In today's blog post, we'll discuss:
What is a Commercial Lease?
A commercial lease is an agreement between a landlord and a tenant to use commercial space to conduct business for a fixed term and in exchange for consideration.
The Civil Code of Quebec (the “C.C.Q.”) contains the rules for commercial leasing that apply unless the lease agreement states otherwise. As a result, the first step is negotiating the terms and conditions that will govern the commercial lease agreement. There are not many public order clauses of the C.C.Q. that apply to commercial leases which gives the parties greater flexibility in negotiating the agreement.
The Negotiation Process
The negotiation phase is often a lengthy process with many back and forth discussions between the parties.
It’s best to start with a document called an “Offer to Lease” which serves a few purposes. First, as the jumping-off point of the terms and conditions the parties are negotiating. Second, it documents the negotiations to avoid misunderstandings between the parties. At the end of the negotiations, it is the roadmap of the terms and conditions of the official lease. As a result, it’s important to ensure the content of the final lease resembles the terms agreed upon in the Offer to Lease.
The Type of Lease
Landlords can use one of several different types of leases when renting a commercial space. Understanding the difference between each type allows the tenant to have a stronger negotiation strategy and helps better budget monthly expenses for the company.
The most common types of leases:
Gross lease: The tenant pays a single amount that covers the base rent and all incidental expenses (Incidental expenses include: property taxes, insurance, utilities, maintenance, etc.)
Modified gross lease: The tenant pays an amount + certain incidental expenses.
Net (single net) lease: Base rent amount + usually one incidental expense (often the property tax). The landlord pays all other expenses.
Net net (double net) lease: Base rent amount + usually two incidental expenses (for example the property taxes and the insurance). The landlord covers all other expenses.
Net net net (triple net) lease: Base rent amount + all other incidental expenses. For example, property taxes, insurance, utilities, operating costs, and maintenance costs.
Percentage lease: Base rent amount + a certain percentage of gross sales above a certain amount.
We work with both landlords and tenants with commercial leases, whether it be to draft, review, or negotiate with the other party. Click here to get started.
The Total Amount of the Lease
The tenant should know the total amount they are responsible for paying by reading the lease. At the very least, the language used in the lease should be clear enough to allow the tenant to make the calculation. This requires expert drafting to avoid misinterpretation by either party (or even a different interpretation by the court if there is a legal dispute).
In some cases, rent is set at $xx.xx per square foot of the leased space, expressed either at an annual or monthly amount. Let’s use an example to calculate the total amount of the lease.
Melanie rents a 2,500-square foot office space quoted at $10.50 per square foot.
The annual amount of rent: 2500 x $10.50 = $26,250 per year for rent
The monthly amount of rent: $26,250 per year for rent divided by 12 months = $2187.50
With percentage leases, it’s common to have a base rent plus a percentage of gross revenue beyond a certain threshold. Let’s look at an example.
Albert has a percentage lease and is responsible for paying a base rent of $1000 per month, plus 6% of all gross revenue over $75,000 per month. Albert made a gross revenue of $83,000 in one month, so the total amount of his rent would be:
$83,000 - $75,000 (the total gross revenue minus the threshold amount) = $8000
$8000 x 0.06 = $480
$480 + base rent of $1000 = month’s rent of $1480
Regardless of the type of the lease, there should always be a mechanism for making the calculation so the tenant can know the amount they are responsible for paying - either expressed directly or through a type of formula.
The Leased Space
There shouldn’t be any ambiguity regarding the space the tenant can use under lease.
The precise space being leased (including the surface area), and any other parts of the commercial area that are included should be indicated. For example, if there is a parking spot then the lease should state this.
The Length of Time
Review the term of the lease and any options to renew at the end of the term. There is no general rule for the term of a commercial lease as each business is different. It’s up to the parties to decide how long they would like to commit to the space and what will happen once that time is up. In multi-year leases, there will often be a formula for an incremental increase in rent per year.
Usage, Permits & Exclusivity
The lease usually states the premise is being leased for a specific purpose and the tenant must obtain prior written permission from the landlord to use it for another purpose.
To ensure the tenant is legally allowed to operate their business in that space, the lease will often require the tenant to obtain the permits required to operate the business. This can include the certificate of occupancy and any industry-specific permits. For example, a restaurant that wants to serve alcoholic beverages must have an alcohol permit.
Another important term is the exclusivity clause which means the landlord cannot rent to the tenant’s competitor a commercial space in the same building. For example, if there is a salon in the building, another salon cannot lease space and start competing with the first tenant.
Repairs/Maintenance Obligations
The C.C.Q. splits the responsibility for the repairs/maintenance between the tenant and landlord. However, it is possible for the lease to state the tenant is responsible for all repairs. Reading the lease carefully to understand the responsibilities of each party regarding the repairs/maintenance is crucial.
Generally, any repair and maintenance are shared between the landlord and tenant depending on the gravity of the repairs. Minor maintenance repairs are assumed by the tenant, whereas major repairs are handled by the landlord. For example, the landlord would be responsible for fixing leaking pipes, or electrical outlets that stop working.
We can further differentiate between the time before the tenant occupies the premises and once they have taken possession. At the beginning of the lease, the landlord must ensure the premise is ready to be used by the tenant. Generally, if there are any repairs to be done the landlord must take care of them at their own expense before the tenant moves in. Sometimes, the lease will state the tenant is responsible for making those repairs.
Termination, Subleasing & Transfers
A commercial lease is a contract, meaning it ends on the date agreed upon by the landlord and the tenant. In some cases, one party may terminate the lease earlier or it can continue after the agreed upon date. Often, leases will include a renewal clause which allows the tenant to renew the lease. These types of clauses may also provide for a rent increase.
The landlord can ask the tenant to leave the lease early if the tenant does not fulfil their obligations. This includes not paying rent on time or not adequately maintaining the leased property. In other situations, if the landlord sells the building in which the tenant is leasing, the new owner may end the lease early if it is not published. (See the section on publishing a lease for more information).
The tenant can get out of the lease early by subletting or transferring the lease to a new tenant (known as “assignment”). Subletting and transferring a lease are two mechanisms by which a tenant can leave the lease and have another tenant take over the premise. In a sublet context, the original tenant remains responsible for the lease and has obligations towards the sub-lessee. On the other hand, transferring a lease (known as a lease assignment) will transfer all the rights and obligations arising from the original lease to the new tenant. Again, the lease can state otherwise to keep the former tenant responsible for the lease even if it is transferred.
The C.C.Q. states that the landlord may not refuse to sublease or transfer the lease without a serious motive. However, a commercial lease can give more discretion to the landlord. As a result, most commercial leases will include rules regarding subletting and transferring. It is quite common to see clauses that will expressly prohibit any type of subleasing/transfer. Other types of leases will state that subleasing/transfers are subject to written approval by the landlord.
Publishing the Lease
A lease can be published by presenting a notice of lease to the registry. The notice must refer to the main lease, identify the landlord and the tenant and describe the building in which the leased space is situated.
While there is no legal obligation to publish a lease, it’s a good mechanism to provide an increased layer of protection to the tenant and make it enforceable against third parties. For example, if you register your lease and the building in which you are renting is subsequently sold, the new owner cannot terminate the lease before the end of the term.
This blog post is not legal advice and is for general informational purposes only. Always speak with a lawyer before acting on any of the information contained herein.