A commercial property lease can be a complex and confusing document to review. We recommend you obtain legal advice if you have any questions before signing a lease as a tenant, or before purchasing a commercial property with an existing lease that you will taking over. Lease agreements are contracts and are usually drafted by landlords or their counsel. As a tenant, the lease agreement may have quite onerous obligations to the tenant, so review of the contract before signing is important. Here are some points and tips that a lawyer will review with you:
Lease agreement’s effective term vs. contract term:
The lease agreement’s “contract term” is the term that is specified in the contract, from the commencement date to the end date.
A lease agreement’s “effective term” is the period after which the lease can be terminated by either the tenant or the landlord (sometimes called “Early Termination”). There may be a requirement to give notice before the termination becomes effective.
Practically, the effective term is what parties should be focusing on when reviewing the lease to decide if the length of time is what was expected; a longer effective term at a good rental rate being valuable for the landlord and important to a potential purchaser of a commercial property, the opportunity for a tenant to terminate a lease early in the event of financial hardship or other circumstances being valuable to a tenant.
Lease renewal rates:
A lease agreement’s rental renewal rates are often calculated as the going rate for similar properties in the location of the property. Sometimes you will see rental rates for future terms to be calculated using a Cost-of-Living allowance or other formula to set the increase/decrease. Care should be taken to ensure that there is a clear formula for the next rental rate.
Environmental laws:
Depending on the lease agreement, there could be no requirement for a tenant to provide a Phase I or II Environmental Audit on their departure from the premises, at the tenant’s cost.
Determining whether the premises had been affected by any hazardous substances brought onto it by the tenant could be difficult for the landlord to determine/prove without obtaining an environmental audit before the lease commences as a baseline to compare.
Maintenance costs and repairs, plate glass, etc:
The lease agreement will usually assign responsibility for repair and maintenance of the Heating Ventilation Air Conditioning (“HVAC”) system to the tenant. However, tenants may try to modify this clause by specifying that maintenance costs to a maximum amount, or do not include full replacement. If the landlord requires periodic maintenance, confirm approved service providers and how many times per year. The landlord may require the tenant to obtain proof of maintenance. Also look for who is responsible in the lease for replacing the HVAC system. Plate glass can be an expensive tenant cost as well depending on the space.
Triple net lease:
A Triple net lease typically requires the tenant to pay the real property taxes, insurance, and maintenance (basically all costs) for the premises. Tenants need to take care in reviewing what forms the Additional Rent needs to be paid by them, For example, the lease agreement may specify that insurance is the tenant’s responsibility by indicating that the insurance obtained by the landlord is a part of the Additional Rent.
Multiple renewal options:
A lease agreement might have multiple provisions setting out options to renew for various lengths of time. E.g., one provision says can renew for 2 more years, another says can renew for 3 more years. All renewals should be in writing.
Other important tips:
Ensure that there is a clear calculation of all the Additional Rent for the lease agreement to avoid any confusion and disagreement between the parties.
Ensure that the tenant is not awaiting the landlord to complete any outstanding work on the premises. On purchase, the tenant can be asked to provide an estoppel certificate to confirm there are no outstanding landlord work orders and the owner can confirm security deposits and basic and additional rent paid to the date of closing.
Be mindful of Rights of First Refusal or Options to Purchase clauses in a lease. Both types of clauses can reduce the saleability of a property if the tenant must first be given the opportunity to either match a third party offer within a certain number of days (which is never attractive to a potential buyer because of this time delay), or the tenant can exercise an option to purchase the property outright.
In summary, a commercial lease encompasses various important factors, from financial obligations and maintenance responsibilities to environmental and renewal options. A comprehensive review with legal counsel can help navigate these complexities, ensuring that the lease terms meet your needs and protect your interests.