Shopping for a Commercial Premises

Having a good or a bad lease can contribute significantly to the success or failure of a business.

I was asked by blog reader Denise, who is currently looking for a new commercial premises, to address some things to think about when shopping for a commercial property.  Here are my top 5 tips.

1. NEGOTIATE – Only a few provinces and territories in Canada (BC, ON, NWT) have legislation which directly governs commercial leases. For Quebec see info here.  This means that unlike renting an apartment, there is a lot of room for negotiating the terms of your commercial lease.  On the downside, many large commercial landlords have long and complex leases which favour their interests, not those of the Tenants.  If you are not comfortable negotiating yourself, you should think about hiring a commercial leasing agent to represent you as a Tenant’s Agent. They will know the local market conditions and how to interpret lease provisions.

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2. UNDERSTAND HOW RENT IS CALCULATED – Because there are no standard commercial leases, the description of how rent is calculated varies from lease to lease.  Usually there is Basic or Base Rent which is a dollar amount per square foot.  Where it gets tricky is what is included in Additional Rent under the lease.  If the Lease is triple Net, this means that the Landlord will pass all cost onto the Tenant which could include utilities, taxes, snow removal, signage etc.  Make sure you understand how this is calculated and ask for a past history of the allocation of common costs to Tenants.

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3. USE and NEIGHBOURS – Make sure that what you intend to use the premises for is an acceptable use for the Landlord and is written into the Lease.  If you may be producing loud noises or strong smells, discuss this in advance with the Landlord to make sure it will be acceptable and fits with the uses of the other nearby Tenants.  Do your own due diligence about what businesses in the area are doing.  Once you move in, you will have little control about what the neighbours are up to.

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4. PERSONAL GUARANTEES – If your business is incorporated, the Tenant under the Lease will be the corporation.  If the Landlord proposes that the Lease be guaranteed by you personally, try to negotiate that this is taken out (whether this is successful often has to do with local market conditions like the occupancy rate).  Having such a personal guarantee in your Lease puts your personal assets on the line which could be a significant risk to your family finances under a long term Lease.  

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5. LEASEHOLD IMPROVEMENTS – If you need to make improvements to the commercial space, these are called leasehold improvements.  These can be a frequent cause of disputes between Tenants and Landlords, so there are a number of points which are important to cover.  (1) Who will pay for the improvements – the Tenant may be able to get the Landlord to pay for improvements before you move in or the Tenants may be required to pay.  (2) Make a detailed plan and get it approved by the Landlord if you are making improvements.  (3) You may be able to finance these types of improvements – talk to your banker or lender. (4) Make sure the Lease indicates what the Tenant can remove when the Lease is over (furniture, equipment, flooring etc.) and that the requirements to return the premises at the end of the Lease are not too expensive to comply with.

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Entering into a commercial lease as a Tenant is definitely a case of Tenant Beware.

A final friendly reminder that the Landlord (or their Leasing Agent) is not your friend in the negotiation of your lease.  You have to put on your big girl/big boy pants and advocate on your own behalf.  If there is anything that you do not understand in the Offer to Lease or Lease Agreement, you should consult a Leasing specialist or commercial lawyer.