The terms of any business's lease have become increasingly important in determining its stability, valuation, and long-term success. We are observing recent changes by one of Canada's large institutional landlords which has introduced new lease clauses that could disrupt the operations and financial health of your business or professional practice. For tenants, understanding these clauses isn't just advisable — it's essential for survival.
Let's unpack what's at stake, why it matters, and how you can protect your business interests.
The New Leasing Clause: What's Happening?
Unsurprisingly, most landlords seek to maximize the value and returns of their properties, and expansions or renovations are common strategies to achieve this. However, these new clauses take things a step further, introducing new risks for tenants.
These clauses grant landlords sweeping rights to make structural modifications, expand their properties, and even terminate leases without providing any compensation to tenants. Here's a closer look at the terms:
- Termination Rights for Expansion: Landlords can terminate a tenant's lease at will to create additional leasable spaces.
- Structural Modifications Impacting Non-Ground Floor Suites: Construction activities like adding elevator shafts or columns may force tenants to vacate —even those occupying upper floors.
- Mandatory Business Cessation: Tenants must halt operations entirely during construction periods, resulting in significant revenue loss.
- Short-Notice Vacating Requirements: Tenants could be asked to vacate portions — or all — of their premises with minimal notice.
- No Compensation for Disruption: Unlike typical relocation or demolition clauses, tenants receive no financial support for relocation, lost revenue, or operational impacts.
The Immediate and Long-Term Risks for Tenants
While these clauses may serve a large institutional landlord's growth objectives, they impose significant burdens on tenants, especially professional practices, which rely on location stability to serve their patients or clients.
Business Continuity Disrupted
The requirement to cease operations during construction could devastate revenue streams, particularly for businesses like medical offices, law firms, or retail businesses that depend on consistent access for clients or customers. For businesses with specialized facilities or equipment, relocation or downtime may be nearly impossible to manage without severe financial strain.
Loss of Premises on Short Notice
Short-notice vacating requirements mean that tenants could face abrupt displacements. For professional practices, relocating within 30 days isn't just inconvenient — it's often unfeasible. Building out new premises, ensuring compliance with regulatory requirements, and re-establishing client relationships will often take months, not weeks.
Zero Financial Recourse
Without compensation provisions, tenants must absorb all costs of relocation, business interruption, and lost revenue. This shifts the financial burden entirely to tenants, leaving them vulnerable to significant financial losses.
Business Valuation at Risk
For many businesses and professional practices, location stability is a cornerstone of business value. Buyers and financiers look for long-term lease agreements that offer predictability and security. The introduction of termination clauses and mandatory relocation terms could make these practices less attractive to investors or buyers, sharply reducing valuations and complicating succession planning.
Navigating the New Reality: Steps for Tenants
Tenants should consider the following proactive measures to safeguard their interests in this changing environment.
Conduct Thorough Lease Reviews
Before signing any lease agreement, engage legal counsel to review all terms and identify red flags. Pay particular attention to clauses related to termination, relocation, and construction impacts.
Negotiate for Protections
Landlords may present these clauses as non-negotiable, but tenants often have more leverage than they realize. Talk to your lawyer about negotiating for compensation provisions, extended notice periods, and limitations on termination rights.
Plan for Contingencies
Given the unpredictability introduced by these clauses, tenants should prepare contingency plans for worst-case scenarios. This includes identifying potential alternative locations, setting aside funds for relocation, and having a plan in place to communicate with clients if there is a disruption.
Assess Long-Term Lease Viability
If a lease includes these terms and the landlord is unwilling to negotiate, carefully weigh the risks. For some businesses, the potential downsides may outweigh the benefits of the location.
What's Next for Tenants?
Staying informed and remaining proactive is your best protection, as it will ensure your lease works for (not against) you. Sean Robson and our commercial leasing team at Lerners have the legal expertise to identify onerous lease clauses and can negotiate terms with your landlord that will help protect the long-term outlook of your business.
Special thanks to our articling student, David Zhang, for his assistance in preparing this article.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.