An Overview of the Laws Governing Commercial Leases
When considering the different leasing laws, commercial real estate differs from residential real estate. In this section, we will start with some of the differences and then elaborate on some central commercial leasing laws. As mentioned, unlike residential leases, there is no specific law or set of laws that govern commercial leases in Ontario. Although, when negotiating commercial leases it is important to be familiar with the substance of the "Commercial Tenancies Act". One of the major differences between residential and commercial leasing law is that for commercial leases the parties are free to contract out of most leasing laws. As it pertains to the "Commercial Tenancies Act", either a tenant or the landlord can evict, re-enter or distrain, should there be default in paying rent or breach of covenant in the lease. The landlord can also elect to continue the lease in default of rent or breach of covenant and this will not terminate the lease. One of the most significant differences , that will concern any business, is that there is no rent control on commercial leases. And, a landlord can increase the rent significantly on renewal or termination. Whereas with residential properties, the landlord is only permitted to increase the rental price once a year and by no more than the cost of living, following guidelines set out by the province. Any increases above the set cost of living must be approved by the provincial government. This being said, lease may have pre-agreed upon rent increases, so you will have to check the commercial lease agreement. The remuneration for commercial leasing lawyers is based on hourly rates. This is more expensive than residential lawyers whose remuneration is based on a fixed price. Since commercial leasing is far more complicated than residential leasing, it is important that you hire practices that specialize in commercial real estate.
The Elements of a Commercial Lease Contract
In the U.S., the basic elements of a commercial lease agreement or a lease for commercial space are familiar. However, they can be complex and are different from that of a residential lease in several ways.
Commercial lease agreements typically include:
- the location of the property being leased
- length of the lease (also known as its duration)
- base rent, including any additional costs that may be included (such as a flat fee for water and sewer services)
- permitted use of the leased property, such as whether it may be used for a restaurant or retail business
- maintenance and repair responsibilities
- the extent to which the tenant may be permitted to make alterations or improvements
- renewal options
- permitted property transfer (assignment or subletting)
- dispute resolution provisions
The distinction between a commercial lease agreement and a residential lease agreement is that commercial leases are not governed by the same laws that govern residential leases. For instance, if a commercial tenant does not pay its rent, a commercial landlord must go back to court to recover possession — the tenant is not protected by state laws that govern residential tenants.
Tenant and Landlord Duties and Responsibilities
Tenant and Landlord Obligations will often be codified into the terms of the lease, however, the general commercial leasing principles governing the obligations of a tenant and landlord are as follows:
1. Maintenance
One of the key issues to consider when entering into a commercial lease is the parties’ obligation to maintain the property. With respect to the front façade of a commercial property, tenants are responsible for maintaining the sidewalks and common areas while landlords are responsible for maintaining the entrance ways and exterior. Another example would be where a lease requires a tenant to maintain and repair any mechanical systems in a commercial space. Alternatively, a lease could contain a more broadly worded provision where it requires "good repair". With respect to equipment, appliances or fixtures, for example, one party is often responsible for maintenance and repair, and the other party is often required to replace the item, as and when needed.
2. Insurance
Commercial leases in Ontario will often contain an insurance clause providing that both parties shall, at their own cost, insure against certain risks with respect to the property. In most instances, a tenant should be obligated to obtain insurance covering its goods and trade fixtures located at the property. On the other hand, the landlord is typically expected to maintain insurance covering the building itself.
3. Property Taxes
A commercial lease should specifically state who is responsible for property taxes. While the landlord is usually responsible for paying property tax, the net amount is usually passed on to the tenant through operating costs. The payment of property taxes is a very important term in a commercial lease to understand in advance. Failure to pay municipal realty taxes can lead to a tax sale and foreclosure of the property.
When negotiating a commercial lease, it’s important to identify your obligations and responsibilities with respect to a commercial space. Some of these obligations may be obvious at the onset, while others may be more nuanced. The goal in understanding your obligations under a commercial lease is to avoid potential litigation and costly disputes.
How to Approach Negotiating a Commercial Lease
Negotiating a Commercial Lease
When it comes to commercial leases, the negotiations go beyond the rate of rent. From annual rent increases to lease termination dates, there is plenty to talk about before both the landlord and tenant are happy with the terms of the contract.
If you approach these negotiations as a real business discussion, a commercially minded solicitor can provide you with the insight to make the best decisions for you and your business.
Employing a solicitor to review the lease at the outset will help avoid complication down the line. Small details on paperwork tend to be overlooked, but it pays to have legal counsel review the process with you to ensure that you are fully informed of the impact of any clauses in your commercial lease.
It is essential to understand the obligations placed on the landlord and tenant under Australian laws such as the:
As a tenant, you will want to ensure that any negotiation with the landlord covers clauses such as:
Even if you do not intend to sign a new lease at expiration, you should still approach negotiations with the view that you can sign another term. Some landlords will expect you to take this view or they may not negotiate favourite terms with you at all.
Take an active role in the discussion and avoid taking early assent to any proposed clauses. You will want to leave nothing off the table, even if some items appear unrelated to you or not relevant for your negotiations. For example, if your business includes trading online, then you should be mindful of how your trading might interact with a lease clause.
When you know your way around commercial property law, you will find yourself with more negotiating power.
Common Landlord-Tenant Law Issues in Commercial Leases
From hidden fees to restrictive clauses, commercial leases can be riddled with legal traps for the unwary. Tenants should be particularly aware of the following issues when signing a lease: Rent Increases – Many commercial leases contain provisions for annual rent increases and are often based on the Consumer Price Index (CPI) or fixed monetary amounts. If the hypothetical inflation is greater than the actual inflation over the term of the lease, the fixed increases set forth in the rent schedule may lead to significant financial "overruns" over the term of the lease. Tenant Improvements – It is not uncommon for the landlord to agree to construct or improve certain tenant improvements to the commercial property at "no extra charge" to the tenant. However, this seemingly beneficial provision only looks attractive to the tenant if the landlord did not already price the agreed-upon construction into the rental fee. Additional Rent – Watch out for "additional rent" provisions, where certain costs are passed on to the tenant by the landlord (e . g., maintenance, repairs, signage, HOAs, taxes, etc.). The landlord may pass on costs for items the tenant did not expect to cover. Furthermore, assess and analyze the common area costs with extra scrutiny, especially if the landlord’s costs are being split between all tenants. Estoppel Certificates – It is common for the Lease to require the tenant to sign an Estoppel Certificate which certifies that the Lease is in full force and effect. Be sure to review the Lease and any amendments carefully. It’s also wise to have prior attorneys review your documents. Spending money to make your lawyer familiarize himself with your leasing history may save you thousands by avoiding litigation later on. Personal Guarantees – Personal guarantees by its owners, shareholders, officers or members should not be taken lightly. Guaranteeing a lease can have a long-term negative impact on a business owner and their personal finances.
Resolving Disputes and Ending Leases
Dispute resolution provisions are an integral part of a commercial lease and aid in the efficient and effective resolution of any disputes between the landlord and tenant. Parties can include various forms of dispute resolution in their contract such as mediation, arbitration, and litigation. Mediation is a non-binding form of alternative dispute resolution whereby a neutral third party acts as a facilitator, with the goal of arriving at a resolution that best meets the interests of both parties. If a resolution cannot be reached, the tenant and landlord may choose to proceed to arbitration. Arbitration is a more formal process where an arbitrator considers evidence presented by each side and issues a decision. The parties can further opt to have the decision binding or non-binding. Finally, the most adversarial form of dispute resolution is litigation which involves a judge and determination of the dispute based on the rule of law.
A commercial lease will often contain very specific provisions regarding the ability of the landlord to terminate the lease as well as the ability of a tenant to terminate prior to the end of the lease term. The landlord’s right to terminate the commercial tenancy may exist in the following circumstances: If the tenant is unable to remedy the default in a timely manner, the landlord has the ability to terminate the lease.
The tenant’s ability to terminate a lease may exist in the following circumstances: A tenant’s right to terminate may also be expressly stated in the lease agreement. Finally, unless otherwise stated in the lease agreement, the law affords a commercial tenant with the right to assign the commercial lease to a third party. The tenant cannot unreasonably refuse the assignment. At common law, this means that the tenant could not assign to a third party who was financially incapable of performing the covenants in the lease. As this approach was restrictive, statutory changes were introduced allowing a tenant to assign to a third party so long as the landlord is not reasonably unwilling to accept the proposed assignee as its tenant pursuant to the terms of the lease.
How Local and State Legislation Affects Commercial Leasing
In addition to federal laws, many local and state laws impact the drafting and enforcement of commercial leases. Thus, it is important to be aware of any such regional regulations that may affect the terms of the lease or the expectations of the parties.
State and local laws may vary substantially from one region to another, and in some areas they may affect a significant number of potential tenants. For example, laws regarding building accessibility for individuals with disabilities are often far more stringent in states like California, Illinois and New York (where these laws originated) than in states with lower population densities and more relaxed local laws. A tenant considering moving a business or opening a new business in another state should be aware of how local laws may impact his or her costs, and should consult local counsel in that state to determine the likely effect of these laws on the proposed business.
There have been some infamous instances of local laws directly impacting the terms of a commercial lease. In a famous case that garnered national attention in the late 1980s, Legion Insurance Company leased space in a historic building in Philadelphia. Local ordinance gave a historic tag to the building that protected it from alterations. When Legion’s furniture and other tenant property was damaged in 1998, they filed a suit for damages against the owners of the building to make their leased space more livable. Because of the building’s classification, it was off limits for any alterations. The Court of Appeals for the Pennsylvania Superior Court refused to allow damages for Legion in part because of local laws requiring the historic integrity of the building and because of the restrictions in the lease between the parties. After the decision, Legion company moved out of the building. Local laws may not always be so well publicized, however, and those who intend on entering a commercial lease agreement should consult an attorney to determine whether such local laws may apply and affect the terms of the lease.
Working with the Law in Commercial Leasing
Regardless of whether you are a new business or a long-established corporation, seeking legal assistance throughout the leasing process can help you avoid litigation and save both time and money. When it comes to commercial property rental laws, one mistake can be your downfall — but by hiring a professional legal expert, you have someone working hard for your best interest and protecting you from pitfalls . Your attorney will help you take every potential circumstance into account, negotiate on your behalf, and ultimately represent you. Not only will they aid in the drafting of your lease agreement so that it is as unambiguous as possible, but they’ll also ensure that you understand your responsibilities as a tenant and that these are reasonable.