When you sign a lease, remember that you are entering into a legal contract. You might want to consider obtaining legal advice before signing. The following information provides a good starting point for those unfamiliar with commercial leases.
Typically, a commercial lease will last anywhere from three to ten years. It is important to determine when the lease begins and when the agreement will end.
Your lease should clearly outline what will happen if the rental space is not ready by the move-in date and what rent adjustments will be made by the landlord. Unless the space you agree to occupy is already vacant and remodelled to fit your needs, unexpected problems could occur.
Make sure you are aware of any clauses that allow the landlord to provide an alternative space if the new premises are not ready on time. This type of arrangement can mean that you might have to move your business more than once, which can increase moving costs.
If you are moving from an old location into new premises, give yourself extra time before leaving to cover any delays that could happen with the new location such as construction, tenants moving out or property damage.
Commercial rents are generally measured by the cost per square foot of the space. Many landlords charge tenants separately for heat and electricity. There are at least five common ways to calculate rent, including:
In the past, the increasing cost of operating a building was covered by an increase in rent when the lease was renewed or when a new lease was created for a new tenant. Most landlords protect themselves from unpredictable changes in real estate by including an escalation clause in a lease agreement. The clause allows a landlord to raise rent if the cost of maintaining or operating the property increases. Most landlords will negotiate the escalation clause with you.
Some examples of escalation clauses include:
Note: The CPI generally overstates the impact of inflation, so you should not agree to pay more than a portion of the annual CPI increase, especially if the lease already contains increases for taxes and direct operating costs.
If you decide to expand your business or move locations before your lease ends, you can discuss sub-leasing with your landlord.
Make sure that the tenant who is interested in sub-leasing meets your landlord’s standards for the property. Keep in mind that you will be responsible for paying the rent if your subtenant decides to leave before the lease ends.
Once your lease expires, a landlord does not have a legal obligation to offer the same space to you, unless you have agreed on a renewal formula and have a clause that guarantees the space when your lease expires.
You will usually have to provide written notice exercising your option to renew the lease, or it lapses automatically (a one year notice for long-term leases is common, but three or four months can be the standard for short-term leases). Some leases are renewed automatically until you cancel them. This can be a good arrangement for your company if you have several locations and do not want to risk having your lease expire.
You can protect yourself and your business by making sure that your lease contains a non-disturbance clause, which is an agreement that provides for the continuation of a lease in the event of loan foreclosure.
Generally, landlords are expected to carry a comprehensive policy on their building that will cover liability for common areas, such as lobbies, stairways and elevators, and provides casualty protection for the building itself. They also have the right to insist that tenants carry their own insurance to protect the landlord against claims that might arise from the conduct of their businesses (a visitor who trips on an office carpet, for example) and "contents and improvements" coverage that protects his investment in the property itself.
You may want to consult with a professional insurance agent or lawyer to make sure that your insurance policy works with your landlord’s policy.
Some of the points you will want to consider when negotiating the terms of your lease with your landlord include: electricity, HVAC and cleaning services.
When you have reached an agreement with your landlord about the services that will be provided, make sure that you get the details in writing.
Modern office buildings generally provide allowances for improvements – such as new partitioning, lighting, carpets or paint – but there may be variations in individual tenant needs and what a landlord is willing to provide.
Agreements about renovations should be put in writing with a detailed plan and estimate of costs from a contractor before the lease is signed. This document is called a "workletter" and will specify who owns any improvements.
Unless you make an agreement in your lease, anything you add to the property belongs to the landlord when you leave the premises. Examples include air conditioners, light fixtures, shelving, cabinets, or manufacturing equipment.
Calculating square footage is a way to compare rents, but not all landlords measure square footage in the same way. Warehouse or factory space might rent for only a few dollars per square foot but a first-class office space or a desirable storefront usually has a much higher price.
When deciding on the size of your location, try to answer the following questions:
Now that you are familiar with the basics of a commercial lease, it may be useful to contact a lawyer that deals with real estate and business regulations for more information about your rights and responsibilities when signing a lease.
For more information on general business topics, contact Canada Business Ontario today. Telephone services are available in English or French.