Commercial leases are often lengthy contracts which cover a number of situations, risks, expenses and liabilities. As businesses seek out leased locations for their operations, careful consideration should be given to reviewing and negotiating the terms of a commercial lease. These binding agreements generally have long terms, options to renew and require investment in the space to make it suitable for a tenant’s business.
Most leases are standard form agreements prepared by landlords and commonly include one sided clauses in favour of the landlords which attribute costs and responsibilities on the tenant. Below are five clauses which tenants may wish to consider addressing in a lease negotiation to protect against excessive risk and expense.
- Operating Costs: Many commercial leases are net leases which require the tenant to pay taxes, utilities and a portion of the landlord’s costs incurred to repair, operate and maintain the building in which the tenant is located. Tenants should review these costs carefully to ensure that they are reasonable and contain no duplication. For example, some leases contain provisions making the tenant responsible for replacement costs of certain items (such as HVAC systems, parking lots, the roof and elevators, to name a few). To avoid incurring large costs towards the end of a lease term, the tenant should ensure that these replacement costs are amortized over an extended period (typically the life of the capital item). Management fees or administration fees are commonly charged in addition to operating costs and tenants should review the lease to ensure that (i) that both fees are not being charged and (ii) that there are no duplications (such as management or administration salaries, wages and other supervisory expenses) also being charged as part of the operating expenses.
- Environmental Clauses: These provisions are designed to shift risk from the landlord to the tenant in the event of any contamination to the premises (and sometimes the building and surrounding lands) which commonly require the tenant, at its cost, remediate any breach of environmental laws. Tenants should review these provisions to determine if they contain indemnity provisions in favour of the landlord and confirm that the application is not overly broad such that the tenant becomes responsible for contamination that existed prior to the commencement date of the lease or was not caused by the tenant.
- Obligations on Termination: Leases frequently include clauses that place various obligations on a tenant when the lease is terminated which should be reviewed. For example, most leases require a tenant to remove its alterations, fixtures and leasehold improvements at the request of the landlord and then repair and restore the premises back to the original condition, all at the expense of the tenant. This work can be costly and time consuming. Tenants may wish to negotiate provisions which limit these requirements, such as restricting it to only include alterations, fixtures and leasehold improvements installed by the tenant (and not former tenants) or limiting it to those which, at the time they are installed by the tenant, were indicated by the landlord as items which must be removed on termination.
- Assignment and Subletting: Landlords, as expected, typically exert a large degree of control over tenants in their buildings and as a result will almost always include restrictions which prevent tenants from transferring a lease to other parties or subletting the premises without the prior consent of the landlord. This can make selling a business or subletting part of a tenant’s space very difficult. During negotiations, tenants may wish to include exceptions to prohibited transfers which allow a tenant to complete tax re-organizations, assign or sublet the lease to an affiliate or permit a transfer of the lease if the tenant sells its business without the consent of the landlord. If this isn’t possible, tenants may wish to require the landlord to respond to consent requests within a certain time period to avoid any delay in completing business transactions. Tenants should also review the lease to determine whether a request for landlord consent gives the landlord a right to terminate the lease early or, upon a transfer or sublet, increase the rent.
- Relocation: In larger buildings, many leases contain relocation clauses which permit the landlord to move a tenant to a new location (which, in some cases, may not even be in the same building). Tenants should be wary of these provisions as they can be extremely disruptive to a tenant’s business and may impose additional costs on the tenant. If this provision cannot be negotiated out of the lease, tenants may wish to put restrictions in the relocation clause such as limiting the number of times the tenant can be relocated during the term of the lease, requiring the new premises to be comparable to the original premises and providing that all costs of the relocation (including the installation of similar leasehold improvements) are to be paid by the landlord. Tenants should also consider language which requires the landlord to provide advance notice of its intention to relocate the tenant so that preparations can be made in advance for the move.
These example are just a few clauses which a tenant may wish to consider addressing during its lease negotiation and by no means is it an exhaustive list of items which need to be addressed during the negotiation process. Every lease should be carefully reviewed to ensure that its terms permit the tenant to operate its business without interference from the landlord and without undue expense to the tenant. Contact Lerners LLP today to discuss your commercial leasing needs.