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:
- 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.
- 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.
- Everything is negotiable (within reason).
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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
Gary C. Courtney
Courtney Aarbo Barristers & Solicitors www.courtneyaarbo.ca
