Key terms in a commercial lease

January 2014

Introduction

The preparation of a commercial lease is a job that requires a great deal of precision and attention. The rights of the parties to this type of lease are essentially governed by the lease since the Civil code of Quebec leaves a lot of freedom to the parties, unlike housing leases.

It is therefore very important to ensure that you have a well developed and detailed commercial lease to avoid misunderstandings which could lead to a dispute. The last thing the parties want is to argue over the terms of the lease.

Here are some important points to consider in negotiating and preparing a commercial lease:

 

The Rent

Rent is obviously a very important element in a commercial lease. Very often, we will talk about basic rent and additional rent. The base rent is actually the portion of the rent directly related to renting the rented area. For example, in the case of commercial premises, the base rent could be $ 12 per square foot per year. Normally, this rent is payable monthly.

The additional rent is that portion of the rent that represents the additional charges related to the leased area. There is no strict rule but expenses such as the portion of taxes, insurance, snow removal, etc. related to the leased area are often included in the additional rent. The additional rent is also usually payable monthly.

 

Use of the leased area

A commercial lease should indicate the nature of the Tenant’s operations. The Landlord must plan the activities which are permitted in the leased premises. For instance, a provision of the lease would prohibit a Tenant who leased an area for a day care center to convert it into a massage parlor at a later date. This is all the more important when the leased premises are located in a building with several other tenants who may complain about any other usage of the leased premises.

The use for which the premises are rented must be indicated and provide that no other use will be permitted without the agreement of the Landlord, who may refuse in his sole discretion. Conversely, the tenant on his side has an interest in knowing from the outset the activity limitations that are related to the premises he wants to rent.

A Tenant may want to have the exclusivity of a certain activity in the building where the rented space is located. As an example, a notary could request as a condition to the conclusion of a lease to be the only notary firm operating in this building. It is therefore essential to specify this in the lease contract.

 

Insurance

The insurance aspects of a commercial lease must not be neglected. In the event of a disaster, such as a fire, the Tenant must be properly insured. The Tenant is usually expected and has the obligation to submit a certificate of insurance proving that his premises are properly insured. The general terms of insurance coverage should also be provided, such as the amount of basic coverage and civil liability.

 

Work and maintenance

A rented building, whether it be a building or a simple local, will sooner or later require maintenance or repair work. It is therefore essential to determine the Tenant’s responsibility and that of the Landlord in oroder responsibility to avoid discussions in tjis regard. Here again, there is no immutable rule. It's a question of negotiation.

If the Tenant is responsible for repairs, the Landlord may want to ensure that the work is done according to the rules of the art by a qualified contractor. He may sometimes request to review the plans before the execution of the work. This also applies to rental development work. Sometimes such work is major and it may be important for a Landlord to know precisely what work will be done in order to avoid unpleasant surprises.

Finally, it is necessary to foresee the state in which the Tenant will leave the premises at the end of the lease. Should it be necessary for him to carry out restoration work at his expense, it will be important to specify this in the lease.

 

Subletting or assignment of lease

A cautious Landlord will carefully choose a Tenant to avoid problems. It will be necessary to specify in the lease if the Tenant may sublet or transfer the lease to another person. The Landlord will probably want to have a say in the matter so as not to end up with an undesirable Tenant in the premises.

 

Endorsement

Most businesses are operated through a joint-stock company. The Landlord may wish to have the lease endorsed by the senior executive of this company to guarantee rents in the event of the insolvency of this joint-stock company. Such security must be carefully drafted to be enforceable.

 

Conclusion

The above are just a few important aspects of a commercial lease as it would be too long to analyze all its legal aspects herein. As with all your contracts, it will prove wise to invest a little money in seeking the advice of a lawyer as compared to risk being involved in a litigation before the courts later on.

It is therefore recommended to discuss this with your business lawyer. If you do not have one, do not hesitate to contact me.