Commercial lease: 8 must know provisions
Unless you own the building where you operate your business, you probably think about your commercial lease fairly regularly. Do you have enough room to grow? Are you in the best location? What are your options when your lease is up?
Few of us, however spend much time thinking about the lease itself. Many believe leases are provided in standard form. You see one lease, you’ve seen them all.
Unfortunately, this is not the case for a commercial lease. Residential leases follow a standard form because they fall within the ambit of the Manitoba Residential Tenancies Act. Under Manitoba law, landlords and tenants must use the prescribed form.
Commercial leases aren’t governed under any specific law. Rather, a commercial lease is a contract. Under common law, contracts are simply agreements made between parties. The principle of ‘freedom to contract” applies, so the content in leases can vary quite dramatically. If the parties want to include provisions that state that rent is payable daily or that only lime green is permissible as a colour indoors, they are free to do so.
While the content can vary, a commercial lease does follow a certain pattern. It must cover topics such as rent, the division of responsibilities, length of term, and so on.
So without further ado, here are 8 provisions you must understand found in most, if not all, commercial leases.
This is self explanatory. But, in addition to the rental rate of the leased property, this provision outlines what the rent includes, such as water, heat and electricity. In many leases, it only includes the rate to occupy the space, and is usually based on square footage.
If the rent does not include expenses, a formula may be included to describe how the expenses are calculated. In many office spaces, this will be calculated on a cost per square foot. You pay this amount in addition to the rent.
Who is responsible for what? This can also vary quite dramatically. Under my current lease, the landlord is responsible for changing fluorescent lights. In other leases, the landlord is only responsible to provide you with a shell. When you take possession, you must foot the bill to put up walls, build offices, and install flooring.
You may even be responsible for installing and maintaining all plumbing, electrical, and HVAC systems in your space. In some cases all tenants, together, may be responsible for all snow clearing, landscaping, electrical, plumbing and HVAC (which includes the furnace and central air conditioning unit) for the entire property. As a former colleague used to say, you may even be responsible for the landlord’s gas when he drives over to pick up his or her rent cheque.
3. Limitations on use
Landlords may limit the use of the space to your current business type. So for example, if you are a hair salon, your lease likely specifies that you operate a hair salon. This becomes important if you want to sublet. The landlord may not permit you to sublet to a business that is different than yours.
In fact, in Manitoba, this situation was litigated in 2015. A tenant signed a 5 year lease to operate a shoe store. Shortly after opening the business, the owner was unable to obtain inventory from her supplier. The owner asked the landlord if she could sell lady’s wear instead from another store she owned as a temporary solution. The landlord refused. The tenant than found someone who wanted to operate a “pole dancing school” to sublet. Again, the landlord refused.
In the end, the judge found in favour of the landlord. The landlord had given reasonable consideration to the tenant’s requests and rejected them for valid reasons.
4. Are all common elements available for use?
In some situations, the landlord may not include or restrict access to certain common elements. This could include items such as visitor parking and loading docks. Make sure you understand what is available and when it is available.
Most leases require the landlord’s approval prior to subletting. In the example cited above, the mall already had a retail outlet for women’s wear. In retail situations, landlords will usually offer a tenant exclusivity in their area of business. Existing tenants would rightly be upset if landlords allowed competing businesses to set up shop next door.
The landlord may also consider whether the type of business in compatible with the landlord’s overall strategy. In the case above, the judge agreed with the landlord. A pole dancing school was not appropriate for the family oriented mall.
6. You will be responsible for rent even when subletting
If you sign a 5 year commercial lease, you are legally responsible for the rent for the entire term, even when you sublet. The subletting tenant will have to sign a lease with the landlord, but the landlord will not let you off the hook until your lease is up. The new tenant will pay rent, but if the new tenant defaults, the landlord will be able pursue both you and the new tenant.
7. Personal guarantees
Landlords, like banks, will usually require that you sign a personal guarantee if you are leasing the space under a corporation, especially if this is the first time you lease from that landlord. In time, you may be able to negotiate out of this, but not always.
I am aware of one major landlord in Winnipeg that requires all tenants to sign a personal guarantee. This means that should your company go bankrupt, you would still be personally responsible for the rent.
In some cases, this personal guarantee remains in effect the entire term of the lease even if you sublet to another tenant. So you could be personally responsible for a subtenant’s failure to pay rent… ouch….
8. Insurance policies
Finally, most leases require that you obtain appropriate insurance. Make sure you review the entire lease as these obligations may be spread around the document. In most cases, you are required to obtain fire and third person liability insurance. Failure to obtain insurance may put you in default under your lease.
Disclaimer – Legalese
I appreciate the irony of this disclaimer, but while I am critical of the rules, I must still play by them, so here goes….This article is presented for informational purposes only. The content does not constitute legal advice or solicitation and does not create a solicitor client relationship (this means that I am not your lawyer until we both agree that I am). If you are seeking advice on specific matters, please contact Philippe Richer at email@example.com, or 204.925.1900. We cannot consider any unsolicited information sent to the author as solicitor-client privileged (this means confidential).
Philippe Richer is President of TLR Law Group. TLR has been located in the St. Boniface neighbourhood, in Winnipeg, since 1996. The office serves the middle class and small business within the province. With a focus on estates, wills, real estate, and corporate law, he leads his team in providing accessible legal services. Philippe also authored the business law course for the Knowledge Bureau and instructed the français juridique class at the faculty of Law at the University of Manitoba.