What to Watch for When Entering into a Commercial Lease Agreement

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    Signing a commercial lease is one of the most important decisions a business owner will make and getting the right advice is crucial. After all, once your signature is on that agreement it can be extremely difficult to change the terms. You must ensure you understand all of the fine prints of the contract and how they may impact you.

    For example, as a tenant are you responsible for such shared common area expenses as janitorial services, landscaping or snow removal? Are there incidental expenses such as utilities, insurance and property tax?
    Negotiating a commercial lease agreement can be a complex process. At MB Law, we provide the highest standard of legal services and can help you negotiate the best deal possible.

    Details, details, details

    You have put a lot of thought into your business. It is your passion. Leasing a commercial property, whether it is office space, retail or a production facility, requires the same type of laser focus. Attention to detail is important. The property might be in a nice part of town and the facilities could check every box on your checklist, but you still need to do your homework.

    You must understand the area to determine if it is the right fit for you. Are there logistic issues that could prevent you from truly prospering? Is the landlord the true building owner? Do you need to consider any zoning laws that could impact your business? You are entering into a business relationship with landlord, so it is in your best interest to find out who they are and what their financial situation is. Get a complete picture before putting your signature on a contract and do not assume that everything your prospective landlord is telling you is accurate. Due diligence is essential.

    What Are the Terms of the Lease?

    Understanding the process before signing a lease is vital. First, you should always remember that negotiations only end when the agreement is signed by both parties. Landlords will naturally present a lease that is favourable to them. However, while they have something you need, you also have bargaining power as a lessee. If there are terms that do not suit you, negotiate for a better deal. Make a list of the provisions you would prefer to be revised then see if you can find common ground with the landlord.

    The length of the lease will vary depending on your needs and what the landlord is willing to accept. Make sure the agreement is clear on when the lease starts. You may need to complete renovations or leasehold improvements before the lease starts, so clarify when you will be allowed access to the property. Depending on the circumstances, the landlord may allow you to access the property at a reduced rate or rent-free prior to the start of the lease. You should also inquire about provisions which outline in the event the property is not ready for you to take possessionas when your lease begins.

    If your agreement is for multiple years, will there be rent increases? If so, how will they be calculated?

    During your negotiations set out the terms for terminating the agreement. There could be many reasons you may want to get out of your lease. They include a downturn in business or you may discover your company is growing faster than expected and you need to expand. A good agreement will spell out how each party can end the lease. Is there an early termination penalty? Can you sublet to avoid all or part of the premises any penalties or to offset rent? How much notice do you have to give when terminating the lease? What are your rights when the landlord wants to end the lease early and what are your rights if they do?

    Do not forget to look out for the future when drawing up a lease agreement. You will need to determine if you have option to renew your lease when it ends.

    You will no doubt have obligations to consider when the lease ends. Tenants are typically obliged to leave the premises in good repair. If you have made renovations, will you be expected to put the property back to its original condition? Are there fixtures such as signs or displays that can be removed? Remember, considering even the little details can make the transition much easier when the lease ends.

    The Types of Leases

    Typically, rent for commercial spaces is calculated by the cost per square foot of the space. This generally does not include utilities or other additional costs, such as maintenance or insurance. Commercial rental agreement may have different pay structures:

    • a gross lease requires you to pay a flat monthly amount and the landlord would be responsible for expenses related to operating the property;
    • in a net lease you would be responsible for paying the base rent and some or all of the real estate taxes on the property while the landlord would pay for building’s operating costs;
    • a double-net, or net-net lease requires you to pay the base rent, taxes and insurance for the property;
    • under a triple net, or net-net-net lease, which is the most common for commercial properties, you would be required to pay for your share of the costs of operating the building, repairs and maintenance; and,
    • in a percentage lease you would pay a fixed rate plus a percentage of your gross income.

    When deciding what agreement works best for you, it will be necessary to consider the types of expenses involved in renting a commercial space, such as general repairs and maintenance fees.

    Before Putting Your Signature to Paper, Call Us

    As a savvy business owner, you weigh all your options so you can make an informed decision. Many issues can arise when signing a commercial lease agreement so it only makes sense to seek sound legal advice. That is where we can help

    At MB Law, we are primarily dedicated to serving real estate clients. Our job is to minimize your stress and ensure you get the agreement you need to give you peace of mind and help you prosper.

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