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Real Estate

THE BASICS OF A COMMERCIAL LEASE

The global economic recession unavoidably affected the commercial leasing market in Canada. This has caused landlords and tenants to think over their respective bargaining positions when engaging into a commercial lease negotiation. Thus, the approach of negotiating and drafting a commercial lease will inevitably take into consideration the current economic reality of the business world. After-all, a commercial lease should be a business decision, not an emotional one.

A commercial real estate lease agreement is used as a contract to rent buildings, office space, retail stores, industrial warehouses, and other commercial spaces. It is a customized contract negotiating the rent, damage deposit, fixed or periodic tenancy, cost, utilities, rent increases, and also an option to renew and for any improvements. This can be modified or amended in the future depending on what is agreed to in the agreement. Most businesses need to rent real estate for the use of a small office, a stall space in a shopping mall, or a whole building or warehouse for manufacturing and storage. Regardless of the necessity and size of the property, the landlord requires the owner of the business to sign a real state lease agreement. Ultimately the lease agreement defines the economic consequences for both the landlord and tenant. Hence, negotiating a solid commercial lease ahead of time could be the primary cause for the success or failure of your business.

The general principles of commercial real estate leases differ significantly from residential leases. Residential leases are highly regulated in Ontario where the Residential Tenancies Act creates a strong tenant position through a responsive set of rules that cannot be amended through a written lease agreement between the landlord and tenant. For instance, in residential tenancies the landlord is usually responsible for the repair expenses and some monthly utility costs. In contrast, commercial leases are very loosely regulated where the rights and obligations of landlords and tenants are primarily a matter of informal agreement between the parties, later formulated into a written and strong worded contract.  The commercial tenant will not be afforded with the same legal protection offered to the residential tenant. Commercial tenants should be cautious enough to know the possible legal actions that the landlord is capable for certain circumstances, such as late rent payments.

The leasing process for commercial real estate leases in Canada is usually done in two stages. Firstly, an “offer to lease” is signed which contains all the essential business terms of the agreement. Finally, a full lease is signed in the landlord’s form. The offer is more often the most excellent chance for the landlord and the tenant to negotiate for the best agreed upon business points, conditions and deal-breakers. When the offer is finally signed and all conditions have been satisfied, the lease will then be drafted containing the possible modifications requisite by the offer.

It is most likely that landlords and real estate brokers would want you to make the first offer. This will give landlords the chance to deal and come up with an agreement that would best suit them. In times like this, it is advisable that a tenant start low, ask for extra business benefits, and lastly, ask for more than he or she would hope to get. When a tenant negotiates, often times it feels like a power struggle in which it is the tenant who swallows his or her pride just enough to get what he or she needs. Hence, in the negotiation process, it helps for the tenant to be prepared for the actual lease agreement. Finally, a tenant must not show his or her eagerness, but rather to be ready to negotiate the best possible lease deal. If a tenant’s first offer is accepted, he or she did not actually start low enough.

The negotiating power in commercial real estate leasing is most of the time manipulated by the landlord unless the tenant will occupy a large amount of space or is secure and highly reputable (i.e. a triple A tenant). Consequently, most forms of offer or lease will essentially favor the landlord. However, generally in my experience, the landlords in Canada are not biased in negotiating some of the points that are of substantial importance to the tenant. The tenants, therefore, should push for their crucial needs and have a comprehensible set of critical business points when entering into negotiations.

Every case for a commercial real estate lease is unique, and the complications in negotiating any Canadian lease should be handled by a real estate lawyer on behalf of each party. Both parties will benefit from knowing the basics behind the leasing process in order to focus and properly arrive to a final, demand-able and dependable document (i.e. lease contract). All agreed terms in the lease are essential, therefore, a need to contact a Canadian real estate lawyer at an early stage of planning is important.  Call the lawyers at Levy Zavet PC the next time you are leasing commercial real estate, it may be the difference between the success or failure of your business. As specialists we will be able to include clauses for your business interest, will give you tips to ask during negotiations, and protect you from signing an agreement that may cost you money in the future for any default on both sides. There are many specific questions to ask which we  can anticipate and ensure your protection.

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