Considerations for Tenants in a Commercial Lease

A well-drafted and well-negotiated commercial lease is essential to the success of a Tenant’s business. Grey areas can lead to unexpected costs and even litigation down the road – this can be avoided by good drafting and making sure you think about all of the following prior to signing on the dotted line. Here are 7 key things to think about during the negotiations with the Landlord:

1. Responsibilities:
Important obligations from the Tenant’s perspective are payment of rent, repairs and maintenance. The Landlord is usually responsible for maintenance related to the building’s structure, however, Tenants should be careful that the Landlord is not trying to offload these expenses on to the Tenant. The Tenant should pay particular attention to who is required to maintain and repair the HVAC equipment, the property taxes, the insurance and the utilities.

2. Boundaries:
The lease should very clearly define the space being leased, including a diagram and specific square footage.  An important item to address if the Tenant is leasing in a shopping mall, for example, is use of the hallways, storage area, garbage, parking, etc.

3. Dollars and Cents:
Is it a “gross lease” or a “net lease”?
A “gross lease” is one in which the Tenant pays a single amount which covers the rent AND other associated costs, such as property taxes, maintenance and insurance. A “net lease” is where the Tenant pays a base rent for the space and an additional amount for all other associated costs.
Are there “management fees” or “administrative fees”? These are fees that the Landlord sometimes charges to “manage” the property. Tenants should be wary of these.

4. Duration:
The term will be outlined in the lease agreement. Tenants should discuss extensions to the term and how renewals will work. A Tenant will obviously want to be able to renew the lease easily if they have spent time and money repairing a rental space. A Tenant will have more negotiating power the longer the lease term. Landlords will obviously prefer a longer term, so a Tenant may be able to negotiate a lower rent by offering the Landlord a longer term.

5. Remedies:
As a general rule, Landlords have much stronger remedies against defaulting Tenants than Tenants have against defaulting Landlords. If, for example, a Tenant misses a rent payment, a Landlord is going to choose the remedy that is most advantageous to him. Tenants should not assume that they will be given additional time to pay. Tenants should also be aware that Landlords have the remedy of “distress” which allows a Landlord to seize and sell the Tenant’s assets located in the leased space to satisfy rent owed.

6. Termination:
A lease agreement can be terminated at any time with the consent of all parties, however, Landlords will rarely allow a Tenant to terminate a lease. Sometimes a lease agreement will specify other Tenant “acts of default” which could entitle the Landlord to terminate early.  If the lease is for a fixed term, then the Tenant will likely need to fulfill its obligations for the full term.

7. Some Other Common Issues:
(a) Leasehold Improvements
No matter how good the “improvements” are for the Tenant’s business, the Landlord is entitled to ask for the removal of any “improvements” at the end of the Tenant’s term as a Tenant is usually required to leave the space how they found it. 

(b) Assignments and Subleases
The Tenant should check that assignments and subleases by the Tenant are permitted, as they can be important for the Tenant in the future.

(c) Notice of Entry
Tenants will want to negotiate a reasonable notice period and/or require the Landlord to enter the leased space outside of regular business hours, so as to avoid disrupting the Tenant’s business operations.

(d) Insurance
Tenants are usually required to obtain insurance which covers both the Tenant and the Landlord. Tenants should thus not overlook the importance of adequate insurance coverage, and should discuss this issue with their insurance advisors before signing.

This is provided as information ONLY; it should not be construed as legal advice. For more information, please contact Vanessa DeDominicis on 250-869-1140 or [email protected].

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