Commercial Leases - what you need to know

Unlike residential leases, which are tightly regulated, there isn’t nearly as much legislation surrounding commercial leases. While less legislation (and often less red tape) can be a good thing, in this case it also means fewer protections for tenants. 

A commercial lease is a legally binding agreement between a landlord and a tenant that sets out the terms under which the tenant may occupy and use the landlord's property for business purposes. These agreements are enforceable under provincial contract law, and their terms are governed by the principles of contract law, such as offer, acceptance, consideration, and mutual consent. 

Because it is a contract, it means two things:

• There is opportunity to negotiate terms such as price, services included, and duration.
• When an issue arises, you must refer to the original contract to determine what rules govern the relationship. 

This is why it is critical to read the commercial lease contract carefully, and have it reviewed by a lawyer before signing to ensure you fully understand the complex legal language.

Types of commercial lease

Commercial leases come in many different forms, but the two most common are the Gross Lease and the Net Lease.

A Gross Lease is probably the most straightforward type of commercial lease. A landlord charges a lump sum per month, which includes taxes, insurance, and maintenance. Utilities may or may not be included, but typically they are. 

Under a Net Lease, the tenant pays a base rate but is also responsible for paying building-specific expenses. The base rate will be lower than under a Gross Lease, but the tenant must factor in the additional expenses such as taxes, insurance, maintenance, utilities.

Net Leases can be further broken down into Single-Net, Double-Net and Triple Net Leases – the difference in each type lies in which expenses must be covered by the tenant. In a Single-Net Lease, the building owner covers more expenses; with the Triple-Net, the tenant takes on most of that responsibility.

Things to consider before finalizing your lease

Duration:  Check both the length of the lease and the renewal terms. Most commercial leases run from 3 to 10 years. 

Additional Costs: What are the general costs associated with the lease? Look at whether the lease is gross or net and confirm if a security deposit is required and if/how it will be returned. Also consider parking costs, maintenance fees, utilities, and insurance. Does the lease include the costs of security?  Are taxes included? 

Responsibilities: Think about building maintenance, structural damages, landscaping, snow removal, shared spaces like hallways, and elevator maintenance. What happens when those things stop working or get broken - is it the landlord’s responsibility or yours as the tenant?

Improvements and modifications: What happens when the space is renovated or changed by the tenant? Who pays the costs and what items are expected to stay? 

Penalties: Unexpected circumstances could force you to cancel your lease. If so, would there be a penalty? In some cases, you would be required to pay all costs that would have been incurred as if you had completed the term of the lease. Also be aware some leases require the tenant to restore the space to its original condition upon leaving.

Zoning/Permit Requirements: For peace of mind, do your own check to see if the zoning for the property allows a business like yours to operate there. If your business requires permits from the municipality or province, ensure you have them before signing your lease. 

When in doubt, call a lawyer

While most provinces have legislation that covers commercial leases, these laws typically provide limited protections beyond the lease agreement itself. That is why it is always recommended to have a commercial lease reviewed by a lawyer. Why use a lawyer? A lawyer can help clarify the terms, implications and potential liabilities contained in the lease. They can also help you negotiate fairer terms and identify risks that could go unnoticed. 

Even more important is that the advice given by a lawyer is supported by their provincial law society and professional liability insurance. 

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