A commercial lease agreement is a legally binding contract between a landlord and a business owner which sets out the terms and conditions relating to the property to be rented for commercial purposes. Whether it is a brand new business opening its first brick-and-mortar store, or a familiar new franchise, entering into a commercial lease is a significant commitment accompanied by legal and financial risk. Further, commercial leases in particular, are often locked in for substantial periods of time, during which there is potential for various issues to come to light.
It is important to consult with a commercial real estate lawyer when negotiating a commercial lease to ensure the terms are fair for both parties. Both the landlord and tenant must understand their rights, obligations and remedies under the lease.
What is a Commercial Lease?
In Alberta, commercial real estate encompasses a variety of properties, including retail space, offices, institutional space, warehouses and industrial space, and specific multi-family residential units. After deciding to lease a commercial space, it is important to become familiar with the applicable documents. Renting a commercial space is far different from renting a residential property. Commercial lease agreements generally fall into three categories: single net lease, double net lease, or triple net lease. The type of lease agreement will impact the amount a tenant is expected to pay in rent and other costs.
Most commercial lease agreements are lengthy, complex documents filled with legal jargon and may include one-sided terms. It is strongly recommended that both parties engage legal counsel from the outset of the leasing pursuit, as any document becomes binding once signed.
Differences between a residential lease and a commercial lease agreement
Standard commercial leases are often drafted to be favourable to the landlord; therefore tenants must be able to watch for particularly unfair terms. However, commercial leases can significantly differ from each other. Therefore, regardless of how experienced a business owner may be, it is important to review each lease thoroughly. This can be difficult for both new and seasoned commercial tenants. For landlords, it is important to ensure that the lease is drafted in a manner which provides appropriate protections.
Commercial lease agreements differ from residential leases because tenants have fewer legal protections. Commercial tenants are typically required to pay additional costs beyond rent, for example, janitorial services and garbage collection. According to the terms of a commercial lease agreement, a landlord may also be able to increase rent without notice. However, specific terms within a commercial lease agreement, such as rent, renewal terms and operating cost calculations, are often negotiable. If a term is not negotiable, the parties must understand the consequences of agreeing to such terms.
Documents become legally binding upon execution
The first document to be negotiated and executed between the parties in the commercial leasing process is an Offer to Lease, known as a letter of intent. Despite the seemingly inflexible language contained within an Offer to Lease or Lease Agreement, all contracts are negotiable to an extent. Therefore, it is important to ensure that a party understands and agrees with the terms of an offer to lease. Generally, a party should be entitled to a reasonable period between receiving a document and executing the document to review the terms and seek independent legal advice.
Depending on the type of business a commercial tenant operates, terms relating to miscellaneous items such as parking spots and shopping cart corrals may be important to include. For landlords who wish to keep units uniform, it may be helpful to include terms for specifications on window coverings and stipulate operating hours. If terms fail to get included, or unfavourable terms are not struck, it can be tough to address them after the fact.
How can a lawyer help?
In commercial lease matters, a lawyer can assist from initial negotiations to final execution. A lawyer can act on behalf of either party to negotiate the removal of unfair terms and include terms to provide additional protections. After negotiations have been finalized, a lawyer can review the lease terms and explain specific terminology to help a party make an informed decision before entering into the agreement. Furthermore, a lawyer can ensure that the proposed terms are legally binding.
Once both parties have executed a lease, a lawyer can help enforce a party’s rights and mitigate the consequences of a breach. Finally, a lawyer can advocate on behalf of a party and protect their rights in the event of litigation. If a tenant seeks to assign their lease to another commercial tenant, and it is permitted under the lease agreement, a lawyer can assist with completing the assignment.
Issues discovered after the fact
In the event that a dispute arises and a lawyer’s advice is sought concerning lease interpretation, it is not uncommon for a lawyer to discover terms which the tenant either was not aware of or did not understand prior to execution. Some examples of these unfair terms include common area costs, personal guarantees, landlord indemnification, and requirements for lease renewals. Often, landlords may place significant limitations and rigid requirements on terms relating to the assignment and termination of a lease, which a tenant may not fully understand until they wish to invoke such a term. For these reasons, obtaining advice before putting pen to paper pays off in the long run.
Contact the Real Estate Lawyers at DBH Law in Calgary for Advice on Commercial Leasing
The experienced commercial real estate lawyers at DBH Law in Calgary provide a range of commercial real estate services to both landlords and tenants, including negotiating and drafting commercial leases and assisting with lease assignments. Each client has unique concerns and needs when it comes to finding a location to establish their business. This is why our lawyers work closely with their clients to ensure that they understand their rights and obligations at their new commercial space. We understand that time is of the essence when it comes to executing, assigning, or renewing a lease, therefore we work to complete matters quickly and carefully. To speak with a commercial real estate team member, contact us online or call us at 403-252-9937.