Tuesday, 2 April 2013

Commercial Leases -- Ten Common Problem terms from a Corporate Lawyer

Ten Common Problem Terms in Commercial Leases

By Gary Courtney, Barristers & Solicitors

Providing Information to Assist Small Businesses

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

What follows is some commentary on terms of commercial leases that often cause tenants difficulty:

  1. Commencement of the Lease Term. When reviewing a lease one will normally find that a Landlord will only agree to use its best efforts to deliver the premises on a specific date, and be released from liability for any damages which may arise as a result of late possession. For the tenant a fixed possession date might be critical. There should be a provision setting an outside date by which possession must be delivered. The commencement date should provide the Tenant ample time move in and open for business.
  1. Percentage Rent. Many Leases contain provisions for additional rent to be paid based upon a percentage of gross sales. The definition of gross sales is critical and those items included and excluded from gross sales should be carefully reviewed. Better yet, try to have this clause omitted.
  1. Operating/ Additional Cost. The definition of these costs is critical to the overall costs to the tenant of the lease, as these cost payments can be substantial. The definition of occupancy costs should be reviewed carefully to ensure that there is no double charging, for example, by including both a depreciation charge and a capital cost replacement charge for parts of the building that need replacing. Care should be taken to ensure that the portion payable by the tenant is the proportion the leased premises bears to the whole of the rented and rentable area of the building. In the event there is a vacant space in the building, the Landlord should bear the common area costs in respect of such vacant area. It is also essential that your agreement provide proper and full accounting of the claimed costs.
  1. Insurance. The types and dollar levels of insurance required of the tenant should be reviewed with insurance advisors to confirm a tenant is able to comply with such requirements.
  1. Caveats. Commercial Leases normally prohibit the tenant from filing a copy of the Lease with the Land Titles Office. This provisions is inserted as Landlords do not wish the business terms of each Lease transaction to be available for public scrutiny. However, the Lease should not prevent the tenant from filing a Caveat at Land Titles on title to the property to protect its interest in the lease, (only available if the Lease term is three years or more). It is critical to register this caveat or else you risk having your lease ignored by a future buyer or financier of the property.
  1. Subletting and Assignment. Any prohibitions that require a landlord’s consent should be qualified by the proviso that such consent will not be unreasonably withheld. These clauses are very complex and need to be carefully reviewed. These clauses become critical if the tenant wants to move location for example.
  1. Option to Renew. Should be contained in virtually all Leases. The Option to Renew usually provides that if the lease is renewed for a new term it will be on the same terns as the initial lease, except for the amount of rent. An option to renew should provide for some fair method of determining the rent for the new term.
  1. Default. All default provisions (except perhaps for a default in the payment of rent) should be qualified by the requirement for the landlord to give notice to the tenant and provide the tenant with a reasonable period of time within which to remedy any default before the landlord is permitted to exercise its remedies under the lease.
  1. Demolition Clause (Sale Clause). Allows for the termination of the lease in case of demolition or sale of the premises. If the landlord wants one the tenant should investigate what is happening at the property and perhaps argue for terms compensating him if the clauses are acted upon.
  1. Environmental Clauses. These terms should be carefully reviewed to insure the tenant does not have to pay for the clean up of environmental problems for which it is not a fault.
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

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