Many businesses enter into lease agreements without professional advice. The moment you sign a commercial lease agreement, you have most likely made a long term commitment with a variety of obligations and demands – both monetary and otherwise. Many clients I meet do not realize the gravity of the agreement they are entering into. For some, they think of it as a monthly fee, others think they can just get out of it, or leave the premises without legal consequences or implications. However, when I explain the agreement they have just entered into from a high level, their view on the agreement suddenly changes. For example, a client may say, it is a $1500.00 per month commitment, what’s the big deal? It’s the cost of doing business, right? Yes – I suppose that is somewhat true, but in fact, what if it is a $1500 per month commitment over 5 years? That is a $90,000 commitment. Many clients have had experiences in the past when renting an apartment or home – however, leases in the commercial context are much different. Most of the protections afforded to tenants under rental housing legislation do not exist in the commercial context. In the commercial context, parties are allowed to negotiate the terms of their agreement as they choose.
Why Consult a Lawyer?
When running a business outside of your home, you probably need to sign a commercial lease in order to rent a space to operate your business, whether to make your product, or to meet your clients and customers. Invariably, commercial leases heavily favour the creator of the lease – the landlord, and are unfortunately worded in complex legalese which, without proper advice, makes it difficult to truly understand and appreciate the obligations you are agreeing to, and the possible legal implications. Seeking professional advice from a lawyer should be the first step you take when entering into commercial lease negotiations. Many clients I meet have the misconception that a lease is “written in stone” or cannot be changed to suit their needs or particular business. However, many landlords understand the commitment they are receiving from a tenant and thus are willing to make changes and concessions to “close the deal.”
Offer to Lease
Tenants and landlords typical begin by signing an “offer to lease” which outlays essential leasing terms such as rent, additional rent (maintenance, insurance, realty taxes), the term of the lease, etc. This legally binding agreement comes with the expectation that the offer to lease document will be replaced thereafter by a longer formal lease which will be much more in-depth and will involve a host of obligations and requirements which were not included in the offer to lease. The landlord then provides the tenant with their standard formal lease after the tenant signs the offer to lease. It is safe to assume that your landlord’s formal lease will be heavily structured in the landlord’s favour. Make sure you don’t sign away your right to change the standard form lease when you’re still in the “offer to lease” phase. Getting a lawyer involved right at the beginning stages is essential, as once you agree to certain terms in the offer to lease, it may be too late to go back and change the terms of negotiate.
A standard commercial lease usually does not automatically have provisions included which are highly beneficial to the tenant. As such, it is the tenant’s responsibility to attempt to negotiate and obtain varying rights and benefits under a lease. For example, obtaining a ‘free rent period’ from the landlord will enable the tenant to save on rent while the unit is being renovated in order to tailor the premises to the particular business. Additionally, many leases state that any leasehold improvements (basically renovations that improve the overall look and value of the premises) belong to the landlord. A leasehold improvement allowance or ‘tenant allowance’ can be obtained by the tenant whereby the landlord agrees to pay for a portion of those renovations. When starting a business at a particular location, it is vital to determine if the location will suit your present and future needs. As a result, it is important to properly negotiate the term of your lease agreement. In some cases, expansion may be on the horizon and thus a shorter term should be negotiated. In other cases, you may realize that it may take quite a few years to obtain a return on your investment; therefore, you must make sure that you have secured the location long enough for you to earn said return. If you sign a lease that is too short, or does not provide renewals, you may be in for an extremely damaging and costly relocation in the future.
Although you may have incorporated a business and plan to enter your lease agreement under the business name, you may have the misconception that your liability under the commercial lease is limited to the assets of your corporation. Unfortunately, landlords are smart, experienced and most likely have consulted a lawyer when drafting their lease agreements. As a result, most landlords will require you to sign a personal guarantee. When you sign a personal guarantee, you are guaranteeing the Corporation’s lease liability. As a result, if the Corporation defaults under the lease, the landlord will be able to undertake legal actions against you personally – and therefore your personal property (home, investments, bank accounts, etc.). Just because a landlord may require a personal guarantee in order to lease the space to your Corporation, does not mean there is not room for negotiation. You may want to consider:
– Asking for a time limit on the guarantee. A landlord may want to establish that you have a proven track record and thus may agree that the personal guarantee will expire after a few years into the lease agreement.
– Provide a security deposit instead. Having a landlord hold on to money during the term of a lease may be a difficult proposition, but it will limit your exposure and will deny the landlord’s ability to attack your personal assets if things go wrong.
To conclude, I highly recommend that you consult a highly experienced lawyer to help protect your business and your interests. Given how difficult it can be to deal with many landlords, and given how strictly many landlords enforce lease agreements, underestimating the importance of protecting yourself and the location of your business could end up being quite costly. Unfortunately, many clients I have met rush into the lease agreement in order to secure the location for their business. At the same time, the value of consulting with a lawyer before signing a lease agreement is not realized until it is too late. More often than not, consulting with a lawyer will be a worthy exercise given the legal obligations and implications you may be agreeing to when signing an agreement heavily favouring the landlord.