What to review before signing a commercial lease

The rent per square foot is the number everyone negotiates. It is rarely the number that determines what the space actually costs you, or whether you can get out of it.

Additional rent is where the money hides

In a net lease the tenant pays base rent plus a proportionate share of operating costs, realty taxes and often management fees. That additional rent can approach or exceed base rent, and it is estimated rather than fixed. Ask for the actual figures for the last two or three years rather than the landlord's estimate for the coming one.

Then look at what is included. Capital expenditures are the recurring fight: a new roof or HVAC replacement is a landlord asset, and a tenant should resist paying for it through operating costs, or at minimum require that it be amortized over its useful life rather than expensed in the year incurred. Administration and management fees calculated as a percentage of costs that already include management fees should be caught and corrected.

What you are actually renting

Check how the area is measured and whether the lease uses a gross-up or a loss factor that inflates the rentable area beyond what you occupy. Confirm what is included in the demised premises, and whether you have rights to areas you assumed came with the space: parking, storage, signage, roof access for equipment, after-hours HVAC.

Term, renewal and the option that is not one

A renewal option is only valuable if it is enforceable. An option to renew "at market rent to be agreed" is, in practice, an agreement to negotiate. Look for a defined mechanism, usually market rent determined by arbitration if the parties cannot agree, with a stated process and timeline. Note the exercise window: options are routinely lost because notice was due twelve months before expiry and nobody had it in a calendar.

Two clauses quietly determine whether a lease is an asset or a liability: the renewal mechanism, and the right to assign.

Assignment and subletting

You may not be planning to move, but you may be planning to sell the business, and in most transactions a share sale or asset sale triggers the assignment or change of control provisions. Landlord consent is standard; consent "not to be unreasonably withheld, conditioned or delayed" is the position to hold. Watch for a landlord right to terminate rather than consent, which converts your lease into an option the landlord controls, and for profit-sharing on a sublease at a higher rate.

The clauses that let the landlord move or remove you

Demolition and relocation clauses are common in older buildings and shopping centres. They allow the landlord to terminate or relocate the tenant on notice. If one is in your lease, negotiate the notice period, a contribution to moving costs and, ideally, a right of first refusal on comparable space. If your business is location-dependent, this clause deserves more attention than the rent.

Personal covenants

Landlords frequently require an indemnity agreement or personal guarantee from principals. Where you cannot avoid it, negotiate its scope: cap the amount, limit it to a defined number of months of rent, provide for it to fall away after a period of good payment history, and make sure it does not automatically extend to renewals and expansions that have not yet happened.

End of term

Restoration obligations can be expensive and are usually ignored at signing. If the lease requires the premises returned to base building condition, the improvements you are installing today become a demolition bill in five years. Negotiate a schedule of what may remain, and get the landlord's approval of the fixturing plans in writing at the time of installation rather than arguing about it at the end.

This article is general information, not legal advice, and does not create a solicitor-client relationship. The law changes and its application depends on your circumstances. Speak to a lawyer about your situation.