Commercial Lease – For Tenants
We get it – you are excited to start your business, you found your dream space, and your new landlord expediently presented a copy of its lease for you to sign. Wait, not so fast – before you put your signature on that lease, you should definitely review these provisions closely:
- Is there a personal indemnifier?
A personal indemnifier is often required by the landlord when the named tenant is not an individual, such as a corporation or a society. This is because the landlord wants to ensure that if the “non-individual” tenant defaulted on the lease and dissolved, the landlord has the ability to recoup its loss from the personal indemnifier. Often, the obligations of the personal indemnifier under the lease are “joint and several” – which effectively means that the landlord can collect its damages 100% from that personal indemnifier, without being obligated to first pursue against that non-individual tenant.
- What is included as “Additional Rent”?
Often you will note that “Additional Rent” is specifically defined under the lease. As a potential tenant, you want to pay close attention as to how that definition is defined – namely, what are the items included as “Additional Rent” and is payable by the tenant? If the lease is triple-net (and often very landlord-centric), then at the bare minimum you will see these items included: property taxes, landlord’s insurance, utilities, repair and maintenance of the property; sometimes you will see other items such as: landlord’s management fees, landlord’s legal fees, capital repair and replacement to the property, and such other operating costs that the landlord may include.
- Is there an option to extend or renew?
Legally speaking, there is a difference between an extension and a renewal. An extension is a continuation of the existing lease, and a renewal is a commencement of a new lease. From the tenant’s point of view, it may be more favourable to have an option to extend under the lease (instead of an option to renew) – because most tenants want to continue to enjoy the full benefit of the existing lease. On the other hand, landlords typically prefer renewals because it gives them the opportunity to renegotiate the existing lease and thereby serving a brand “new” lease to the tenant.
In any event, you want to pay close attention as to how many terms and years are granted in the option to extend (or renew). Depending on the nature of your business, the longevity of your lease can significantly increase the value of your business. Though, the double sword to this is that you may be bound to commit to the lease for a long time until: (a) you have found a new buyer who would take over the existing lease, or (b) the current term expires and you don’t exercise the options to extend or renew, or (c) you negotiate with the landlord to mutually terminate the existing lease.
- Is there a demolition clause?
A demolition clause allows the landlord to exercise its right to terminate the lease unilaterally for the purpose of demolishing the property for redevelopment. A demolition clause could be devasting to tenants because the tenants must vacate the premises by a certain date once the termination notice is provided to them from the landlord – say, six or twelve months of prior notice. Usually, the landlord would not provide any compensation to the tenant (hence the prior notice for the tenant to find a new space). Effectively, the tenant has to think about how long (and the cost) it is going to take for them to find a new suitable space, fixture the premises, and open their business such that their business would attract the same level of profit had they stayed at their existing location.
The above four items are in no way shape or form exhaustive. Each lease is different and each tenant is different. A thorough review of the lease requires a careful read on the interplay of each provision within the lease. Feel free to contact Bell Alliance if you need your commercial lease reviewed!