What Should You Check Before Signing a Commercial Lease in Ontario?

Signing a commercial lease is usually one of the bigger commitments a business owner makes, and it can be easy to focus mostly on the rent number and skip past the rest of the document. That approach can end up costing more than expected, since a commercial lease is generally a long and detailed contract, and many of the terms that matter most are not the ones printed in bold on the first page. Below is a general look at some of the things that may be worth checking before you sign, whether you are opening your first location or moving to a new space.

Understand the Rent, and What Counts as Rent

Base rent is usually the easiest part of a commercial lease to understand, since it is often stated as a fixed amount per square foot or per month. What tends to catch people off guard is everything that gets added on top of it. Many commercial leases are structured so that the tenant pays base rent plus a share of the landlord's operating costs, and these extra charges can add up to a significant amount over the life of the lease.

Additional Rent Can Be a Bigger Number Than You Expect

Additional rent, sometimes called common area costs, operating costs, or triple net charges depending on the lease, may include things like property taxes, insurance, maintenance, and a share of costs for common areas in the building. These amounts are not always fixed and may increase from year to year. It is generally worth asking how additional rent is calculated, whether there is a cap or estimate provided, and whether you will be able to see the actual costs the landlord is charging back to tenants, since this can vary a lot between leases.

Check What You Are Actually Allowed to Use the Space For

Most commercial leases include a permitted use clause that sets out exactly what the space can be used for. If your business changes direction later, or you want to add a new product line or service, a narrow permitted use clause may limit what you are allowed to do without going back to the landlord. It may be worth thinking not just about your business today, but about how it might grow, and whether the permitted use clause leaves enough room for that.

Renewal Rights Are Not Automatic

Some tenants assume they will simply be able to stay in the space when the lease term ends, but that is not always the case. Whether you have the right to renew, on what terms, and at what rent, generally depends on what the lease actually says. Some leases include an option to renew at a fixed or formula based rent, while others leave the renewal rent open to negotiation, which can put the tenant in a weaker position later. It is generally a good idea to check this clause closely if staying in the location matters to your business plans.

Personal Guarantees Can Extend Beyond the Business

Many landlords ask for a personal guarantee, particularly from newer businesses or numbered companies without much of a track record. A personal guarantee generally means that if the business cannot meet its obligations under the lease, the individual who signed the guarantee may be personally responsible for some or all of what is owed. This can matter a lot depending on the length of the lease and the amount of rent involved, so it is worth understanding what you are agreeing to personally, not just what the business is agreeing to.

Repair and Maintenance Obligations

Commercial leases usually divide responsibility for repairs and maintenance between the landlord and the tenant, and the split is not always what people expect. In some leases, the tenant may be responsible for a wide range of repairs inside the space, and sometimes even structural elements, depending on how the lease is written. It may help to look closely at which repairs fall on you as the tenant, and which stay with the landlord, since this can affect both your budget and your day to day operations.

Assignment and Subletting

Business plans change, and at some point you may want to sell the business, bring in a new operator, or sublet part of the space. Whether you are able to do that, and whether the landlord's consent is needed, generally depends on the assignment clause in the lease. Some leases require landlord approval that cannot be unreasonably withheld, while others give the landlord broader discretion. Checking this clause early may save a lot of difficulty if your plans change down the road.

Termination Rights and What Happens If Something Goes Wrong

It is worth reading the sections of the lease that deal with default and termination, even though it is not the part anyone wants to think about when they are excited to open a new location. These clauses generally set out what happens if rent is missed, if either side breaks a term of the lease, or if one party wants to end the lease early. Understanding these terms in advance, rather than after a dispute has already started, may put you in a better position if something does not go as planned.

Why It May Help to Have a Lawyer Review the Lease First

A commercial lease is generally drafted by or for the landlord, and it is not unusual for the terms to favour the landlord's interests unless a tenant negotiates changes. Having a lawyer review the lease before you sign may help identify terms that could be a problem later, and in some cases there may be room to negotiate certain clauses before the lease is finalized. Every lease and every business situation is different, so it is generally worth having your specific lease reviewed rather than relying on a general checklist alone.

Frequently Asked Questions

Q: Can I negotiate the terms of a commercial lease, or is it fixed once the landlord sends it?

A: In many cases, at least some terms can be negotiated, though this can depend on the landlord, the market, and the specific space. It is generally worth reviewing the lease closely before assuming any term is final.

Q: Do I always need to give a personal guarantee to lease commercial space?

A: Not necessarily, though many landlords ask for one, particularly for newer or smaller businesses. Whether a personal guarantee is required, and on what terms, can vary depending on the landlord and the circumstances.

Q: What happens if I want to leave before the lease term ends?

A: This generally depends on what the lease says about early termination and assignment. Leaving before the term ends without following the lease terms may lead to consequences, so it is generally a good idea to review this before signing and before taking any steps to leave early.

Q: Is it worth having a lawyer review a commercial lease even for a small space?

A: It can be, since even smaller leases can include terms around additional rent, renewal, or personal guarantees that may have a real impact over time. Whether a review makes sense for your situation depends on the lease and your specific circumstances.

Contact DevLaws

If you are about to sign a commercial lease in Ontario, or you already have one you would like reviewed, the team at DevLaws is here to help. Contact DevLaws today to schedule a consultation and talk through your specific situation.

contact@devlaws.com | +1 437 290 0424 | devlaws.com

Disclaimer

This article is provided for general information purposes only and does not constitute legal advice. It is not intended to create a lawyer-client relationship. Laws and regulations can change, and the information here may not reflect the most current developments. Every situation is different, and the information in this article may not apply to your specific circumstances. If you have questions about a commercial lease, you should consult a qualified lawyer for advice tailored to your situation. DevLaws does not guarantee any particular outcome or result.