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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Demolition Clause (
- 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
Gary C. Courtney
Courtney Aarbo Barristers & Solicitors
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