Wednesday, 20 March 2013

Commercial Lease Basics -- Lawyer Tips for Small and Medium Sized Businesses

Commercial Lease Basics

By Courtney Aarbo, Barristers & Solicitors

Providing Information to Assist Small Businesses

One of the most important, and costly agreements entered into by virtually all businesses new and old, is a commercial lease for their premises.

The standard lease agreement for commercial space will almost always be the longest and most difficult to understand “standard form” agreement one will have to deal with. The lease agreement of the 50 page variety will almost without exception be extremely one sided providing the Landlord with everything conceivable, and the Tenant with the minimum possible protection.

Despite what the leasing agent of the landlord lets on, the Tenant has a lot of bargaining power. Many of the one sided terms in the standard form lease blank can be eliminated or amended, resulting in large savings to the Tenant.

Given all these factors it is a very wise investment to retain professional help such as a lease broker and / or lawyer to help.

What follows are general recommendations when dealing with lease negotiations and the lease itself:

  1. The commercial leasing agent, while useful to advise you efficiently as to the rental space on the market, is not the best person to provide you with advice on whether you are getting a “good deal”. Remember, the leasing agent is paid usually a percentage commission by the Landlord, only if he rents the space.

  1. It is critical that you have an idea as to the market rate for space before you start bargaining on a specific location. Look around. Make inquiries. You should  approach your search in a fashion similar to how you would look for a house.

  1. Everything is negotiable (within reason).

  1. Gross rent usually means the total amount the tenant will pay to the Landlord- it is a fixed sum. Net rent plus operating costs is not a fixed sum. The net rent to the Landlord (his “profit”) is fixed, but the operating costs will fluctuate (usually going up) through the lease term. Often the operating costs are more than the net rent. With Gross rent you should have a known fixed sum per month for you to pay during the entire term.

  1. Most commercial leases involve net rent plus operating costs. It is crucial that you obtain a history of the operating costs for the space and that you have a good assurance as to what to expect during the lease term. For example, if a property tax reassessment is in the works- it has been known for operating costs to double in one year due to property tax increases. It is critical that you obtain a detailed definition of what is included in operating costs. Sometimes Landlords try to charge inappropriate items as operating costs. It is critical that the lease stipulates that the tenant get a proper account of the operating cost charges each year.

  1. If you operate through a corporation, personal guarantees of the rent payment by your corporation are almost always requested, but can frequently be eliminated or reduced in negotiations. Remember that you set up a corporation to avoid personal liability, so it is obviously unwise to lose the protection through a huge personal guarantee.

  1. Tenant inducements like several “free” months rent, or money towards tenant improvements are regularly given by Landlords (and appreciated by tenants starting out in business). Nothing comes “free” however, as most Landlords will have calculated the payback for the tenant inducements by requiring higher rent during the balance of the term. If you don’t require tenant inducements, then require lower rent.

  1. Most commercial leases involve a 5 or 6 page “Offer to Lease” and a 50 page lease (to be signed later) The Offer to Lease is a binding legal document that may in fact constitute a binding lease. Most major terms are set out in the offer. Going to your lawyer for advice on matters covered in the Offer to Lease, after it is signed is too late. At a minimum make sure the offer contains a term that it is subject to approval by your lawyer, and that your lawyer can propose reasonable amendments to the lease itself. Better yet, call the lawyer in during negotiations, where he or she can do the most good.

  1. Get any “verbal” assurance put into the offer and lease. Virtually all offers and leases have a clause that says there have been no representations except what is in the document in writing. If it is not written in, you may not get the concession.

  1. That 50 page document which the leasing agent says is “standard” contains 50 pages of detailed legal clauses, many of which you will have difficulty understanding and many of which should be eliminated or amended. These clauses are important. The fact that it is the “Landlord’s Standard Lease” should tell you that it is written for the Landlord’s benefit, not yours. Have your lawyer review it before you sign it.

For more information contact Courtney Aarbo Barristers & Solicitors at 3rd Floor 1131 Kensington Road N.W., Calgary Alberta T2N 3P4 or info@courtneyaarbo,ca or phone 403-571-5120.

Gary C. Courtney
Courtney Aarbo Barristers & Solicitors  

Wednesday, 13 March 2013

Selling Residential Rental Properties in Alberta- How to Terminate a Tenancy

By Courtney Aarbo Barristers & Solicitors

Providing Information to Assist Small Businesses

It has been our experience at Courtney Aarbo that in sales of rental property there is some confusion about what is required to be done by seller’s to comply with the “Residential Tenancies Act of Alberta”. Failing to comply with this legislation can result in great complications or even not being able to close the real estate deal.

As a first point one should note clause 2 (1) of the Act, which exempts certain types of rental properties from its provisions. These include rentals of mobile homes and rooms rental within the landlord’s home (boarders).

Assuming the Act applies, and the Seller is attempting to sell a home or condo that is rented with either a yearly or monthly lease, and the Buyer is planning to move in as apposed to continuing to rent, then the Seller is going to need to properly terminate the lease as of the sale closing date, or earlier. Failure to do so will breach the Seller’s obligation to provide the Buyer vacant possession under the contract.

If the Lease is a ‘month to month’ lease then section 8 (1) (b) of the Act requires the landlord (the Seller) to give the tenant notice on or before “the first day of the notice period.” The notice period is defined as being 3 consecutive ‘Tenancy months’. By way of example, if the sale is to close on July 1st, then the month to month tenant must be given proper notice to vacate by no later than April 1st.

If the Lease is a yearly tenancy then section 9 of the Act requires that a landlord give notice to the tenant “on or before the 90th day before the last day of the tenancy year”, to be effective at the end of the lease year. Section 10 (c) does allow a notice to terminate a yearly tenancy that is late to be effective 90 days later so long as it is served before the end of the tenancy year. By way of example, if the lease year ends June 30, a notice would need to be served on the Tenant on or before April 2nd to be effective June 30th. If however it was served on June 1st, it would be effective 90 days later. If the landlord (the Seller) did not serve the tenant until July 1st, into a new tenancy year, the notice would not terminate the tenancy until June 30th the following year- obviously a problem if the real estate deal close date is only one month later.

Please note that by section 10 of the Act the notice to terminate must

a)      be in writing;

b)      be signed by the person giving the notice (landlord) or the landlord’s agent;

c)      set out the reason for terminating the tenancy example: a sale of the property;          

d)      identify the premises for which the notice is being served; and

e)      state the date on which the tenancy is to terminate.

Service of the notice can be effected under Section 57 of the Act by personal service, registered mail, or certified mail. If the landlord cannot serve because the tenant is absent from the premises, it can be left with an adult or posted to the premises door.

Of course if the Buyer is purchasing the property with the idea of not continuing to rent it, then provided the Buyer wants the existing tenant, no notice to terminate needs to be given. The Seller will however have to assigned the tenancy agreement to the Buyer, notify the Tenant of his or her new landlord, and properly adjust on closing for rent paid and damage deposits. These adjustments are usually calculated by the Seller and Buyer’s respective lawyers.

For more information contact Courtney Aarbo Barristers & Solicitors at 3rd Floor 1131 Kensington Road N.W., Calgary Alberta T2N 3P4 or or phone 403-571-5120.

Gary C. Courtney
Courtney Aarbo Barristers & Solicitors