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Leasing Commercial Space

Luc A. Bourque for The Lawyers Weekly

Most businesses need to rent space: a small office, a retail space in a shopping mall, or a whole building or warehouse for manufacturing and storage. Whatever the need and the size, the landlord will want the owners of the business to sign a lease. This article outlines the basics of a commercial lease for landlords and tenants.

General Principles

Commercial leases differ significantly from residential leases. Residential leases are highly regulated in Ontario – the Tenant Protection Act creates a strong tenant-friendly set of rules that cannot be modified in the lease. In contrast, commercial leases are very loosely regulated: the rights and obligations of the landlord and tenant are mainly a matter of contract between the parties. What is agreed to in the lease is key. Therefore, contacting a lawyer at an early stage is important.

As a commercial lease is a matter of agreement, each lease is somewhat unique and every landlord will have its own form of lease. Nevertheless, there are "standard" components found in almost all forms of lease. These include provisions relating to:

• The premises and term of the lease - these provisions describe the space being rented and the time for which the tenant will rent it
• The tenant's monetary obligations under the lease – these sections usually include the rent, the tenant's share of operating costs for the building, the tenant's share of municipal taxes for the building, and the tenant's utilities
• The tenant's physical obligations under the lease – this is a broad category covering restrictions upon the use which the tenant intends to make of the space, the specific ongoing maintenance which the tenant is required to carry out, and the alterations which the tenant is allowed (or required) to make to the space itself
• Insurance – these provisions relate to the requirements of the tenant's insurance policy relating to the space, and in some cases, the requirements of the landlord's insurance policy relating to the building generally
• Lease assignment and subletting rights – these provisions describe restrictions regarding the transfer of the rental space to other parties
• Registration, subordination and non-disturbance rights – these sections describe the rights of the tenant as against the landlord's creditors and/or future purchasers of the landlord's building
• Default – these provisions set out in detail the landlord's remedies in the event of tenant default under the lease and
• Special rights – these are the specific terms agreed to by the tenant and landlord regarding future rights such as renewal, expansion, or termination, and regarding the work and inducements the landlord agrees to provide to the tenant as an incentive to enter into the lease.

Process

Often the leasing process is done in two stages - first an "offer to lease" is signed containing all of the essential business terms of the agreement, and later a full lease is signed in the landlord's form. The offer is usually the best chance for each side to negotiate its business points, conditions and "deal breakers". Once the offer is signed and all conditions have been satisfied, the lease is then drafted containing the modifications required by the offer.

Negotiating Power

In Canada landlords wield most of the negotiating power in commercial leasing, unless the tenant is taking a large amount of space or is a potential anchor in a retail setting. As a result, most forms of offer and forms of lease will inherently favour the landlord. However, generally landlords are also prepared to be fair in negotiating most points, provided they are points of significant importance to the tenant. The tenant must therefore plan ahead and be clear on its critical business points. Provided a tenant knows its needs, it will be in a better position to focus the negotiations on its important issues.

Every case will be unique, and the complications involved in negotiating any lease should be handled by a lawyer on behalf of each party. However, both parties will benefit from knowing the basics behind the leasing process in order to focus and properly instruct counsel, and to arrive at a final document that all parties can live with for years to come.

Luc A. Bourque is a lawyer with Soloway Wright LLP in Ottawa. He can be reached by e-mail at lbourque@solowaywright.com