Commercial Leases: The 9 things you need to know
A commercial lease is generally more complex than a residential lease because it has different clauses. Since they are legal contracts, make sure you know what your responsibilities and obligations are when you sign them.
1. The Different Types of Commercial Leases
First, it is important to know that the rent for a commercial lease is generally calculated according to the number of square feet used: this will have an impact on the rent and its associated fees for the five main categories of leases:
- Gross Lease: involves a fixed monthly rent payment and includes all rental costs, even if the landlord’s expenses increase. These leases are the most frequent ones used for office buildings.
- Net Lease: In addition to the base rent, the tenant pays a proportionate contribution to the space leased for property and school taxes. However, the landlord is responsible for any other operating expenses.
- Supernet (Double Net) Lease: In addition to the charges listed in the Net Lease, the tenant pays a contribution towards the cost of the building’s insurance.
- Hypernet (Triple Net) Lease: the tenant must pay a monthly bill for all the building’s expenses, such as taxes, insurance and even maintenance. This lease is often used for industrial buildings.
- Proportional Lease: the tenant
pays a fixed rent, in addition to a percentage of their gross income. This type
of lease is generally used for retailers who lease space in a shared area, such
as a shopping mall.
2. Rent Increases
Unlike a residential tenant, a commercial tenant is not protected against excessive rent increases. The landlord of the building has no restrictions on the size of the rent. Therefore, a landlord could include an indexation clause allowing them to increase the rent should the operating costs of the building increase. This type of clause can include periodic increases during the period covered by the lease or revisions calculated on a pro rata basis according to the increase in expenses related to taxes, heating or even maintenance.
3. Term and Renewal
As a rule, a commercial lease is valid for
three to five years, possibly even ten years, and sometimes there is no
termination option. Unlike residential tenants who have the right to remain on the
premises - that is, they can renew their lease as long as they wish - a
commercial tenant does not. The latter can, however, request that a renewal
option be included in the lease. However, the landlord is not obliged to offer
the same space to the tenant when the time comes to renew the lease, unless a
warranty clause provides for it.
4. Termination of a Commercial Lease, Subletting and Transfer
So, what happens if the landlord sells the
building? Termination of the lease, subletting or transfer: these are some of
the things you can negotiate when you sign a commercial lease.
However, in the absence of such a clause,
the Civil Code of Québec allows the
tenant to sublet or transfer their lease, without the landlord being able to
oppose it without a serious reason. Nevertheless, the landlord may waive the inclusion of such a
clause in the lease.
5. Tenant Improvements
Tenant improvements - changes made to the
premises to meet the tenant’s needs in full - can be paid for by the landlord,
the tenant and sometimes both parties. Most commonly, however, tenant improvements
are made by the tenant and automatically belong to the landlord, including:
- Light fixtures
- Equipment attached to the floor or walls
All in all, the improvements made, and the
fixtures added to the premises could become the property of the landlord when
the lease ends. Conversely, the owner of the building could ask the tenant to
remove everything, at their expense, to restore the premises to the same
condition as when it was first occupied.
Since a corporation can sign a lease, the owner of the building can require that one of the officers be personally responsible for the lease. This will provide the landlord with some guarantee if the corporation does not pay its rent or for any other problem.
Generally, the landlord has a comprehensive insurance policy for their building, including common area liability. However, it is recommended that each tenant have their own insurance policy for the operation of their space.
8. Special Clauses
Although a commercial lease is relatively complex, it can include several interesting clauses such as:
- Non-competition: this exclusivity clause prevents the landlord from renting another space in their building to a business like yours.
- Tenant improvements: these clauses allow both parties to know what can be improved and to determine the conditions under which the improvements will be made, including financial expenses.
- Repairs: These clauses identify
who, the landlord or the tenant, is responsible for the repairs that need to be
done, specifying minor and major repairs.
9. Building Services
You will most likely have to negotiate
certain lease terms within your commercial lease, as you would for a
residential lease. These may include electrical, heating and air conditioning,
as well as maintenance services.
Finally, the legislation does not protect the tenant of a commercial lease as it would for the tenant of a residential lease. It is therefore strongly recommended that you consult a real estate professional and obtain legal advice before you make a commitment.
- The ABCs of Commercial Real Estate for Investors
- Renting with a Real Estate Broker
- Centris.ca: For Commercial Properties as Well