Commercial leasing is a vital aspect of business operations, offering companies the opportunity to secure suitable spaces for their operations. While commercial leases come in all different shapes and sizes, a quality commercial lease considers the rights and obligations of both parties, to each other, as well as to any potential third-party stakeholders – such as lenders, guarantors, municipal authorities, insurance providers, etc.
Understanding the intricacies of commercial leases is crucial to ensure the interests of both landlords and tenants are protected and that their rights are upheld. In this guide, we’ll explore the key elements of commercial leases, highlighting their unique features and providing insights into best practices for businesses.
1. Defining Commercial Leases
A commercial lease pertains to the rental agreement between a landlord and a business tenant for a property intended for commercial, industrial, or retail purposes. Unlike residential leases, which cater to individuals seeking living spaces, commercial leases are tailored to meet the specific needs of businesses. A properly drafted commercial lease imposes contractually binding obligations on each party to the lease upon execution.
2. Key Elements of a Well-Drafted Commercial Lease Agreement
A comprehensive commercial lease agreement should encompass the following essential elements:
Parties Involved: Clearly identify the landlord and tenant, specifying their legal names and contact details.
Property Description: Provide a detailed description of the leased premises, including its size, location, and any unique features.
Lease Term: Define the lease duration, outlining the start and end dates of the lease as well as any options to extend.
Rent and Escalation Clauses: Specify the rent amount, payment frequency, and procedures for rent escalation over time.
Maintenance Responsibilities: Clearly outline the responsibilities for property maintenance, repairs, and who covers associated costs.
Subleasing and Assignment: Address whether subleasing is permitted and under what conditions tenants can assign their lease to others.
Insurance Provisions: State the various requirements of insurance coverage each party is responsible to maintain during the course of the term of the lease and often contemplate both property and liability insurance.
3. Types of Commercial Lease Structures
While not an exhaustive list, four common lease structures prevail:
- Gross Lease: The tenant pays a fixed rent amount, and the landlord covers most operating expenses, such as utilities and maintenance.
- Net Lease: The tenant pays a base rent along with a share of operating expenses, which may include property taxes, insurance, and maintenance costs. The operating expenses are often split proportionately amongst the various tenants in the property.
- Modified Gross Lease: A combination of the gross and net leases, where both parties share operating costs to some extent.
- Percentage Rent Lease: The tenant pays a base rent plus a percentage of gross sales, generally used in malls and multi-tenant retail locations.
4. Local Regulations and Zoning Laws Impact
Alberta’s local regulations and zoning laws significantly influence commercial leases. Businesses must ensure that their intended use of the property aligns with zoning regulations. Engaging legal professionals with expertise in Alberta’s real estate laws can provide guidance on compliance with local zooming laws.
5. Negotiation and Due Diligence Process
Negotiations between landlords and tenants are paramount. Before signing, thorough due diligence is essential, including reviewing the lease terms, inspecting the property, and understanding potential operational costs. A legal professional can assist in conducting due diligence, and advising or negotiating various lease terms, including, but not limited to non-competes/exclusive use, tenant inducements, trade fixtures and turnkey improvements. Seeking legal advice helps ensure a fair and balanced agreement.
6. Renewal, Termination, and Dispute Resolution
Lease renewal and termination clauses should be carefully considered. Tenants should be aware of notice periods required for either party to end the lease. In case of disputes, options such as negotiation, mediation, or legal action can be pursued, as outlined in the lease agreement.
7. Expert Resources in Alberta
While the above considers the general structure and terms of commercial leases, the details of each commercial lease will vary significantly depending on the business and location. Given the unique nature and specific operational demands of each business, it becomes imperative to structure a commercial lease in a manner that precisely addresses and accommodates these distinctive needs.
In many instances, issues with commercial leases can arise not from the aspects covered within the lease, but rather from what has been omitted. While it is difficult to address each and every possible scenario that could potentially arise, consulting a legal professional can mitigate the risk of entering into a commercial lease without proper advice and aid in the avoidance of common pitfalls before they occur. The value of addressing potential challenges upfront and establishing clear terms to prevent disputes is immeasurable.
Commercial leases require careful consideration and attention to detail to protect the interests of both landlords and tenants. For businesses seeking to enter into a commercial lease, the experienced team at KH|Dunkley Law Group is prepared to assist with navigating the intricacies of negotiating commercial leases. Contact us at KH|Dunkley Law Group to request a quote for a review of your commercial lease.
This memorandum is for informational purposes only, does not constitute legal advice or an opinion, and does not create a solicitor-client relationship. This is an overview and is not intended to be a complete and exhaustive explanation of the concepts covered. This information may become inaccurate based on passage of time or changes in the law. Nothing herein should be relied upon without seeking the advice of a lawyer.
