People often accept that a commercial property lease is standard and simply accept its contents. However, what is contained within a lease is critical to the well-being of the property, and may contain clauses, provisions and requirements that can determine the property’s profitability. While tenants need to adhere to the agreed upon terms and conditions, for them it is simply a part of their business. For you, the property owner or landlord, the lease is your business – it is the terms by which you earn revenue.
As actively managing your lease is crucial to managing your property and your asset, here are some ideas to include in your lease documentation to ensure your property lease serves you well:
- Legal – the lease is a legally binding document and should be either written or vetted by a legal professional. Shortcuts may be dangerous. Your property management company will have some insights, and together with proper legal advice can ensure your needs are met and your property protected.
- Standard lease forms – by creating a standard lease, you do not need to reinvent the wheel for every new tenant. Create a master copy and adapt the lease for each new tenant’s needs (as well as your own, under the specific circumstances).
Commercial Property Lease Contents
As an owner, your lease should meet your specific needs. So consider the following items that could be covered in the lease:
- Insurance Requirements –protect yourself, but also ensure that a tenant with unique needs has sufficient coverage. Have your insurance agent review the insurance requirements in the lease before it is signed.
- Space – determine the amount of physical space required to conduct the business. It is important to know what proportion of the rent-able square footage is useable.
- Rent – this can be determined against useable or rent-able square footage. Specifying the expenses associated with the leased space should be defined in the agreement, and rent increases negotiated with tenants.
- Permitted Uses of the Premises – some properties may include restrictions on the use of the space. Therefore, give consideration at the outset to a property’s permitted uses.
- Tenant Improvements – consider what may be required and likely costs and timing. The parties will need to decide who contributes and whether the landlord’s prior approval is needed. Confirm who will own the improvements, even after the lease is terminated and the tenant has vacated the premises. Leases should stipulate who restores the space to its original state once the tenant leaves, and who bears those costs.
- Duration of the Lease – it is important to determine the exact lease period.
- Option to Renew – consider the useful life and the use of the commercial property, and whether an option to renew the lease is desirable. Inter alia, the parties will need to agree upon how the rent will be determined, how far in advance the option must be exercised and whether there is a right of first refusal or first offer for additional space in the same property complex.
- Lease Default – consequences upon an event of default are an important aspect of a commercial lease because of the significant legal and financial impact a default may have on a business and the property owner. Understand what remedies are available to you if the tenant defaults in carrying out their obligations under the lease.
- Compliance with the Law – an owner must ensure that the maintenance of the premises, the proposed permitted uses and the current zoning of the property are all in compliance with applicable law.
- Assignment and Subletting –The parties should negotiate these terms prior to entering into the lease. The parties should also consider if a sublet is at a higher rent than the original lease, and who would be entitled to the excess rent.
- Termination – this is one of the most important provisions in a commercial lease. Consideration for the needs of the owner and the tenant will ensure a good relationship between the parties.
- Building Services – clearly define what services the landlord will provide and what the tenant will be expected to provide. The areas to be covered should include electricity, HVAC and cleaning services. Be clear on the payment of taxes and utilities. These are important details that must be clearly communicated and managed.
- Property Improvements – buildings generally provide allowances for improvements but there may be variations in tenant needs and what a landlord is willing to provide. Agreements about renovations should be put in writing with a detailed plan and estimation of costs before the lease is signed. In addition, the tenant may be allowed to make some changes or improvements and install equipment. Define who will own these fixed assets and if the tenant must restore the property to its original state. Fixtures that would damage the premises if removed must be defined.
- Repairs – clearly define who is responsible and what kinds of repairs are covered.
While the above does not represent an exhaustive list of items to include in your standard form lease, hopefully it gives you some ideas. Get the appropriate advice from your lawyer, accountant, insurance broker and property manager, who might know your property better than anyone.
Get it right the first time and ensure that you maximize the value of your property and your investment.
Feel free to contact me directly if you have any questions in this regard. I’d be happy to point you in the right direction.
In my next article, I will discuss what happens after the lease is signed.
Armadale is a commercial property management company located in Toronto. Over the past 25 years Armadale property management Toronto has grown, offering clients highly-focused, customized, one-on-one building management services that fit their property and benefit their bottom line. Armadale specializes in commercial property and facilities management for retail, office and industrial properties. Contact Armadale today!