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Leases: The Chains That Bind

Losing your place of business or being locked into an unwanted or expensive lease can be a disaster. To avoid problems, take the time to negotiate a beneficial lease on the terms you need and want. You can bet that your landlord knows exactly what is in your lease. Do you?

Unlike residential leases, which are governed by legislation, commercial leases are suited to extensive negotiation. Commercial tenants have much greater leverage in lease negotiations then they typically realize. Before you begin your negotiations – and remember, almost everything is up for negotiation – know your objectives and options. Here is some information to get you started.

Disclaimer

INDUCEMENTS – NEGOTIABLE BONUSES

Whether renewing an existing lease or negotiating a new lease, landlords often offer good, potential tenants attractive inducements, if you ask for them. Ask your landlord to pay some or all of the costs of your renovations or leasehold improvements – especially where they add to the value of the building. If extensive leasehold improvements are required, you may be able to save a trip to the bank if your landlord will finance your improvements through increased rent amortized over the term of the lease. Moving expenses are another expense that landlords may pay. How about a few months free rent to cover the costs of moving and re-establishing your business?

Your may be surprised to find that many landlords actually expect to be asked to cover some of these expenses. Remember – your landlord earns nothing from empty premises.

TERM AND RENEWAL – KEEPING YOUR “OPTIONS” OPEN

How long do you want to have the right to occupy your place of business? Some tenants favour a long term lease – five to ten years or more. Others are concerned about being locked into premises that may become too small if their venture succeeds or not needed at all if the venture fails. The best of both worlds can be had through a shorter term – one to three years – linked with renewal options that can extend the potential total term of a lease to ten years or more. This provides you with the option, every few years, of either keeping your space or moving. Remember that a renewal option usually has to be exercised in writing several months before the expiry of the current term.

RENT – WHAT ARE YOU REALLY PAYING FOR?

Gross or triple net? This is where residential and commercial leases are vastly different. Under a gross lease you pay fixed monthly rent and your own utilities. Under a triple net lease you will have Base Rent plus Additional Rent, representing part of the expense of running the entire building. Look very carefully at the lease to see what expenses you are responsible for. Before agreeing to pay Additional Rent, know what amounts were paid in the past and what is included in this expense. Make sure your share of the expenses is fair in view of the type of business you have as compared to other tenants in the building. If triple net makes you nervous, consider negotiating predictable gross rent.

OTHER TENANT OBLIGATIONS – THE FINE PRINT

Look at your lease to see what insurance your landlord expects you to buy. Bring a draft of the lease to your insurance agent for a quote on the cost. If you do not want insurance, try to negotiate your way out of the obligation. Another obscure term in many leases is the obligation to repair and maintain the premises. How reasonable is it for you to keep the building in a good state of repair? What is the state of repair when you are to take possession? If you are moving to an old building, be very careful in accepting this type of obligation.

LIMITATIONS

Most leases describe the nature of the business you are allowed to conduct. The description may be accurate today, but what about five or ten years from now? The described use should be broad enough to cover the possibilities. For example, replace “computer sales” with “retail sales and repairs”, or “take out pizza” with “restaurant”. If the lease does not give you the right to sub-let, seek a term permitting you to sublet with the landlord’s approval.

OTHER CONSIDERATIONS

Did you know that you can lose your lease if the building is sold? To prevent this, the lease can be registered on title. Who owns the leasehold improvements when you leave? This too is up for negotiation. Given the importance of a lease to your business, consider spending a few hundred dollars on legal advice before signing it. It could save you thousands of dollars in time, legal fees and extra expenses down the road.