Commercial Lease Provisions Every Commercial Tenant Needs to Understand
A commercial lease can be for a business of any type and size. It can be a lease to run a convenience store, a large manufacturing facility or a retail space in a mall. Such leases are often very lengthy documents filled with legalese and are almost always drafted to favour the landlord’s rights. They generally bind the parties for several years and include major contractual commitments and obligations.
Below are some of the more material provisions contained in a commercial lease that a tenant should strive to fully understand and bargain over:
Surrender/Restoration: On expiration or earlier termination of the term of the lease, the landlord generally requires that all leasehold improvements be removed by the tenant at its sole cost. Sometimes the tenant is also required to restore the premises to its “base building” or “shell” condition. Such removal and restoration obligations can be very costly and time-consuming for the tenant. As such, tenants should try to contract out of these provisions, or at least modify them such that only the leasehold improvements made by the tenant would be required to be removed.
Relocation: At times, when a tenant is leasing in a multi-tenant building, the lease allows the landlord the ability to relocate such tenant, usually to a different unit in the same building. Clearly such relocation can cause a plethora of problems for any tenant, as the current unit may be particularly well-suited for the client’s business, while the new unit may not be so suitable. The tenant should try to limit the geographic area the landlord is permitted to relocate the tenant, as well as ensure that the new unit is comparably similar to the current unit, and that the tenant will receive adequate notice of when the landlord will be exercising such right.
Assignment, Subletting, Change of Control: Almost all leases prohibit a tenant from assigning its lease, subletting, or undergoing a change of control without the landlord’s prior consent. Tenants should check the lease to see whether certain exceptions to the consent requirement exist, such as for instances where the corporate tenant is internally reorganizing, or there needs to be an assignment to an entity closely affiliated with the tenant. These provisions are also critical when the tenant is selling its business, as the deal would likely be conditional on the lease being assigned to the purchaser on closing.
Operating Costs: Most commercial leases are “net” leases, meaning that in addition to paying the rent, the tenant would be responsible on a proportionate basis for the majority of the costs associated with leasing the unit (i.e., the landlord’s costs to operate, maintain and repair the building). Provisions related to operating costs typically provide that the landlord can recover some of its capital expenses (e.g., cost of a new roof) from the tenant. These costs should be allowed to be paid by the tenant on an amortized basis. In addition, many of these clauses also state that an administration or management fee will be included as part of such operating costs, so the tenant should negotiate for such fee to be reasonable.
Repair Obligations: Commercial leases also allocate certain maintenance and repair obligations to each party, but some will not contain a positive obligation on the landlord to perform any such maintenance or repairs. Such sections of the lease should be amended such that there is no ambiguity as to which party is responsible for both the performance and cost of the repair/maintenance. The landlord’s share of responsibility should include the structural aspects of the building and the common areas. The tenant will want to ensure that its repair obligations are subject to reasonable wear and tear.
Events of Default: The types of events that enable the landlord to terminate the lease are also listed out in the majority of commercial leases. Many of these provisions provide that the landlord can terminate without notice, for example, for the non-payment of rent. Such strict language should be modified to include a “curing” and prior notice period, where the tenant has a few days to correct the alleged (and possibly inadvertent) default after receiving notice from the landlord before the landlord is permitted to exercise any of its rights upon such default.
The foregoing are only a few of the important items every commercial tenant should understand and attempt to negotiate over with the landlord. Some others involve issues surrounding insurance obligations, compliance with applicable laws, environmental risk, and subordination requirements. It is highly recommended that prospective tenants have their formal lease, and ideally their offer to lease, closely reviewed by a commercial real estate lawyer prior to signing.