A commercial lease is a binding contract between the owner of commercial property (the landlord) and one or more tenants who wish to occupy that property for a certain time. Commonly third party guarantors, usually the owners of the tenant’s business, are also parties to the commercial lease. Third party guarantors guarantee the performance of the lease by the tenant.
There are a variety of types of commercial leases, depending on the type of property being leased. The most common commercial leases are retail, office, warehouse and ground (sometimes called land leases).
In most cases the landlord prepares the commercial lease. Accordingly, commercial leases almost always heavily favor the landlord’s interests. As with any contract, commercial leases are negotiable. A prospective tenant is not normally expected to accept a commercial lease at face value or without modification.
In this article, we give a brief overview of some of the questions we commonly receive in respect of commercial leases.
What is the difference between an Offer to Lease and a Formal Lease?
An offer to lease is commonly the first written agreement between the landlord and tenant. An offer to lease usually covers only the minimum requirements of a lease, and is separate from the formal lease document.
A typical offer to lease will set out the parties, identify the premises to be leased, set out the key terms of the lease such as length of term and whether the lease is renewable or assignable, and set out the rent. Although it is not ideal, landlords and tenants sometimes move forward with the signed offer to lease, without ever signing a formal lease agreement. In these cases, the offer to lease serves as the tenancy agreement between the landlord and tenant.
It is usually preferable to sign a formal lease agreement, whether a landlord or a tenant. A formal lease enables the parties to formalize the offer to lease and cover numerous topics and contingencies that are not covered in the offer to lease. Having certainty of terms for the lease can greatly reduce future misunderstandings and in many cases, this can address issues before they become problems.
What is a “net” lease?
The term “net lease” is sometimes described in other ways, such as “triple net”, “net net net”, or “fully net” leases. In practice each of these terms serves the same purpose: to make the tenant responsible for all costs, including future costs, that are not specifically contemplated in the lease.
For example, if midway through a lease the government enacted a law requiring the leased premises to provide disability access, a net lease clause in a standard commercial lease could make the tenant liable to improve the premises at its own cost, even though the improvement would likely benefit the landlord on a long-term basis.
How does the “Use of Premises” clause work?
The use of premises clause affects what the tenant can and cannot do on the premises. In a typical lease, any breach of the use clause triggers a right for the landlord to terminate the lease. Although it is often overlooked by prospective tenants, the use provision should always be reviewed to ensure it does not overly restrict the tenant’s business, or the potential expansion of its business. The use clause also applies to sub-tenants and assignees, therefore careful attention should be paid to this clause if the tenant wants flexibility to sub-let or assign the contract (e.g. to a purchase of the business) at a later date.
Can I sub-lease or transfer my lease?
Nearly every commercial lease contains a transfer clause. The purpose of a transfer clause is to restrict the tenant from transferring its interest in the lease to another party. Most transfer clauses restrict the tenant from sub-letting part or all of the leased premises, assigning the lease to a third party, or changing control in the case of a corporate tenant, without prior landlord consent. Transfer clauses are of particular importance to landlords, who generally want full control as to who may operate in their premises.
Since a transfer clause can restrict the ability of a tenant to assign, sub-let or otherwise transfer the lease to another person, tenants will want to consider the scope of the clause and determine whether any exceptions are reasonable or warranted in the circumstances. For example, a tenant may want an exception to the transfer restrictions if the lease is to be transferred to affiliated corporation owned by the same persons as the tenant.
Transfer clauses can be lengthy and complex. If a tenant is contemplating a transfer, sub-let or assignment of part or all of the leased premises, the lease should be carefully reviewed before taking any such action. For example, many standard-form leases provide the landlord with a right to elect to terminate the lease upon a mere request for transfer by the tenant.
The above are just some of the issues and clauses that show up frequently in commercial leases. It is always important to carefully review every term of the lease before entering into a commitment with a landlord or tenant, as the needs and concerns of each person will differ. In many cases, commercial leases are signed “as-is” and treated as standard form documents with no room for negotiation or modification.
However, while many of the terms in a commercial lease may be standard, that does not mean the standard provisions should apply in every circumstance.