An Introduction to Commercial Leases
For many new and growing businesses, signing a commercial lease can be an important and exciting step in the transition from business concept to being a fully operational enterprise. But there are important differences between a commercial and residential lease that business owners must understand before signing any lease.
Not surprisingly the biggest thing to determine when contemplating signing a commercial lease is what the rent is going to be. But, unlike standard residential leases, the majority of commercial leases are ‘triple net leases’ which take all the liability for any costs associated with the building from the landlord and shifts them to the renters. So, the rent you see on the lease is not what you are required to pay every month. These extra costs can include a range of items such as covering the cost of property taxes, utilities and snow removal. In buildings with multiple tenants these costs are usually shared amongst all the tenants and fees are based on the percentage of square footage each unit has. These extras fees can add significantly to the cost of a rental so it is critical that you determine what these costs are before committing to a long-term lease.
Beyond the monthly costs there are other important clauses in the lease that you’ll want to consider before signing a commercial lease. These include:
Building improvements: What improvements need to be made and who is going to pay for the work to be done? At the end of the lease will you get to take those improvements with you or will the landlord now get to benefit from them?
Term of the lease: The minimum term of a commercial lease is typically five years. Depending on each party’s negotiating power this can either be increased or decreased. In addition, the automatic right to renew can also be negotiated into a lease. Be mindful of the notice period required for any renewal. Most renewals allow the landlord to increase the rent.
Rent Increase: Some commercial leases contain escalating rent which increases the rent every year of the lease. Other leases contain clauses which allows the landlord to increase the rent should their costs go up. Landlords often require a personal guarantee in situations in which the tenant is a corporation.
Exclusivity: A clause providing for sector exclusivity is particularly important for retail leases. For example, if you are opening up a hair salon in a mall or plaza you do not want another salon to be able to open in the same complex. The landlord at the same time might want to restrict the range of services or products you are able to offer. For example, the landlord may attempt to restrict the hair salon from providing manicures.
Many of these and other clauses can be negotiated so it is essential that you consult a commercial real estate professional before any lease is signed. The demand for space in a building will of course play a big role in the landlord’s willingness to amend the terms in your favour. In many instances it will be worthwhile hiring a commercial real estate broker to advise you on the locations and lease terms that will best suit your business and budget.