Should I worry about a “standard” commercial lease?
Many start-up or smaller companies are often looking to lease retail, office or industrial type commercial space to operate their business. Some of these smaller companies are struggling to get ahead. In the difficult financial times that are among us, it is understandable that these companies may be looking for ways to save a few bucks. For instance, sometimes these companies try to save on the cost of having a lawyer review what has been presented to them as a “standard commercial lease” prior to signing it. We real estate lawyers unfortunately see the result of this attempted savings much too often. Many of the “standard” commercial leases contain certain “hidden items” which although considered “standard”, can come as quite a surprise to a freshly locked-in tenant. Unfortunately these surprises often occur during or towards the end of a lease term when it is too late to negotiate an alternative. Some of these hidden items come with hefty price-tags that many small tenants cannot easily absorb.
The following is a summary of a few of the many hidden items which can be found in so called standard commercial leases:
- Operating Costs. Net leases, although quite popular, are not as standard as they seem. The concept generally requires that the tenant cover most, if not all of the costs associated with the operation, maintenance and repair of a building in which it rents space, however, this can vary. For example, must the tenant pay for major structural repairs (such as foundations, walls or roofs?). If so, can the cost of these repairs be amortized over the lifespan of such capital items? Is the tenant aware of the “management fee” (often 15%) being charged by the landlord when the landlord carries our certain repairs?
- Tenant Improvements. At the end of a lease term, what is the tenant required to remove from the leased premises? Similarly, what items (such as fixtures or improvements) automatically become the property of the landlord upon installation, even if paid for by the tenant, and therefore cannot be removed by the tenant at any time? In what condition must the premises be left in? Do walls need to be patched, removed or repainted to their original colour?
- Parking . How many parking spaces is the tenant or its customers permitted to use, and is this at an extra cost? This issue often leads to disappointment for tenants.
- Re-measurement of the Premises. Can the size of the leased premises be re-measured by the landlord? If so, when does this take place and how does this affect the rent? In most commercial leases, rent is calculated on a per square foot basis. Once tenant improvements have been completed (typically at the beginning of the lease term) and walls have been removed or replaced, the landlord often reserves the right to re-measure the premises and adjust the rent accordingly. Yes, this could mean an unexpected increase in rent!
- Options to Renew. If the lease contains an option to renew in favor of the tenant, typically the tenant must exercise this option anywhere between 6 and 12 months prior to the end of the term. If the tenant fails to notify the landlord of this option, the tenant loses its right to renew and the landlord is free to rent the premises to a third party.
These are only a few of the hidden items that can be found in what many smaller companies might assume is a “standard” commercial lease. Most often, there are others. It is therefore important to have a commercial lease reviewed prior to signing it. That doesn’t mean that these hidden items are unfair or that an experienced lawyer could negotiate out of them. However, being advised of these hidden items at the outset of a lease term can often significantly reduce a tenant’s exposure to large unexpected expenses that are not part of a tenant’s operating budget. By having an expert review your documents at the outset, you can ensure a smoother operation of your day-to-day business.
Martin St-Onge s a member of the Real Estate Law Group at Perley-Robertson, Hill & McDougall LLP / s.r.l. Martin can be reached at 613.566.2807 or [email protected].
This article was originally published in the November 25, 2008 edition of the Ottawa Business Journal.