Signing a Commercial Lease

Knowing and comprehending the important terms and conditions in the lease clauses is necessary if you want to negotiate a lease that will be commercially feasible.

Key terms and conditions that are frequently present in a lease include the following:

• length (or term) of the lease and any extensions
• reviews of the rent
• authorised use
• tenancy variety and rivalry
• costs
• mending and upkeep
• payment for the inconvenience resulting from the landlord's construction
• subleasing and assignment
• defaults and violations
• relocation and redevelopment
• termination

Other conditions and clauses are probably included in your proposed lease as well. For additional information, read our publications on property management and commercial leasing.

TIP: You should seek independent legal, financial, and business advice before signing a lease or lease-related documents, occupying the space, or making any payments.

Lease term and renewal options

Check that the length of the anticipated lease's lifespan (the period) is sufficient to allow you to recoup your investment and create the required return on investment. Keep in mind that the landlord is under no obligation to provide you an extension on your lease once it has run its course, so you may need to look for another place to call home. Because a large percentage of your company's goodwill may be vested in your property, it is absolutely essential that you take all necessary precautions to protect it.

Options

Make sure that the proposed lease includes an extension option that would allow you to continue using the space after the initial term has expired.

If your business is just getting started and you do not yet have a track record, you may choose to negotiate a brief initial term and brief renewal options, such as a one-year lease followed by two options for an additional two years each. This is an option you have if you do not yet have a proven track record.

If your company is well-established and you value stability, you may decide to discuss the possibility of signing a lease for a longer period of time, such as a two-year lease with options to extend for an additional three and five years.

A tenant entering into a new lease for a retail shop has the right to a minimum tenancy length of up to five years for various leases covered by the Commercial Tenancy (Retail Shops) Agreements Act of 1985 (CT Act). Tenant may prolong the lease if the original agreement does not call for five years (statutory option).

A tenant must fill out a Notice of Exercise of Option form and deliver it to the landlord at least 30 days before the lease expires in order to exercise this statutory option.

Utilising your choice

The conditions of your lease should define the manner in which you must inform the landlord of your intention to exercise your option and the time frame within which you must do so. In most cases, options are "actioned" or "exercised" in writing between three and six months before to the expiration date of the lease.

Before you are required to take any actions to exercise your right to renew, your landlord is required to give you a notice that is between six and twelve months in length, as mandated by the CT Act.

If you do not exercise an option by the time or in the manner indicated in the lease, the landlord may decide not to renew your lease. This is something you should keep in mind.

Reviews of the rent market

You will need to reach an agreement with the landlord regarding the rent amount as well as the rental review schedule. You can negotiate with your landlord to have the rent reviewed less frequently than once a year, which is the standard.

For the purposes of determining a rent review in accordance with leases that are governed by the CT Act, there can be only one basis.

There are many common choices for rent reviews, including the following:

• index of consumer prices (CPI)
• constant percentage growth
• a fixed sum
• the going rate

Make sure you can afford any rent increases that may be suggested for the duration of your lease and any renewal periods.

Market rent

Imagine that if you exercise your option to extend your lease, a market rent review will be in effect. In that situation, it's crucial that you first determine the market rent with the landlord in order to make sure the requested rent is reasonable and economically feasible.

Percentage rent

When negotiating the terms of a lease, it is important to steer clear of the practise of basing rent increases on a percentage of annual turnover. This indicates that you are willing to pay a basic rent as well as additional rent based on a percentage of turnover when a predetermined minimum level of sales has been achieved. Additionally, you are agreeing to pay this additional rent.

If this condition is included in the lease, you are obligated to provide the landlord with information regarding your annual revenue. This information could be used against you if you decide to sell the company or continue the discussion in the event that it leads to further action.

Permitted use

In most cases, a lease provision will detail the kinds of activities that are allowed on the property.

You need to make sure that the approved usage allows for the conduct of all of the activities that are essential to the operating of your company. Included in this are all of the various goods and services that you want to sell to customers in the future.

Instead of concentrating only on the activity that you are currently engaged in, you should think about what it is that you might want to provide in the future in order to expand your business. If, for example, you are only permitted to offer pizza, expanding your menu to include hamburgers or coffee can prove challenging for you.

It is possible that the allowed use will prevent you from being able to transfer the lease to another party in the event that you sell your business or move out of the premises before the end of the lease term. You should make every effort to negotiate an approved use that is sufficiently inclusive to protect your possible financial interests in the event that a business relationship develops between the two of you.

Tenancy variety and rivalry

It is important to pay special attention to the different types of tenants that are located in a shopping centre or neighbourhood. In a perfect scenario, rather than competing with your business, the other companies' offerings should serve to bolster one another.

Including a condition in your lease that states "exclusivity of trade" is a fantastic idea. You are given the exclusive right to sell a particular product category or carry on that form of business within the stores that are owned by the same landlord, which prohibits direct rivalry between the two of you.

Tenant pillars

The presence of a well-known retailer, such a department store or grocery store chain, in the vicinity of a particular piece of real estate may pique your interest in that location (known as an anchor tenant). It's possible that they are perhaps the primary source of foot traffic for your organisation. In that case, you should negotiate a language into the lease that gives you the opportunity to terminate the lease or receive a rent reduction in the event that the anchor tenant moves out of the property or the overall number of tenants in the retail centre drops.

Costs

Other expenses related to renting out business space must be taken into account during negotiations. These expenses, which are in addition to the rent, can be substantial. In some circumstances, they might continue and grow throughout the lease. Several of the typical extra expenses include:

• running costs or outlays
• insurance
• legal fees
• security deposit
• fit-out
• refurbishment
• funding for advertising and promotion

Operating costs or outlays

Operating costs are typically those that are incurred by the landlord in connection with the operation, maintenance, or repair of the rented facility. A few examples of these charges include things like land tax, council fees, water fees, security, keeping up with the care of shared areas, and regular repairs and maintenance.

It is important that you are aware of all of the operating fees that will be required of you before you sign a lease because these costs have the potential to significantly drive up your total expenditures.

If you want to avoid having to pay for the landlord's operational expenditures, you should make an effort to strike a solution. In the event that this is not possible, you should make an effort to limit them to those that will be to the advantage of your property. Also, come to an agreement on a cap for price hikes that will take place during the term of the lease.

It is imperative that the burden for costs like as structural repairs and capital improvements be placed squarely on the shoulders of the landlord because the landlord will continue to benefit from these types of expenditures.

Each lease that is subject to the CT Act is required to include a provision that specifies any operational expenses that you will be required to pay for on an individual basis.

In addition, the lease ought to provide that you have access to invoices and receipts so that you may verify the actual operating costs.

Insurance

The lease may stipulate that you obtain insurance to protect against things like building damage and third-party liability. Any lease provisions requiring you to reimburse the landlord in the event of a loss, wrongdoing, or damage should be avoided.

These provisions can violate your insurance contract. Before approving any insurance clauses, it is a good idea to talk with your insurer about them.

Legal fees

You and the landlord should be able to come to an agreement regarding the legal fees required to prepare and negotiate the lease. It is a good idea to negotiate that each side will be responsible for their own legal fees, or at the very least, agree to place a limit on the amount that you would contribute to the landlord's legal fees.

You should also steer clear of a provision that stipulates that you are responsible for paying the landlord's legal bills in the event of a dispute.

However, in the case of leases that fall under the purview of the CT Act, a landlord is not permitted to require that you pay the costs of the following:

• the process of creating, negotiating, signing, renewing, or extending a lease.
• securing their financial lender's approval for the lease (if there is a mortgage on the property)
• adhering to the CT Act

Any legal fees and other costs related to a lease assignment or sublease may be recovered from you by the landlord.

Security bond

At the beginning of a lease, you could be asked to post a security bond; the amount is typically negotiable. The lease should specify the terms for the usage, withholding, and repayment of the bond if you agree to one.

Fit-out and property condition

"Fitting out" refers to the process of preparing rented space for occupation in accordance with the requirements of the tenant and with the agreement of the landlord. The installation of fixtures and fittings, the storefront, wall and floor coverings, and other goods is one example. Other examples include:

It is possible to negotiate who will be in charge of the fit-out or who will be responsible for certain components of the fit-out. The lease needs to make it abundantly clear what the fit-out criteria are and who is responsible for paying the associated costs. You should make every effort to bargain in order to ensure that the fit-out goods you purchase are considered your property (and may be taken with you) when the lease term comes to an end.

There may be significant costs related with the fit-out. If you are considering leasing premises, you need to ensure that you have sufficient funds to cover the cost.

If you are not informed of the charges for the landlord's finishes, fixtures, fittings, equipment, or services in the Disclosure Statement that is provided to you at least seven days before you sign the lease, then you are not obligated to pay for the landlord's finishes, fixtures, fittings, equipment, or services under a lease that is covered by the CT Act.

Prepare yourself for the possibility that the fit-out will take longer than anticipated. Because there may be a shortage of tradespeople at certain periods of the year (like around the holiday season, for example), the completion of your fit-out may take longer than anticipated.

Refurbishment

You can be required to perform renovations on the facility while you are still under the terms of the lease. This occurs more commonly at shopping malls because it is where the façade of the building is consistently being updated. During the course of the talks, make an effort to limit improvements to once every five to six years.

A language in a lease that requires you to remodel or refit the property is not legally binding unless it is sufficiently explicit about the sort of renovation or refit, the scope of the renovation, and the date on which it must be completed. The CT Act applies to leases.

Funding for marketing and promotions

You may be required to make a contribution to marketing or promotional charges if it is indicated in the lease that you must do so. The majority of the time, a shopping centre will put these funds towards marketing or other types of promotional endeavours.

Before you put your name on the dotted line for the lease, you need to have an accurate estimate of how much you will be contributing to the marketing or promotional budget. Negotiate regulations that will limit the amount of money you may contribute while yet allowing you to have some say in how the money is used.

Mending and upkeep

It is important that the conditions of your lease specify who is responsible for certain types of maintenance and repairs. Make an effort to negotiate with the landlord in order to convince him to agree to assume responsibility for the building's structure and the key capital items (i.e. roof, walls, air-conditioner, exterior fittings such as gutters and downpipes, plant and equipment that are their property, etc.).

If you are a tenant, you may be held responsible for the maintenance and repair of the interior surfaces, such as the floor coverings, doors, and windows, as well as any appliances and fixtures that the landlord provided for your use.

It is recommended that you negotiate with the landlord to replace appliances such as air conditioners and fire sprinklers when they reach the end of their useful lives; however, you are still responsible for doing routine maintenance.

Get a professional opinion on the condition of the rental property before you commit to signing the lease. It is necessary for both you and the landlord to provide your approval before taking any photographs for the condition report. If there is a disagreement regarding the condition of the property or equipment at the end of the lease, and if the damage was due to regular wear and tear, this report may be helpful in determining whether or not the damage was due to normal wear and tear.

Compensation for the inconvenience resulting from the landlord's construction

You may be entitled to pay if your landlord performs work that interferes with your business (such as routine maintenance or building renovations).

Subleasing and assignment

You may be required to assign the lease if you make the decision to sell your company or if you are unable to continue operating the business (another person takes over the lease). This will require the approval of the landlord, so check that your lease agreement says that they cannot reject for unreasonable reasons if they do not provide their permission.

The prospective new tenant's poor credit history, their likelihood of operating a profitable business, or their intention to use the property for a use that is different from what is permitted by the lease are all valid reasons to reject the assignment. In addition, the prospective new tenant's intention to use the property for a use that is different from what is permitted by the lease.

If you transfer a lease to another person, you may still be held accountable for any violations of the agreement that are committed by the new renter. Provisions in retail contracts that are controlled by the CT Act that allow the landlord to refuse approval to a new tenant unless the existing tenant agrees to assume responsibility for the new tenant's default are not allowed to be included.

Because the CT Act is not applicable to all leases, you need to make sure that you are freed from all obligations on the date that you assign the lease.

Even if you sublease some or all of your property, you are still accountable for the rent that is due under the original lease. In the event that your new renter does not pay the rent, it is possible that you will be required to do so. It is essential to investigate the incoming renter's credit history and ensure that they will be able to fulfil the obligations outlined in the lease.

If the CT Act applies to your sublease, you will basically be taking on the responsibility of a landlord in accordance with the CT Act. You are obligated to provide the new subtenant with the required documentation, which may include a Disclosure Statement and a Tenant Guide.

If you sublease or assign a lease, you may be responsible for paying the landlord's reasonable legal fees as well as any other costs that are associated with the transaction.

Lapses and violations

Your lease will be considered to be in default if you are late with your rent payments. After then, the landlord will be entitled to take legal action in order to recoup the lost rent. In the majority of leases, the landlord will also have the ability to enter the property at any time, even without prior notice, and lock you out.

The rent that was lost up until the end of the lease term can be paid back to the landlord, along with any costs incurred by the landlord to repair and re-let the property. The landlord has the right to receive restitution for the lower rent, as well as any further losses and legal expenditures brought on by your default on the lease.

You should make it a point to negotiate the default clauses in your lease so that they state that you are required to receive written notice of any default and that you are given sufficient time (at least 14 days) to correct the default before any action is taken against you. Make sure this is the case.

It is possible that you will be in violation of your lease and a component of the agreement if you do not follow certain requirements, such as failing to maintain or repair the property when it is your responsibility to do so. A reminder that you should include in the terms of your lease a provision stating that you will be given written notice of any violations and that you will be given sufficient time to rectify the situation before any legal action is taken against you.

Relocation and development

If a lease contains a provision known as a "redevelopment clause," the landlord may have the ability to terminate the contract early in order to make significant enhancements to the property. In circumstances like these, you run the risk of being evicted from your home or of having to relocate to a new location. This can have a detrimental effect on your organisation.

Make an effort to have the clauses in the lease that pertain to relocating and developing the property changed, if at all possible. In the event that this is not possible, you should ensure that the lease includes payment for relocation, other costs and damages, and compensation for the loss of business or goodwill that is associated with moving your company.

You should also consider negotiating a lower rent, if the circumstances are appropriate. In principle, the redevelopment provision should provide sufficient compensation to put you in a situation that is approximately equal to what you would have been in had the redevelopment not taken place. This is the goal of the provision.

There are specific regulations that must be followed for the development and relocation of a tenant's business, in addition to the early termination of a lease, for leases that fall under the purview of the CT Act.

You should give serious thought to the risks that are associated with renovation as well as relocation. If you are unable to come to an agreement on a reasonable amount of compensation, you should examine whether or not the potential threats to your business make it worthwhile to sign the lease.

Termination

Examine any clauses that let the landlord to end the lease early when negotiating a lease. If there are, make plans to have them taken out.

investigating the neighbourhood, the landlord, and the lease information

You must conduct some research before signing a commercial lease deal. While exploring, be sure to follow these instructions.

1. Recognise the region

The location of a small business is one of the most important factors in determining its level of success. If you plan to sell a specific product or service to the general public, you should investigate the surrounding area in order to gain a solid understanding of the people who might patronise your establishment. While you are looking for the suitable properties, make sure that you also take the time to identify the perfect new location for your organisation. Gumersell cautioned that this process might take two years or perhaps longer, so if the end of your current lease is getting close, make sure you carefully plan because this procedure could take that long.

2. Learn more about the building's owner and landlord

Gumersell went on to say that gaining a better grasp of the landlord and the owner of the building is one of the most important aspects of study that is sometimes neglected. Your immediate landlord might not necessarily be the owner of the property legally. This could be a possibility. In any scenario, you should educate yourself as much as possible regarding the building's owner and the landlord. You are going into business together, so make sure you are aware of each other's identities, their financial situations, and whether or not they are prompt in paying their payments.

If a landlord fails to make payments to the building owner or mortgage payments to a bank, a tenant or business may end up being evicted in the event of foreclosure. This is the case in some regions, for example, even if a business has been prompt with every payment. In these regions, a tenant or business may end up being evicted. This is only one example of how things might go wrong in a relationship between a landlord and a tenant or between the owner of a building and a renter.

Gumersell recommended that businesses look into the landlord's background by consulting the public records.

You might also ask the landlord for documentation regarding their limited liability corporation or another type of business structure to gain further insight into whether or not the landlord would make an acceptable business partner for your company.

3. The zoning regulations

It is also important to take into account the zoning regulations. Even though your landlord may intend for you to use the space for a specific purpose, such as running a restaurant, you are still responsible for ensuring that the landlord's goals are in accordance with the laws of your town.

It's possible that a landlord or building owner will assume they can rent their space to a particular kind of company enterprise even though doing so would violate the zoning restrictions that are in place in the area. You may ensure that your business will not run into any significant legal challenges in the community in which it operates by synchronising these two aspects.

4. Learn about environmental issues and nuisance legislation

When negotiating a lease, one of the most important issues to keep in mind is whether or not you will be able to run your company to the fullest extent of its capabilities once you have opened your doors to customers. Numerous leases contain in-depth restrictions regulating equipment, smells, and noise. A tax attorney by the name of Ann Brookes asserted that in order to acquire a lease for a restaurant, she was required to negotiate a "clause regarding objectionable odours."

She said, "No offensive odours," citing the building laws as her authority. Due to the fact that determining whether or not one item is unpleasant is a matter of personal opinion, I made sure that there was an exemption for smells that are typical of a restaurant.

Gumersell recommended that you conduct extensive research about the property's fundamental environmental rules before signing any documents. Because landlords regularly ignore these restrictions, they could be used as leverage against your organisation in a legal proceeding.

The most important takeaway is to perform exhaustive research on the property before signing a lease. Do your research on the neighbourhood, the landlord, the local zoning restrictions, and any other environmental or nuisance regulations that the property manager may be subject to. This will help you make an informed decision.

Important laws governing commercial leases to be aware of

 

When you are in the process of amending your lease, there are a few essential considerations that you need to keep in mind. It's likely safe to say that the rent structure is the most fundamental and important component of any lease. If you know how much rent you pay each month and how much it will increase annually, you will be able to better plan budgets and determine whether or not you will be able to continue operating your business in this new location.

The conditions of the lease are also extremely important. Examine the similarities and differences between short-term and long-term leases. Long-term leases can be a good investment if you are beginning a business in a location that is expanding or growing and is in the process of either. On the other hand, short-term leases give you the flexibility to relocate your business or even give up and shut it down if things don't go according to plan.

Make sure that you have a complete understanding of the payment plan and the time period, as well as the actual amount that you are responsible for paying each month. Ask your potential landlord about the following types of payment if you want to rent from them:

• Insurance
• Tax on real estate
• Maintenance (both interior and exterior)
• Repairs
• Security
• Parking
• Local nuisance laws (noise or scent)
• Utilities (water, gas, electric)
• Modifications (whether you can adjust the interior or exterior of your space)

After you have established some fundamental price and term arrangements, it is time to look into some of the less obvious aspects of the deal. When signing a lease, it is important to be aware of the following excellent examples of statutes; however, your actual contract will probably vary depending on the state in which you live:

• Transfer structure. Determine how the termination of your lease will take place in the event that either you or your organisation decides to quit the premises. Subletting and lease assignment are the two most common types of sharing arrangements, as described by Gumersell. When a lease is allocated to a new renter, the new renter receives a copy of the entire agreement in written form. When a current renter sublets, they keep their name on the lease and collect rent from a new tenant, which they then hand over to the landlord. However, the new tenant is responsible for paying rent. In either case, you will typically be required to provide evidence of prior written approval before the lease transfer can take place. It is essential that you figure out this aspect of your contract as soon as possible.
• Personal exposure. It is possible that you will be requested to sign personal guarantees while you are signing a commercial lease in certain scenarios. Even if your company goes into default on these agreements, you will still be accountable for certain leasing obligations. With the assistance of your legal advisor, you should attempt to negotiate this condition in your contract. When signing a lease for your company, you should make every effort to reduce the amount of risk that is taken on by your organisation or real business.
• Holdover rent. The rent paid by a tenant who stays in a rental unit after the term of their contract has expired is subject to an increase. It can be challenging to find a lease, and when companies relocate to new locations, they frequently remain in the old location for a longer period of time than is permitted under their existing lease while the new one is being set up. It is common practise for landlords to include wording in leases stating that businesses are liable for up to two hundred fifty percent of their ordinary monthly rent payment in the event that the rent is late. As a result, remaining in the country for an extended period of time beyond what is permitted could cost you tens of thousands of dollars. Gumersell suggested attempting to negotiate this component's price down to approximately 125 percent.
• Nondisturbance agreement. In many cases, even if you are current on all of your payments, your company may still be forced to vacate the property if the landlord is unable to keep up with the payments on the building's mortgage. If this occurs, you will be permitted to remain in the property and continue paying your rent to whomever organisation has taken over the building from your landlord, Gumersell, as long as there is a nondisruptive agreement in place.

When you are reading the lease, make sure that you give the method of payment and any other restrictions, such as those relating to transfer structure, personal exposure, holdover rent, and nondisturbance agreements, your full attention.

Everything may be agreed upon

Even though these are some very important details to keep in mind, the lease you now have most likely has a large number of other provisions that are open to negotiation. Collaborating with your potential landlord and, if necessary, an attorney can help guarantee that you and your business obtain the best possible bargain possible.

According to the founder of Dotcom Dollar, Allan Borch, in contrast to a residential lease, which has a predetermined length of time, the term of a commercial lease is frequently variable and can be either longer or shorter depending on the agreements that were made. Because consumer protection rules that apply to home lease agreements do not cover commercial leases, commercial lease agreements have less legal protection than residential lease agreements do.

The most important thing I've learnt is that I shouldn't be frightened to negotiate the terms of the lease. It is possible to negotiate many of the conditions of the agreement, including the duration of the period in particular.

Terms of a commercial lease to be aware of

Borch and Dan Bailey, the president of WikiLawn, identified several key terminology that small business owners should be familiar with when it comes to commercial lease agreements. These phrases were outlined by Borch and Dan Bailey. Even while the list does not contain every possible phrase, it does give a good overview of the concepts that are typically included in commercial lease agreements.

Rent amount/base rent.  Based on the area of the space, this sum is determined. Verify that the estimate provided by the landlord genuinely reflects usable space. There is no income requirement for this rent.

Usable square feet. In the case of shared spaces, this refers to the amount of space that is really set aside for the company as a tenant.

The rent has gone up. Rent hikes are often calculated as a certain percentage of the entire rent, but that figure can shift from one year to the next. You can try to bargain with the landlord to set a limit on the amount that the rent can go up.

Security deposit.  This sum will reserve the area while the paperwork is being finalised. The sum should be mentioned in the leasing agreement and in advance.

Length of the lease.  Since commercial landlords prefer lengthier lease terms, the duration of a commercial lease is often between three and five years. The start and end dates of the lease are frequently stated in the leasing agreement.

Improvements.  The types of repairs and enhancements that can be done to the facility are outlined in this section of the commercial lease agreement, along with who is liable for the associated costs. This section's many details are negotiable.

Bottom line. Before you put your name on the dotted line of a commercial lease agreement, be sure you comprehend all of the terms and are at ease with them.

Grant of the lease.  This section specifies that after all requirements, such as paying the security deposit, have been satisfied and the tenant has accepted the property from the landlord, the landlord will pass the property over to the tenant.

Commencement date. This is the day on which the tenant becomes responsible for paying rent and maintaining the rental property. However, it is more typical to refer to this as the day on which the renter takes possession of the property.

Extension. This can be a flat fee or a percentage of the monthly rent.

Taxes.  This section specifies that after all requirements, such as paying the security deposit, have been satisfied and the tenant has accepted the property from the landlord, the landlord will pass the property over to the tenant.

Obligation for repair.  This section outlines the types of repairs that the landlord is responsible for, such as those for material flaws, faults, or failures that are essential to the property's operation. It also describes the maintenance obligations of tenants.

Permits.  Both parties are responsible for obtaining all licences and permits required to make improvements or repairs to the rental property.

Covenants. Both the renter and the landlord are subject to distinct covenants under these provisions. For instance, a covenant can stipulate that the tenant must pay rent even if the landlord doesn't fulfil all of their obligations under the lease.

Restitution paid by the lessee. This clause essentially exonerates the landlord from any responsibility for any harm, loss, claims, or damage, unless those things are the direct result of the landlord's wilful actions or inactions or their extreme level of negligence.

Rent abatement/adjustment. In the event of property damage from a fire or other natural disaster, it is stated in this section whether the rent would be reduced or abolished.

Condemnation.  Although it's frequently disregarded, this sentence is crucial. It establishes what occurs if the landlord's rental property is taken from him or her by a public entity for use, whether through condemnation or eminent domain.

Choice of buying. According to this condition, the tenant can purchase the property at any moment during the lease term for a predetermined sum. Although it's not required, it doesn't harm to provide this provision. The agreement may also prohibit the renter from making a purchase of the property while the lease is in effect. In either case, having it in writing is a smart idea.