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What should I look for in a commercial lease?

While most commercial leases are standard, you should still be careful about what you sign. The fine print matters, and every clause is important! For example, you may find yourself locked into a lease renewal you didn’t want, or  you may discover that you have agreed to absurd hikes in monthly rent payments.

Here are 6 of the many clauses to be aware of before entering into a commercial lease!

 

 

1. Renewal Clause

Most leases are for 1+ years. Once the term is over, you typically begin to occupy the space on a month-to-month basis. In some leases, a renewal clause may be included which would allow you to continue occupying the space under the same or similar terms and conditions.

 

Renewal may be automatic or optional on mutual agreement by the landlord and the tenant. Automatic renewal clauses will extend the lease for a stated period of time, unless you give notice of non-renewal within a stated period of time, and by using the stated notification process. If you have the option to renew, you may be in a position to renegotiate your agreement. Either way, pay close attention to the renewal clause as certain dates will be included as well as the procedure for initiating the negotiation procedure, such as providing notice to the landlord of your intent to renegotiate. The deadlines to this process are essential. It is a good idea to mark these dates in your calendar, and give yourself a notice period so that you can prepare to either renegotiate, or to find other premises to rent.

 

Signature, Sign, Writing, Pen, Author

Source 

2. Acceleration Clause

An acceleration clause provides the landlord with the right to demand the entire balance of the unpaid rent for the remainder of the term. Usually, the landlord is entitled to collect monthly payments as they become due. In spite of this, in the event that some payments are missed, the acceleration clause allows a landlord to mitigate damages by invoking this right before looking to court proceedings. Acceleration clauses can vary greatly so it’s important to know exactly what a landlord can demand from you in the event of a default under the lease.

 

3. Rent and Rent Increases

Many commercial leases will provide for a ‘base rent’ and ‘additional rent’. Be sure to calculate the total amount of rent when determining whether the lease is right for you. The total rent can be more than twice as much as the base rent once all costs have been included. Standard rent increases will likely be included in your lease, but changes in utilities or other shared costs may also result in proportional rent increases.

 

The occurrence of specific events (eg. an increase in property taxes on the premises) may also impact your rent. If you are signing a ‘net lease’, make sure you understand all the additional responsibilities you may have (eg. HVAC repairs) in addition to rent. Depending on the type of lease you are signing, make sure to read it carefully, or speak with a lawyer who can explain it to you, so that you know what to expect.

 

4. Utilities Payments

Utilities may be included in the rent but take caution. If you are listed as a utility account holder, then you’ll be liable for those payments. There are different combinations of utilities that may be included in your monthly rental payment. If you are in a position to negotiate, you may be able to reduce your rent depending on the extra utilities you’ll be paying for.

5. Sublease & Assignment

Your lease may allow you to sublease or assign your obligations, so look for provisions allowing for either right.

 

In a sublease, a subtenant would rent a portion of the property or even the entire property from you for a short period of time. A new agreement would be drafted between you and the subtenant, but you are still responsible for all obligations to the landlord. Such a provision will provide that landlord approval is required for any subleasing activities.

 

In an assignment, the assignee is agreeing to carry out your agreement with the landlord for the remainder of the term. The assignee will be responsible for all obligations to the landlord. Similarly, a clause allowing for assignment will require approval from the landlord so that certain checks, such as background or credit, may be conducted, and the lease can be amended accordingly. You should read the assignment carefully, because you or your guarantor may still be liable for the obligations under the lease until its termination. Be sure to obtain a release from the landlord and the assignee, if possible.

Calculator, Table, Bill, Work, Pay

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6. Common Elements

Use and access to common elements will often be included as a clause. Not all common elements are “common”. For example, the landlord or other tenants may have exclusive possession or use of a common element, such as a parking spot. Make sure you understand how you can use these common elements or areas. Be aware of your responsibilities for garbage and snow removal as well.

 

You will also want to be aware of many other aspects of the lease – what use you can make of the premises; what types of insurance you must obtain; what hours your business must/may operate; what signage is permissible; what repairs are the landlord’s responsibility; who will pay for improvements to the premises etc. Be sure to consult a legal advisor if you are unclear about your obligations!

 

Check out commercial lease templates and samples of the clauses discussed here in the Clausehound Small Business Law Library!

 

This blog was co-authored by Vi Vo.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Beware the Continuous Operation Leasing Clause


Leasing requires more than just a good eye for location. Your professional duties require you to provide competent services. This means you must understand the legal implications of standard commercial lease terms and how these terms can make or break your client’s business.

 

The scenario

Your client, a hairdresser, has no money to operate her business. The popular coffee shop that generated a huge portion of her clientele shut down. She has no choice but to close her business, let her staff go and work out of her basement. Although she closed the business and turned off the lights at the retail location, she continues to pay rent. Everything was fine until she received a letter from the landlord’s lawyer telling her to reopen.

The letter threatened that if she didn’t reopen she would be in breach of the lease. This meant that she would be required to fork up the entire term’s rent increased by 50 per cent. The lawyer referred her to the Continuous Operation clause and the fact that she and her agent (you) signed the Offer to Lease that attached the lease terms.

She’ll lose money if she opens, but she’ll lose money if she doesn’t! Your client is now threatening to sue you for negligence.

 

What happened?

You didn’t see the Continuous Operation clause.

It is in the landlord’s interests to make sure its tenants are fully operating because this attracts people.

More people generate more customers. More customers drive up a tenant’s sales. And higher sales drive up the amount of rent owed to the landlord. High customer volume also attracts grade “A” tenants, a bonus for landlords looking to refinance. In order to make sure that these interests are protected, you may find a Continuous Operation or Conduct of Business clause stipulating the following:

Tenant shall operate its business on all regular business days except legal holidays, at least eight (8) hours each day between 9 am and 10 pm. Tenant retains the right, in its discretion, to be open on Sundays or holidays [….]. Landlord has the right to terminate the Lease should Tenant at any time elect to discontinue the operation of its store and Tenant shall immediately pay to Landlord the Present Day value of all rent remaining due for the balance of the term increased by 50%.

This clause requires your client to always operate her store even if she is financially unable to do so. She also can’t “shut down” to go on holiday for three weeks. This is because she has to be open during regular business days. If she goes on holidays or shuts down, as she just did, the landlord not only has the right terminate the lease, but also to accelerate rent payments at a 50 per cent mark-up.

Canadian courts are unclear as to whether or not they’ll enforce a Continuous Operation clause.

Some judges have and others haven’t. So, don’t leave it up to chance to determine the fate of your client’s livelihood. You might find yourself in a lawsuit.

 

What should you do?

If you’re representing the tenant, strike out this clause completely. If that isn’t possible, request that the clause be modified so that the tenant can close its business, but will still be responsible for all rent, as per the terms of the lease. This is called a “Go Dark” clause and gives tenants the flexibility they need to run their business.

It is unlikely, however, that the landlord will grant the tenant a “Go Dark” clause without some restrictions. Be prepared for the landlord to request a recapture right that allows the landlord to take back the tenant’s space. The landlord may also restrict the tenant’s ability to open up a similar business nearby.

If a “Go Dark” clause is rejected, another approach that would protect your client is to add a “Co-Tenancy” clause to the lease. Generally, “Co-Tenancy” clauses allow the tenant to stop operating its business or be entitled to reduced rent if another “key” tenant closes up its business. A properly drafted clause would have allowed your client to close her doors or get reduced rent, depending on the terms of the clause, as soon as the coffee shop closed.

The next time you’re negotiating a lease, think of these issues and make sure your client is protected.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Overview of Commercial Lease

Overview of Commercial Lease

 

What is this document?

A Commercial Lease is an agreement where a commercial tenant agrees to rent property from a commercial landlord for a specified fee, purpose, and duration of time.

 

When would I use this document?

A Commercial Lease is used by parties who wish to lease commercial property, i.e. property from which to conduct a business. This is in contrast to an agreement to lease residential property, which requires a different type of lease.  A Commercial Lease will often be signed after the landlord has provided an “Offer to Lease” the premises to the tenant.

 

Who signs this Agreement?

A Commercial Lease is signed by the party leasing the premises, the “Landlord” or “Lessor”, and the party paying for and using the leased premises, the “Tenant” or “Lessee”.

 

More details about this document?

A Commercial Lease can be a complex agreement, depending on the size and cost of the leased premises and the legal sophistication of the parties. Because of these factors, there can be varying degrees of room for negotiation by the parties. As with any negotiation, the outcome will depend on the bargaining power of each party. For small business tenants, commercial leases tend to strongly favour the landlord.

The landlord will rent out the property to the tenant for a specified period of time for a specified, usually monthly, payment. The tenant is often restricted by clauses that limit the purposes for which the property may be used, as well as rules about maintenance, parking, signs, garbage removal etc.

If the lease is a ‘net lease’, the tenant will pay a base rent, its own utilities and fixtures, plus its share of all other costs of the property including taxes, insurance, maintenance, and administration expenses.

The Landlord may also have obligations, such as repairs and improvements that must be completed before the tenant occupies the premises.

 

What are the core elements of this document?

The core elements of a Commercial Lease include: the Leased Premises; Rent; Security Deposit, Permitted Use of Premises; Maintenance Obligations; Default; Term, Termination, Expenses, and Insurance.

Some examples of additional clauses may include: Taxes; Net Lease; Assignment; Subordination and Liens.

 

Related Documents

Sublease – an agreement between a tenant, a subtenant and for commercial leases, the landlord, subletting the leased premises to a subtenant. The original tenant is responsible to the landlord and the subtenant is responsible to the original tenant for the performance of the lease.

Offer to Lease – an offer to lease a property between landlord and potential tenant, usually used for commercial leases. This will outline the material points of the lease.

Consent to Assignment of Lease and Amendment to Lease – Agreement requiring consent from the landlord to assign the lease to a different tenant, and to amend the lease accordingly.

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Blog Bite: Overholding Clauses vs Surrender Clauses in a Commercial Lease

In AIM Health Group Inc. v 40 Finchgate Limited Partnership (2012) ONCA 795, the landlord (“Finchgate”), entered into a 5 year lease agreement with the tenant (“AIM”).

Several months prior to the expiry of the commercial lease, AIM informed Finchgate of their intention to not renew the lease but to stay for an extended period of time due to a delay in a medical facilities inspection test required prior to moving into a new premises. Two weeks prior to the notice, Finchgate enforced a surrender clause within the lease which required AIM to vacate the premises at the end of the lease term.

The tenant filed an emergency application and claimed they were entitled to re-entering the premises since the overholding clause in the lease agreement did not state that it was only enforceable subject to the payment of rent and the landlord’s consent. The Court of Appeal reversed the trial judge’s decision and held that an overholding tenancy can arise only if the landlord agrees to a month-to-month tenancy which is normally evidenced through the landlord’s acceptance of rent or by waiving a tenant’s obligation to vacate as stipulated by a surrender clause within a lease agreement.

This interpretation was justified on the basis that clauses typically found in standard form contracts such as a lease agreement should be consistently interpreted in order to foster certainty and predictability in the law.

Key Take-Aways

The Court stated, in obiter, that surrender clauses within lease agreements are not necessary since there is an implied obligation on the tenant to not only give up possession upon expiration or termination of a tenancy, but to also restore absolute possession to the landlord in the same condition that the premises was found to be in prior to the execution of a lease agreement.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Commercial Leases & The Overholding Clause – How To Hold On To Your Space After Your Lease Term Ends

Congratulations – you’re the proud owner of a business!

One of the most important steps you will take in operating that business will be to lease out a space from which to sell your goods and/or services. In taking this step, the commercial lease signed with your landlord will become a crucial legal document in the management of your business.

This commercial lease will have a number of standard clauses, including a description of the leased premises, the rental payments, the term of the lease, possible term renewal options, and, in all likelihood, an overholding clause.

“Wait,” you say, “what’s an overholding clause?”

A typical overholding clause states that when the term of a commercial lease expires and the tenant continues to occupy the leased premises, the tenancy becomes month-to-month (usually at a higher rental rate.) That is to say, when a tenant remains in possession of the leased premises after the lease term has expired, or holds over, the tenancy continues on a monthly basis.

But, Proud Business Owner, it’s important to know that this not an unfettered right to remain on the leased premises for as long as you wish after your lease is up.

The Case

In fact, according to a 2012 decision issued by the Ontario Court of Appeal, AIM Healthgroup Inc v 40 Finchgate Limited Partnership,[1] you have no right to remain on the premises without the consent of your landlord.

The facts of this case were straightforward:

  • AIM Healthgroup Inc. was the Tenant who leased a space from which to operate a medical clinic. 40 Finchgate Limited Partnership was the Landlord.
  • AIM’s 5-year commercial lease was set to expire at the end of 2011.
  • Prior to the lease ending, AIM notified the Landlord that they would not be renewing the lease, but would likely need to remain on the premises for a few additional weeks.
  • The Landlord advised AIM that they would need vacant possession of the premises when the lease expired.
  • The lease expired.
  • Having secured a new tenant, the Landlord changed the locks and disposed of AIM’s property.
  • AIM brought an emergency application seeking permission to re-enter the premises, citing the overholding clause in their commercial lease. They pointed to the fact that the clause did not specifically say that Landlord consent was required.
  • The application judge granted AIM the application.
  • The Landlord appealed the decision.

Ontario Court of Appeal: AIM has no right to remain on the premises

In her decision, Justice Feldman concluded that the application judge had improperly granted AIM’s emergency application.

In order for the overholding clause to apply and the tenancy to continue month-to-month, consent of the landlord must have been granted – even where that language is not expressly included in the clause. Consent can be either explicit (i.e. in writing) or implied (i.e. the acceptance of rent).

She gave 2 primary reasons for coming to this decision:

  • Leading texts and case law have consistently interpreted overholding clauses as requiring landlord consent.
  • It would be commercially unreasonable for a landlord to allow for unilateral tenancy extension by the tenant – they would only have one month’s notice to secure another (potentially more lucrative) tenancy!

Conclusion

So, Proud Business Owner, be cautious about relying too heavily on the overholding clause in your commercial lease if you’re opting not to renew. You’re only allowed to hold over if your landlord has given their consent, expressly or impliedly, for you to do so. Otherwise, you’ve got to be out of there!

Take-Aways

  • An overholding clause states that a tenant may occupy the premises on a month-to-month basis once their commercial lease has expired.
  • Case law has confirmed that landlord’s consent must be granted for a tenant to continue to occupy the premises on a month-to-month basis.
  • Tenants should ensure that their landlord agrees to the tenant occupying premises on a month-to-month basis.

 

Commercial lease documents coming soon to the Clausehound Small Business Library!

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Commercial Lease – Overview

 

A commercial lease governs the terms between the tenant and landlord of a lease agreement.  Bargaining power is typically skewed towards the landlord with difficult to calculate multi-year rent clauses that include the concepts of base rent as well as rent for common areas and services, strict rules that can result in default, and uncapped indemnities, wrapped in formal legal language, all of which makes tenant-side negotiations a challenge.

There main sections of the lease include  (1) General contract terms (Parties, Background, Consideration, Description of the leased premises, etc.); (2) Rent (Compensation); (3) Repairs, maintenance, agreed-to renovations; (4) Damage, Default; (5) Insurance; (6) Term, termination; (7) Liability and Indemnity.

Use keywords like “Insurance”, “Assignment”, “Termination”, “Damage”, and so on in the search filter in order to identify key clauses relating to these sections.

 

Assignment Search Filter

 

We have provided a commercial lease series of documents within Clausehound’s Document Assembly Tool, and a special series of lease-related articles on this Clausehound blog site.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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The Mistake: Tenants Need to Know About Estoppel Certificates

We all hear about the big commercial deal where millions or even billions exchanged hands. But what we don’t hear about is an unusual document that can make or break that deal. Yet, few agents not only don’t know about this document and even fewer address this document during lease negotiations. This means that you can be leaving your clients exposed to risk and that you’re not using your full negotiation power to get better terms.

 

What is this Document?

 

This powerful document is the Tenant Estoppel Certificate (TEC). The TEC is a legally binding document where a tenant represents or promises certain things to be true. These “things” relate to the relationship between the landlord and the terms of the lease. Common “things” found in TECs are:

  • Dates: when the lease started, when it was last renewed and its expiration date;
  • Rent: how much rent the tenant pays and what’s due over the term of the lease;
  • Defaults: if either party defaulted on any rights and responsibilities under the lease;
  • Contact information: the parties’ addresses, phone numbers and email information;
  • Deposits and Letters of Credit: if any deposits exist and if interest is being collected, how the deposit can be used and so on; and
  • Renewals or Extensions: if such rights exist, the terms and the notification periods.

 

Why have it?

 

The TEC is a promise made to a lender or a potential buyer. The lender or buyer wants these promises because they support whatever the landlord claims to be true about its leases, rent and so on. Clearly, the TEC is imperative to the due diligence process of the sale or refinancing of a property.

After all, if you’re going to spend significant amounts of money, you’ll want the security that it won’t be hit with financially devastating surprises.

In other words, a TEC prevents unsubstantiated surprises because it provides the buyer or lender with a “snapshot” of the status of the lease and because it legally precludes the tenant from maintaining any claims inconsistent with the terms in the TEC.

For example, after we acquired a property, I’d be inundated with tenants claiming they wouldn’t be paying a few months of rent because the previous landlord owed them money for tenant improvements. Before I did a thing, I’d look at the TEC that the defaulting tenant signed. If what they said was inconsistent with the TEC, I’d tell them they had no claim or right to avoid paying rent.

 

What do I do if I see it?

 

Recognize this as an opportunity to negotiate in certain terms into your lease. The TEC is very important to landlords and you can use this provision to extract better rent rates or other terms important to the tenant.  To be clear, when the obligation to sign the TEC arises it’s not the time to negotiate terms in the lease; rather, it’s just the time to ensure that the terms in the lease are true.

The most common issues related to TECs are who pays for the preparation of the document, how many times the landlord may request a TEC and what terms the tenant will agree to in the TEC. Pay attention to these issues and ensure that you put in as many “caps” as possible. But, this is just scratching the surface….

Many leases will further include a “deeming provision” if the tenant does not object to or execute the draft estoppel within the required timeframe. This means that, if the TEC goes unsigned, the tenant is deemed to have accepted the representations in that draft TEC it received. Some leases will further allow the landlord to appoint its own agent who can sign the TEC on tenant’s behalf. This is highly problematic, especially if the tenant disagrees with the representations in the TEC, because the tenant will be held to the potentially incorrect statements in the TEC. Examples include exaggerated rental rates or the elimination of any specially agreed rights.

Tenant representatives should further request that the obligation to sign an estoppel certificate is mutual. This means that the landlord will also have to sign an estoppel certificate should a prospective subtenant request one, for example. Also, request that both parties must agree to all of the terms in the TEC, that the tenant has a right to add in her own comments and that the default isn’t the landlord’s standard TEC.  This ensures that the tenant isn’t unwittingly held to certain representations that are inaccurate and can advise the potential purchaser or lender if the landlord is not upholding its obligations.

Consider how much time the tenant has to review the TEC and what happens if the tenant doesn’t respond on a timely basis. Ensure that you define your review period as X “business days” to avoid getting confusion over whether or not holidays and weekends are included in the calculation.

Finally, delete any language that deems the draft submitted approved or appoints an agent to sign the document should the tenant not reply in a timely manner.

As mentioned, above, if the tenant misses the opportunity to review the document this may hold her to unfair or untrue terms.

 

What Should I tell my tenant to do when the obligation arises?

 

If you think a tenant doesn’t have to provide a TEC, think again. The power to require a tenant to sign a TEC typically stems from a term in the lease, as alluded to above. And not providing a TEC could result in serious repercussions.

Distinguish yourself as an excellent agent by guiding your client through the potential pitfalls of a TEC. Consider the following as you help:

  • Ask the tenant if she received the certificate under the stipulated time period and in the form that the lease provides. You want to make sure your tenant was given enough time to review the document and the landlord may have put itself under an obligation to provide the TEC a certain number of days before the TEC must be executed.
  • Review not only the lease, but also all of its amendments. Compare the terms of these documents to the estoppel provisions to ensure accuracy. For example, check that the names and addresses of all parties are correct and that all documents are included in the definition of “Lease”. I’ve come across missing documentation during this process which could be problematic if there is a foreclosure or need for refinancing.
  • Confirm that the landlord hasn’t defaulted on its obligations. Speak with other tenants and walk the property to determine if the landlord has not yet fixed a defective HVAC, for example, as required under the lease.
  • Be sure that the TEC reflects any special terms negotiated between the landlord and tenant. For example, does the TEC include the tenant’s option to renew, expand or terminate early, as well as any tenant improvement rights, self-help remedies and audit rights? Confirm that the TEC doesn’t negate any of these rights
  • Be specific when responding to any statements requiring the tenant confirm that the landlord has not defaulted on its obligations “to the best of tenant’s knowledge”. The tenant may only have knowledge about specific types of landlord obligations, especially if the tenant operates in multiple facilities.
  • Confirm how much the tenant is paying by contacting the tenant’s accounting department and reviewing the latest rent invoices.
  • Don’t let any landlords pull a fast one by using the TEC as an opportunity to expand the tenant’s obligations or delete the tenant’s rights. If something is unclear, qualify the language be inserting “as required under the Lease….”

 

Remember, success in the real estate business is all about the value you can provide to your client. By knowing a bit more about the secret TEC you’ll be sure to stand heads and shoulders above the crowd, as well as protect your client.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Avoiding lawsuits in lease deals

Lawyers are great assets for any real estate agent or realty team. They’ll help you craft a legally acceptable arrangement, but they have their limits.

They won’t help you create a good business deal because that’s your job. If you don’t do your job your client will be stuck with a bad deal and the courts will not strike down an agreement just because the deal, well, sucks. But the courts will uphold a lawsuit against you if you failed to meet your professional duty to provide competent advice.
How can you avoid a lawsuit? You’ll have to flip through the 100-page lease and have a strong understanding of every clause. The problem is that you don’t have the time and getting a lawyer involved is very expensive. Yet, you also can’t afford to not know the legal dangers lurking to destroy your deal, client and reputation. The solution? Educate yourself and read on to learn about one of the most common mistakes arising out of lease deals.

 

Why you have to care (and know!) about more than per square foot rate

The scenario: Your client is an experienced restaurateur and needs a space that’s at least 3,000 sq. ft. in a trendy Vancouver neighbourhood. The square footage is critical because anything smaller won’t fit the number of seats required for the restaurant to turn a profit. Losing even one table would destroy his business.

After months of searching and several deals falling through, you finally find the perfect location at a below market rate. The suite is in a busy strip mall with a gorgeous green space attached and a large parking area.

As you review the Offer to Lease you know that your client will be pleased because the offer clearly states that the rentable area is approximately 3,020 sq. ft.

A month later, your client calls. He tells you that his contractor measured the suite and the space is actually 2,500 sq. ft. – he won’t be able to make his business work. He says you and the landlord intentionally misrepresented the size of the unit and he wants out of the deal. If not, he’ll sue.

Is the square footage discrepancy between what your client measured versus what is written in the lease and what he’s paying rent on legal? You bet. May your client try and sue you? You bet.

 

What happened?

Your client assumed that the rentable area was the actual size of the unit and you didn’t explain the difference between rentable and useable area.

 

What is the difference and why does the landlord do this?

Before signing an offer, always warn clients that there can be a big difference between the useable area and the rentable area. Understanding and telling your client about these differences is imperative because rental rates are almost always based on the basis of rentable area. I’ve seen many disgruntled tenants start lawsuits over failing to appreciate this difference and businesses fail because of the unexpected cost of rent.

Generally, usable area is the space that a tenant can actually occupy and use, while rentable area includes a tenant’s share of space in the building deemed beneficial to the tenant. The tenant doesn’t necessarily have exclusive possession of such space.

Here’s the clause:

“Rentable Area of the Premises means the area expressed in square feet…. as certified by the Architect or Land Surveyor of all floors of the Premises (including, without limitation, any Mezzanine Area, Basement Areas and Storage Areas), measured from: (a) the exterior face of all exterior walls, doors and windows…. The Rentable Area of the Premises includes all interior space, whether or not occupied by any projections, structures, stairs, elevators, escalators, shafts or other floor openings or columns, structural or non-structural and …. the area of such recess or entrance for all purpose lies within and forms part of the Rentable Area of the Premises.”

This clause essentially means that the rentable area, unlike the useable area, includes the tenant’s share of the building’s common spaces such as lobbies and other non-rentable space such as elevators, mechanical rooms and shared or public bathrooms. The measurements include spaces that no one can physically occupy, such as columns and rooms filled with laundry machines, boilers and HVAC systems.

Why does the landlord make this distinction between rentable and useable area? Because it costs money to run the entire facility, which is open for the tenant’s use and benefit.

As such, the landlord will want to recoup these costs and, sometimes, even make a profit for running the building.

 

What should you do?

What distinguishes good agents from great agents is that good agents negotiate favourable rental rates. Great agents, in comparison, not only know how to negotiate favourable rental rates, but they also know how to protect their client.

The first method to protect your client and yourself from professional negligence claims is to advise your client to hire an architect to measure the space. The hired professional should not only measure it, but also help your client determine if his space needs are met. Be sure that the architect or professional has the proper accreditation to provide a Letter of Area Certification and uses a generally accepted measurement standard such as that adopted by Building Owners and Managers Association (BOMA). Although the BOMA standard isn’t required by law, it is very well-recognized and will enhance the legitimacy of your position during negotiations or if your client has a dispute with the landlord.

The second protective measure is to figure out if the landlord has added a “loss factor” to the rentable area calculation. Although not contained in our clause example above, landlords may also add an arbitrary “loss factor” that is used to “gross up” the rentable area’s size. A “loss factor” is perfectly legal as there is no measurement standard required by law.

Protect yourself by reading the measurement or rentable area clauses carefully. Not the best with reading legal text? Strike out any language that gives the landlord “absolute” or “sole discretion” in calculating the area. Another tool to detect the “loss factor” is to compare your measurement professional’s results with your landlord’s. Also, be sure to add in a sentence requiring that the landlord use generally accepted measurement standards, such as the BOMA standard, and expressly prohibit that the landlord add any “loss factor”.

The final protective measure is to walk through the entire premises. As outlined above, the rentable area also includes columns. By doing a walk-through, you may find that there are numerous columns within the premises that are not available for use. If that’s the case, ask the landlord to reduce the rentable area calculation by excluding a few of the columns.

The best defence against lawsuits, damaged reputations and failed deals is planning and information. With your own facts you’ll have a more informed basis for negotiation and you’ll protect your client from any business-destroying surprises.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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