Clients will often invest substantial time and money into painstakingly preparing the perfect business plan, a meticulously detailed budget, as well as comprehensive and thorough internal business agreements, such as employment agreements and supplier agreements; however, when it comes to entering into a commercial lease, it’s surprising how often sophisticated business owners will enter into complex and onerous commercial leases without completing even a basic review. There often exists a mistaken belief that commercial leases are standard documents, which must be entered into by the Tenant as presented by the Landlord.
Prior to entering into a commercial lease, it’s essential for the Tenant to carefully review the terms and conditions. Tenants should appreciate that the rent due pursuant to a commercial lease will frequently be one of the businesses’ largest expenses. There is no standard form of commercial lease, and generally the form the Tenant will receive will be drafted heavily in favour of the Landlord. Accordingly, prior to signing, the Tenant must carefully review the terms of the commercial lease to understand exactly what they are agreeing to, and be prepared to negotiate.
Whether or not the Landlord will agree to negotiate with the Tenant will depend upon the market and demand for the rented premises. However, as the adage goes, “it never hurts to ask”. Below are three commonly negotiated Tenant-friendly points:
- Set a cap on increases in Additional Rent.
Triple Net Leases are commercial leases where the Tenant is solely responsible for all costs associated with the leased premises (including, but not limited to, janitorial costs, insurance costs, maintenance fees, utilities, property taxes, etc.). The Tenant will pay these costs to the Landlord every year by way of Additional Rent. Often Tenants will be surprised about the actual aggregate cost of their commercial lease as they will only focus on the specified Basic Rent amount; however, Additional Rent can add up quickly, and can sometimes be as much as or exceed Basic Rent. Generally, a commercial lease will specify an estimated cost for the Additional Rent, subject to this estimated amount being adjusted between the Landlord and Tenant once the actual costs are determined. To ensure that this estimated cost is accurate, and that the Tenant is not provided with a significantly higher Additional Rent invoice once the actual amounts are determined, the Tenant should try to include language in the commercial lease which specifies that Additional Rent will be no greater than 110% (or some other agreed upon market percentage) of the original estimate provided. As commercial leases often have lengthy terms, the Tenant should try to include language which specifies that Additional Rent will not increase more than 10% (or some other agreed upon market percentage) each year during the term of the commercial lease.
- Include a right to audit.
Every year the Landlord will provide the Tenant with an invoice specifying the Tenant’s Additional Rent and/or operating costs. In the event the Tenant disagrees with the Landlord’s invoice, it is essential that the Tenant include language in the commercial lease granting the Tenant the right to examine and audit the Landlord’s books in respect to the Additional Costs and/or operating costs. Without this provision the Tenant may have to pursue lengthy and costly court action to try to obtain a right to examine and audit the Landlord’s books. Tenants should also try to include language which specifies a penalty in the event the audit reveals a discrepancy, to ensure that fair and accurate Additional Rent and/or operating costs are being charged.
- Returning the leased premises to their “base” conditions.
During the term of a commercial lease, which may often be 5, 10 or even 20 years, the Tenant will frequently make numerous and substantial improvements to the leased premises to meet its specific business needs. Commercial leases will often include language requiring the Tenant, at the end of the term, to return the leased premises in their original condition. In the event the Tenant makes numerous or substantial improvements during the term of the commercial lease, the process of converting the leased premises back to their base condition can be quite costly. The Tenant should try to remove this language if possible.
Due to the Landlord’s familiarity with its form of commercial lease and its experience negotiating commercial leases, the Tenant will often be at a significant disadvantage. Accordingly, it is vital that prior to entering into a commercial lease, Tenants take the time to carefully review all terms and conditions, and obtain legal assistance and guidance if necessary. Tenants should not hesitate to try to aggressively negotiate the terms of a commercial lease to be more tenant-friendly; after all, this agreement will govern the relationship between the Landlord and the Tenant for potentially a decade or more to come.
If you are considering leasing a commercial property, you should seek legal advice before signing an agreement. Contact Pamela Lindsay at 604.484.3058.
Associate Lawyer in Business and Real Estate Law
Lindsay Kenney LLP – Vancouver Office
This article is intended to be an overview of the law and is for informational purposes only. Readers are cautioned that this article does not constitute legal or professional advice and should not be relied on as such. Rather, readers should obtain specific legal advice in relation to the issues they are facing.