It is essential that tenants carefully consider many factors when negotiating a commercial lease. This can help avoid unforeseen costs, protect existing or future business and start the tenant-landlord relationship on the right foot. Here are some key provisions that tenants should consider while negotiating a commercial lease.
Base Rent and Extra Cost
Most commercial leases used today allow landlords to add to the tenant's negotiated "base" rent, an array of their operating costs known as "additional" rent. These types of leases are known as net leases. It is important for tenants to understand how the proposed operating costs are calculated by the landlord and review the costs that fall under the tenant's responsibility. Tenants may negotiate limitations on what can be charged back as operating costs and require the landlord to provide an estimate of the current operating cost based on the space to be rented. Also, tenants should consider including an obligation from the landlord to provide detailed statements with supporting documents of such operating costs, allowing the tenant to confirm the accuracy of the operating cost being charged as additional rent.
Repair/Maintenance Responsibility
If a lease requires the tenant to assume some responsibility for the repair/maintenance of the leased premises and its facilities, the tenant should consider negotiating limitations on its level of responsibility. The tenant may seek exclusions to certain responsibility, like reasonable wear and tear, structural repairs of the building and potential repairs related to the negligence of the landlord.
Restoration
Landlords may require the tenant to restore the leased premises or return it to its original (preoccupation) condition. The procedure to restore the leased premises and remove all leasehold improvements can be a burdensome and expensive process. The tenant should consider having some limitations to this requirement for removing only its own trade fixtures (e.g. equipment, signs, etc.) and chattels (e.g., tables, chairs, etc.), and not the leasehold improvements installed during their tenancy.
Uses of the Leased Premises
Confirming how a tenant may use the leased premises will be included in the lease. Such a provision is usually heavily negotiated by both parties, as it provides the foundation for what the space will be used for and what may be prohibited. The landlord may have a specific restriction/prohibition on activities within the building, which should be considered during the negotiation. For example, the lease should provide for the description of the tenant's operation, including any ancillary or related use. Most landlords will favour a specific and restricted description of the permitted use of the premise, while tenants will prefer a broader description of use to permit flexibility to changes in their marketplace.
Extending the Term of Lease
Negotiating the renewal or extension of the lease will provide the right (but not the obligation) to extend/renew the term of the lease. Thus, it is crucial for tenants to be precise as to when this option can be exercised, and to specify the terms of the lease that will remain unchanged or may be negotiated during the extension/renewal. This provides the tenant with flexibility, continuity of the business and limits the requirement to renegotiate most terms of the lease. The tenant must track the lease and business needs, to ensure they exercise the option to extend/renew the lease term within the allocated time. Ultimately, the tenant decides whether to exercise such an option. Hence, it is beneficial to have a contingency plan in the lease to avoid the need to move or negotiate a new lease.
Transfer by Tenant
Occasionally, tenants need an exit strategy or to sell/transfer its business. It is crucial that the lease contains a "transfer" provision that allows for the lease to be transferable to another person/corporation subject to reasonable conditions. In general, most leases will require the landlord's written consent prior to any "transfer" and such consent may contain condition(s) that would limit the tenant's ability to transfer its lease. It would be prudent for a tenant to negotiate such transfer provisions and conditions to allow for certain transfers where consent from the landlord is not required or deemed acceptable.
For most commercial tenants, the lease is one of the most impactful commercial agreements for their business. Involving a leasing lawyer during the negotiation process and prior to signing a lease/offer to lease will greatly reduce unreasonable costs and limit unnecessary risk.
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.
