Should You Have a Lawyer Review a Commercial Lease Before Signing in Ontario?
Social Sharing DescriptionBefore signing a commercial lease, Ontario businesses should understand the full financial commitment, repair obligations, guarantees, renewal rights and exit provisions.
A commercial lease can be one of the most significant contracts a business signs.
It may commit the business to years of rent, additional costs, repair obligations, insurance requirements, restrictions on how the premises can be used and potentially a personal guarantee from the business owner.
Yet commercial leases are sometimes treated as though they are largely standard documents.
They are not.
Commercial leases can vary significantly depending on the property, landlord, tenant and negotiated terms. The agreement can address everything from rent and operating costs to repairs, assignment rights, renewal options and what happens when the relationship ends.
A commercial lease is also more than a real estate document. It is a long-term commercial contract that can affect the business's finances, operations and flexibility for years. Learn more about Delta Law's Contract Law Services.
For a business considering a new location, having the lease reviewed before signing can help identify what the business is actually committing to, where meaningful risk sits and which provisions may be worth negotiating.
1. A Commercial Lease Is More Than an Agreement to Pay Rent
The headline terms of a commercial lease may appear straightforward.
How much is the rent?
How long is the term?
When can the business move in?
Those questions matter, but they represent only part of the agreement.
A commercial lease can also determine:
what additional costs the tenant must pay;
who is responsible for repairs and maintenance;
what improvements the tenant can make;
how the premises can be used;
whether the lease can be assigned;
what happens if the business is sold;
whether the owner must personally guarantee the lease;
what rights exist at renewal; and
whether the tenant has any meaningful ability to leave early.
The wording of those provisions can create substantial financial and operational obligations for the business.
2. A Lawyer Can Help Identify the Actual Financial Commitment
Base rent may be easy to identify.
The total cost of occupying the premises may be considerably more difficult to determine.
Depending on the lease, a tenant may also be responsible for property taxes, operating expenses, utilities, insurance, maintenance costs, management charges and other amounts characterized as additional rent.
A commercial lease review can help identify:
which expenses are payable by the tenant;
how those expenses are calculated;
whether particular costs are excluded;
how costs may change during the term;
whether certain capital expenditures may be passed through; and
how year-end adjustments or reconciliations are handled.
The important number is not simply the base rent. It is the total financial obligation created by the lease.
3. The Lease May Contain Obligations That Were Never Discussed During Negotiations
A landlord and prospective tenant may initially agree on the major commercial terms.
Those terms might include the premises, rent, length of the lease and perhaps a tenant improvement allowance.
The formal lease can contain considerably more.
Repair obligations are a good example.
Depending on the agreement, the tenant could become responsible for maintaining or replacing HVAC equipment, plumbing, electrical components, doors, fixtures or other systems associated with the premises.
A business should understand:
what it is required to maintain;
what it must repair or replace;
what remains the landlord's responsibility;
whether the tenant is responsible for major building systems; and
whether there are limits on the tenant's financial exposure.
These obligations can carry significant consequences, particularly in an older property.
4. The Lease May Affect Future Business Decisions
The business entering into the lease today may look very different several years from now.
It may grow.
It may require additional space.
It may relocate.
It may reorganize.
It may be sold.
The lease can affect each of those decisions.
Assignment and subletting provisions, for example, determine how and under what conditions the tenant may transfer its interest in the premises.
A lease should be reviewed for:
whether assignment or subletting is permitted;
whether landlord consent is required;
what conditions apply to obtaining consent;
whether the landlord receives additional rights when a transfer is proposed;
whether the original tenant remains liable after an assignment; and
how changes in corporate ownership are treated.
For a business owner contemplating a future sale, these provisions can become particularly important.
A prospective buyer may expect to continue operating from the existing premises. A restrictive lease provision can complicate that transaction.
The lease should therefore be considered not only in the context of the business today, but also in light of where the business may be going.
5. Renewal Rights Need to Be Understood From the Beginning
A renewal option can be valuable, particularly where location is important to the business.
But the existence of an option does not necessarily mean renewal will be automatic.
The agreement may establish:
a strict deadline for exercising the option;
specific notice requirements;
conditions the tenant must satisfy;
how rent will be calculated during the renewal period;
whether the tenant must be free from default; and
which provisions continue or change during the renewal term.
A business relying on a location for the long term should understand exactly what its renewal rights provide.
6. Personal Guarantees Can Create Risk Outside the Corporation
Many businesses enter commercial leases through corporations.
That does not necessarily mean the business owner's exposure ends with the corporation.
A landlord may require an owner, shareholder, parent company or another party to guarantee the tenant's obligations.
A personal guarantee may apply to unpaid rent, damages, repair obligations and other amounts owing under the lease.
Before agreeing to a guarantee, consider:
whether it is unlimited;
whether liability is capped;
how long the guarantee lasts;
whether it applies during renewal terms;
whether liability can reduce over time; and
whether the guarantee continues if the lease is transferred.
Depending on the circumstances, it may be possible to negotiate limitations on the guarantee.
A personal guarantee should not be treated as a routine signature requirement. It creates a separate financial exposure for the person providing it.
7. The Lease May Limit the Business's Ability to Leave
Businesses naturally spend considerable time considering how they will enter a new location.
They should also understand how difficult it may be to leave.
A fixed-term commercial lease can create obligations lasting several years, and deciding that the location no longer works does not necessarily end those obligations.
A lawyer can review whether the lease provides:
an early termination right;
assignment or subletting options;
relocation provisions;
redevelopment or demolition provisions;
default and cure provisions;
termination rights available to the landlord; and
obligations that continue after termination.
Understanding the exit provisions before signing can be particularly important for a growing business whose space requirements may change.
8. The Permitted Use Needs to Work for the Business
Commercial leases commonly restrict how the premises may be used.
A narrowly drafted permitted-use provision can create problems if the company later expands its services, adds products or changes its business model.
A business should consider whether the provision covers its intended activities and provides reasonable flexibility for anticipated growth.
There may also be restrictions affecting signage, operating hours, exclusivity, parking, storage or how particular areas of the premises can be used.
The premises may work physically for the business while the lease still restricts what the business is permitted to do there.
9. Alterations and Leasehold Improvements Can Carry Long-Term Obligations
Many businesses invest significantly in preparing a commercial location.
That may involve walls, flooring, signage, plumbing, electrical work, specialized equipment or substantial leasehold improvements.
The lease may determine:
whether landlord approval is required;
who pays for improvements;
what contractor requirements apply;
who owns the improvements;
whether the tenant must remove them when the lease ends;
whether the premises must be restored; and
when rent begins during the construction or fixturing period.
A tenant investing significant capital into a property should understand both its rights during the build-out and its obligations when the tenancy ends.
10. A Lawyer Can Help Determine What Is Actually Worth Negotiating
Commercial lease review is not simply about identifying provisions that favour the landlord.
Many commercial leases naturally allocate substantial responsibility to the tenant.
The more useful question is:
Which provisions create meaningful financial, legal or operational risk for this particular business?
Different businesses will have different priorities.
A restaurant may place significant importance on permitted use, ventilation, equipment and exclusivity.
A warehouse tenant may be particularly concerned about loading access, maintenance obligations and operating costs.
A professional office may place greater importance on renewal options, assignment rights and flexibility if staffing requirements change.
Legal review can help separate provisions that materially affect the business from those that may not justify significant negotiation.
That allows the business to focus its negotiating leverage where it matters most.
When Should a Lawyer Review the Commercial Lease?
Ideally, legal review should happen before the business becomes contractually committed.
In some transactions, that may mean obtaining advice before signing an offer to lease, letter of intent or other preliminary document rather than waiting until the final lease arrives.
These preliminary documents can contain important commercial terms and may affect the parties' later negotiations.
Waiting until the final agreement has already been signed eliminates much of the opportunity to negotiate.
The earlier important issues are identified, the more options the business generally has to address them.
Is a Lawyer Required to Review a Commercial Lease?
A business is not generally required to retain a lawyer simply because it is signing a commercial lease.
But whether legal review is mandatory and whether it is commercially sensible are different questions.
A commercial lease can create financial and operational obligations lasting many years.
The cost of understanding those obligations before signing may be relatively modest compared with the consequences of discovering an unfavourable provision after the business has committed to the property.
Review the Agreement Before the Business Is Bound
The purpose of commercial lease review is not to make every provision favourable to the tenant.
It is to help the business understand:
what it is agreeing to;
where significant risks sit;
what obligations may affect finances or operations;
which provisions may be worth negotiating; and
whether the lease aligns with the company's longer-term plans.
A commercial lease should support the location the business needs without creating obligations the business did not anticipate.
Commercial Lease Review for Ontario Businesses
Delta Law assists businesses with the review and negotiation of commercial leases, including rent and additional rent, renewal rights, repairs and maintenance, assignment provisions, guarantees, termination rights and other material lease terms.
Learn More About Commercial Leases and Contract Law
If you are still researching your lease or want to better understand a particular commercial leasing issue, visit Delta Law's Resources for additional articles and practical information.
You can also learn more about how Delta Law reviews, drafts and negotiates business agreements through our Contract Law Services.
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Speak with Delta Law about your proposed commercial lease before making a long-term commitment.
