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Three Things to Think About When Negotiating a Commercial Lease

Commercial leases are complex in that they set out very specific (often in a verbose manner) the nature of the agreement between a landlord and commercial tenant. They tend to have many moving pieces, which are often defined by the type of business, and the location of the property and the size of the property. A lease for a mechanic's garage is going to be substantially different than a lease for a bar in the downtown core of Toronto or a lease for an industrial shipping and receiving company adjacent to a navigable waterway. As such, it's not only important that you read your lease, but that you understand and negotiate into your lease clauses that account for all types of work carried out by the business you intend to run. Here are three things every tenant should consider to ensure all elements are included in the lease to facilitate a tenant's ability to operate their business fairly and effectively:

1. Understand what the Landlord's obligations are under the lease

The lease should contain specific provisions throughout that bind the landlord to certain commitments. As a commercial tenant, you need to ensure that the commitments include those that are necessary for you to run your business. If for instance you intent to lease a space for running a restaurant, you want to ensure there are specific provisions that the Landlord provides you access to the kitchen for the entire term of the lease, and that there is a specific definition of what is included in that kitchen (or other room you intent to use). If the Landlord is prepared or has discussed that they intend to provide as part of the rent, natural gas services for kitchen use, then you need to ensure that the lease sets out this inclusion.

Similarly, you need to ensure your lease does not provide the landlord with an overly broad ability to access the premises. Clauses in commercial leases often include the right of entry in the event of non-payment of rent or to view the state of repair. It is important that clauses or re-entry do not go too far and permit a landlord to enter the premises willy-nilly. Failing to address this issue and to negotiate the terms of re-entry can leave a commercial tenant at a significant disadvantage  if a landlord attempts to enter the premises at an inappropriate time during the tenancy

2. Figure out a strategy for dealing with potential disputes [1]

Most modern commercial leases will contain a provision for arbitration as a mandatory requirement to address the dispute. Arbitration can however be costly. Commercial Tenants need to think about and be creative about potential solutions to disputes - they need to anticipate a potential problem based on terms in the agreement and, once that problem is identified, think about ways of dealing with that issue in a cost effective, efficient manner.

According to the Commercial Tenancy Handbook, it is in the interest of both the tenant and the landlord to ensure that the relationship does not turn adversarial. To this end, a tenant should evaluate what elements the landlord is being inflexible about at the outset. If the elements are too integral to the business, the Tenant should carefully evaluate whether it is still beneficial to pursue a tenancy with this landlord or move on to another property.

Often times it is important to have a lawyer assist with negotiating and thinking about potential strategies for dealing with disputes for two reasons: first, a lawyer can act as an outsider who is evaluates the terms of the agreement as an objective observer. In that manner, they can anticipate terms that could lead to a dispute that you may miss. Secondly, a lawyer can approach the lease from a legal perspective, he or she can factor into the equation what the law has said historically about a particular and make recommendations about the usefulness of arguing over a particular term. This is particularly advisable where the Landlord has a lawyer and using that lawyer to draft and negotiate the lease. A tenant who negotiates a lease without the assistance of a lawyer in this context runs the risk of negotiating a lease that is overly one-sided in favor of the Landlord even if the Tenant is highly sophisticated and experienced business owner. 

3. Ensure you understand the term length included in the lease and ways the lease allows you to terminate the tenancy

  • Unlike residential leases, commercial leases are not required under law to contain provisions that give the tenant an express right to terminate the lease.  Accordingly, there are two ways a lease may be terminated: 1) where there is an express right to do so (this is a rare case) 2) where the landlord has deprived the tenant of substantially the whole benefit of the lease.  These two options leave tenants with very limited options should they need to terminate their lease.  There are however, some other creative options for exit that are not so obvious. They involve what is called "parting with possession" of the premises. I discuss two options of parting with possession here:
  • Assignment - Even though a lease may not include a provision for termination, nearly all modern commercial leases contain the right to assign the lease to another tenant on consent of the Landlord. An assignment of the lease does not relieve the original tenant's obligations under the lease, it simply adds a new party to the lease who owes obligations to pay rent and to do what the original tenant promised to do under the lease. The agreement is essentially between the original tenant and the new tenant and may (but not always) be an agreement that binds the new tenant to comply with covenants and obligations under the original lease.
  •  Licence - A licence is a casual grant of permission in writing to use the land. A licence is effectively a permit that grants a right (usually for a very limited period) to use the land held in tenancy by the tenant. An example of a licence happens instance when a bar or restaurant gives a third party the right to use the space to throw an event. the Licensing agreement should set out terms of use for the land for the specific purpose and for a specific period of time. These are typically granted to use a portion (and not all) of the property and as such often does not act completely transfer the obligations of the tenancy onto the licensee.

Note, that these are only two forms of parting with possession that can be negotiated into a lease. It’s best that tenant consult a commercial real estate lawyer to assist with the elements of parting with possession. Such elements in a lease can be complex and will require attention to detail to ensure that a tenant is not inhibited from use of these elements during term of the lease.

The above are only some of the issues that need to be addressed when negotiating your commercial lease. It is important and recommended that you have a competent commercial real estate lawyer assist you with your particular case so that you can have an accurate picture of your options. 

**Should you have any other questions or wish to provide further topics regarding commercial real estate, please do not hesitate to write us via emal at ryan@ryanmartinlaw.com or call us at 416.322.3535.

[1] A Commercial Tenancy Handbook - Olsen, 2017 - Problems Encountered by Tenants p.7-12.1

Ryan MartinComment