may lease its nearby units to businesses in competition with yours, you may consider including a covenant preventing competing use within a certain radius.

Transfer rights

As a tenant, your leasehold interest attaches to the leased land, not yourself. Therefore, your rights continue even if the landlord transfers the leased land to a new owner. If you think you may want to transfer your lease or sublease the premise, consider including a provision about your transfer rights. You will want to include provisions about whether you need the landlord’s prior expressed consent to transfer and if any fees are associated with requesting this consent.

Party obligations

The rights and obligations of the tenants and landlords vary depending on the business types, premises, and party needs. Most commonly, however, tenants pay rent and have the right to quiet enjoyment of the premises. The landlord collects rent and maintains the foundation of the premises.

To ensure the interests of your business are best met, book a free consultation with us.