The 3 Things You MUST Know Before Signing a Commercial Lease
Generally, in lease negotiations, the tenant is at a disadvantage. It is typically the landlord that provides the initial draft of the lease and if you think your landlord hasn’t tried to include some highly favourable clauses he or she hopes you don’t read too carefully, think again.
As a tenant, there are ways to improve your position and negotiate a lease that is more favourable to you; in fact, we have a blog coming up that will show you exactly how to do that, stay tuned!
The best way to protect your interests and ensure you won’t run into any nasty surprises in the future is to have an experienced commercial real estate agent on your side. However, in the absence of professional representation, there are three key items you will want to pay close attention to before signing any lease.
#3: The Holdover Provision Clause
A holdover tenant is one that has remained on the premises after the expiration of the lease. If this continued occupation is happening without the approval of the landlord, the tenant is considered to be trespassing. However, there are lots of legitimate reasons for a tenancy to become a holdover and most leases have a clause to cover this event.
As a tenant, you’ll want to ensure this clause exists and that the terms are fair and equitable. In many clauses, the landlord will require an increase in monthly rent if the tenancy becomes a holdover. This is not out of the ordinary nor is it something you should automatically reject. What you want to do is ensure that the amount the landlord intends on charging you as a holdover tenant does not exceed 150% of the basic or net rent you paid in the last year of the term.
#2: The Restoration Provision
In the annals of tricky lease clauses, this one should go down as one of the most frustrating. A restoration provision dictates what state the premises need to be in once the tenant leaves. The typical assumption by tenants is that as long as the premises are in decent shape there shouldn’t be any issues, and in most cases, this is correct. But you must be careful. Sometimes landlords will add language to this clause that will require substantial effort on the part of the tenant, such as requiring the removal of any leasehold improvements (a leasehold improvement is any improvement to a commercial space that is of specific benefit to a tenant, not the building at large). The last thing you want to discover when leasing a commercial office or industrial space is that you need to spend even more money removing any leasehold improvements.
Here is an example of a typical Fixtures and Improvements clause that includes a restoration provision:
Fixtures and Improvements: All alterations, decorations, additions, and improvements made in The Premises by the Tenant or made by the Landlord on the Tenant’s behalf (other than the Tenant’s trade fixtures) shall immediately become the property of the Landlord without compensation therefore to the Tenant. Such alterations, decorations, additions or improvements shall not be removed from The Premises either during or at the expiration of the Term or sooner determination of the Lease except that:
i) the Tenant may at the end of the Term, if not in default, remove its trade fixtures; and
ii) the Tenant shall, at the end of the Term, at its own cost remove such of its leasehold improvements and fixtures as the Landlord may be required to be removed; provided that the Tenant shall, in the case of every such removal either during or at the end of the Term, make good any damage caused to The Premises by the installation and removal of any such alteration, decoration, addition or improvement.
#1: Take a Careful Look at Additional Rent or TMI
Additional rent or Taxes, Operating Costs/Maintenance, and Insurance (TMI) is a very common requirement of landlords and is meant to compensate for the costs to maintain the premises. In a triple net (NNN) lease, the tenant agrees to pay for many of the ongoing building expenses such as taxes, insurance, and maintenance in addition to the basic rent and utilities. As NNN leases require the tenant to take on more financial responsibility for the property, basic rents are generally lower.
In and of itself, a NNN lease is not disadvantageous for a tenant, and in some cases, can be an advantage; however, the devil is in the details. If the lease you’re signing includes additional rent or TMI, make sure to look very closely at what is included and what you’re assuming responsibility for, specifically when it comes to operating costs or maintenance. Ensure the lease spells out exactly what you will be responsible for covering, and if it doesn’t, it is your right to require the landlord to provide sufficient detail.
Here is an example of a typical additional rent clause:
Additional Rent: The Tenant acknowledges and agrees that the Lease and the rental payable hereunder are completely net and carefree to the Landlord, that the Landlord is not responsible during the Term for any costs, charges, expenses and outlays of any nature whatsoever arising from or relating to the use and occupancy of the Premises or the contents thereof or the business carried on therein, and the Tenant shall pay as Additional Rent all charges, impositions, costs and expenses of every kind and nature relating to the Premises and the use and occupancy thereof.
The Secret To Successful Lease Negotiations
The secret to negotiating a lease that will be advantageous to you as a tenant is this:
Knowledge.
When it comes to leasing negotiations, there is no substitute for knowledge, and knowledge comes from experience; that’s why your best bet is to have a trusted commercial real estate agent on your side. Much like the old adage, measure twice and cut once, you will want to review your lease twice (undoubtedly more) and sign once. Once you’ve signed on the dotted line, you’ve agreed to the terms in the lease—make sure you understand what you’ve committed to inside and out.
If you’re involved in a lease negotiation or will be in the future, reach out to the professionals at M Commercial Realty for a no-obligation consultation to ensure your next lease favours your interests, not your landlord’s.