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  

1 comment:

  1. The tip that stood out to me most was number four where you distinguished the difference and the meaning of gross and net rent for a landlord. It seems simple enough that net rent isn't necessarily fixed like gross rent is. We're looking to get a space that will facilitate this profit as much as possible. What are some strategies that I can use?