The basics of commercial leases
Toronto business lawyer Anton Katz says a commercial lease is an important component to most clients’ businesses and before entering into one, it’s crucial to understand key concepts and rights.
Commercial leases in Ontario are governed by the Commercial Tenancies Act, but are also affected by common law and other statutes including the Bankruptcy and Insolvency Act, Katz tells AdvocateDaily.com.
“Commercial leases are an important part of the client’s business because sometimes that is the space from which the business will be transacted,” he says. “Location is of primary importance for a storefront business and of lesser importance for perhaps an office business or a call centre.”
If there’s little public interaction, as is the case with a call centre, location becomes less important. However, if you’re operating a retail business, for example, where location matters, then the right to occupy space at that location is equally important, Katz explains.
“That right to occupy space then leads the business owner to getting a decent term for the lease,” he says. “Often people will enter into a five-year lease, but it could be 10 years or even longer.”
It’s in the interest of the tenant to have either an option to renew or extend the lease. In either instance, if the tenant is looking to stay for a longer period of time at that premises, it’s useful to have one of those options.
“If you don’t exercise either option, then you haven’t lost anything,” Katz notes. “But if the location proves to be valuable and your business continues to be viable, then an option to renew or extend your lease is a useful long-term strategy.
“If you’re running a new business, you may want to negotiate a shorter term of three years with two rights of renewal for five more years each,” he adds.
Another important consideration in a commercial lease is rent, Katz says.
“Many leases are described as being net leases, which means the tenant pays a base rent, often expressed by dollar amount annually and then further expressed in a dollar amount per square foot per month,” he says.
There is also additional rent, sometimes also referred to as TMI (taxes, maintenance and insurance). Net leases will often require the tenant to pay both the base rent as well as additional rent — the idea that the base rent is the landlord’s profit and the additional rent is the landlord’s attempt to recoup the cost of paying taxes, maintenance and insurance on the building, Katz says.
“Usually the amounts are added together and paid as one amount on a fixed interval like the first or last of the month,” he adds.
Right to assign lease
It’s very important to have a right to assign the lease if the circumstances arise where you want to sell your business, Katz says.
“If you have a lease for five years, then you’re contractually required to pay rent for five years. However, your business may not be viable and you may want to exit that business before your five years are up,” he says. “In this situation, you want to have a right to assign your interest in the lease to a third party with the landlord’s consent, not to be unreasonably withheld or delayed.”
He says “not to be unreasonably withheld or delayed” is crucial because some leases permit the landlord to arbitrarily withhold consent.
“It’s very important for the lease to say the landlord cannot unreasonably withhold or delay its consent,” Katz says. “If you don’t have that language, your ability to sell your business is significantly impaired and that could be disastrous to your business plan.”