Bulletproof Your Lease Agreement
By Elaine Sambugaro | August 31, 2001
In a previous CanadaOne.com article, we outlined 10 items that business owners ought to consider before signing a commercial lease. This month, we're taking a closer look at monetary and structural booby traps contained in some standard commercial leases to help you ask the right questions and avoid unnecessary costs.
1. Don't obsess about rental rates
The rental rate is a critical component in a leasing agreement, but it shouldn't be the ultimate consideration. Tenants often make the costly mistake of focusing all their attention and negotiating skills on rental rates, and they forego equally important sections of the contract.
David MacDonald, a former lease consultant in Nova Scotia, suggested tenants should pay more attention to two other areas: the amount of money they will have to pay at the end of the term if they have yet to renegotiate the contract with their landlord and any additional costs the tenant has to incur beyond the basic rent at the end of the term.
To sidestep these two potential pitfalls, MacDonald advised, entrepreneurs should analyze a section of a Standard Lease Agreement entitled "Holding Over." Sometimes the wording in the contract will require the tenant to pay "two times the monthly rental rate" if the tenant occupies the premises after the contract has expired, MacDonald said.
This type of wording gives the landlord the upper hand and puts a lot of stress on a business owner whose lease is about to expire and who enjoys the benefits of the present location, said MacDonald. To avoid being at the mercy of the landlord, tenants should always try to amend the clause to read "one times" rather than "two times," prior to executing the lease agreement, he said.
As for the unexpected "extra costs" that can be tacked on at the end of the contract term, MacDonald said that particular attention should be paid to the following phrase or similar set of phrases:
"The tenant will deliver up to the Landlord at the end of the Term, or earlier termination thereof, the Demised Premises broom clean and in good and tenantable repair, destructions as herein provided for and reasonable wear and tear only accepted and further, at the option of the Landlord, to remove all leasehold improvements, installations and alternations or to pay the Landlord the amount of any expense incurred by the Landlord in removing all leasehold improvementsâ€¦, etc."
Tenants should negotiate the removal of all words after "reasonable wear and tear only accepted," MacDonald advised, because if they fail to do so, they could be faced with a hefty invoice at the end of the term that requires them to pay for things such as the cost of waste disposal.
Another section in a Standard Lease Agreement that could become a costly trap for a small business owner, according to Bill Morris, an independent lease negotiator in Dartmouth, N.S., is a possible rent hike due to a landlord's decision to expand the size of the leased property. "Let's say it's a strip mall and the landlord decides to expand the premises and the rent increases. If the small business owner didn't negotiate that out before, and the agent didn't point that out, then they could be caught," Morris said. "That's why it's important for the tenant to understand these little traps before they sign anything – they have to understand that costs can vary â€¦ if taxes go up, if insurance goes up, if landscaping costs increase."
Morris cautioned entrepreneurs to assume a buyer-beware attitude when seeking to lease a property. He said potential tenants should ask relevant questions before signing the lease to avoid surprises. Some critical questions a tenant should ask the landlord follow:
- Detailed information about the total cost of rents, broken down on a per month basis;
- Detailed information about any extra costs that the landlord will want. For example, a landlord might want to compensate for non-leased premises in his building by requiring new tenants in the building to assume a percentage of the costs of the available space;
- Detailed calculation of the charges the tenant will have to incur when leaving the premises and why it is necessary for the tenant to incur those charges.
2. Solvency provisions are not always necessary for tenants
You might think that you need to negotiate a solvency provision in your lease agreement in the event that a mortgage company forecloses on the leased premises, but that is not necessarily the case.
Lisa Borsook, head of the commercial leasing practice group at Weir & Foulds, said that even if a landlord goes bankrupt or defaults on his mortgage, in most cases, it doesn't dissolve the lease. "The bankruptcy of the landlord does not affect the dissolution of the contract. It stays in effect," Borsook said. "The tenant stays there. He does not leave possession. A trustee steps in, and he or she performs some of the landlord obligations."
|Solvency provisions: this spells out a tenant's rights if the landlord's mortgage company forecloses on the leased premises.|
3. Don't scrimp: hire professionals to help you
Another critical point that MacDonald stressed was the importance of examining every word in the final lease document because these documents are always drafted by landlords (and their legal counsel) and are written to protect the best interests of the landlord. Small business owners shouldn't just sign a lease without seeking the help of professionals to remove undesireable clauses, add favourable ones and amend ones that need amending with a view to saving money during the course of the lease term.
That means more than just hiring a lawyer, although MacDonald advised small business owners to get one of those too. Professional help includes competent inspectors who will ensure that your premises are in good working condition at the time of taking possession of the property.
Competent inspection is important because tenants often agree to reimburse the landlord for damages they caused upon vacating the premises. Some of those damages may not fall under their responsibility because they were already present before they leased the property. MacDonald said that most Lease Agreements contain clauses in the "Date of Commencement" section that make tenants liable for damages caused during the course of the lease. If the tenant is not aware of the condition of the property once he moves in, he may be setting himself up for unnecessary costs once the lease term expires.
Inspectors should also be hired to ensure that the square footage of the location being leased is the actual amount stipulated in the contract. In most cases, the two match. But sometimes they don't. It is better to discover whether the landlord has adequately described the area of the property being leased prior to signing the final Lease Agreement.
4. Spend time negotiating "going dark" rights if you're a small retailer
Experts say that it's becoming easier for tenants located in shopping malls to negotiate "going dark" rights. These are clauses within the agreement that give retailers the right to close their store or get a large rent reduction from the landlord if a major business in a shopping centre decides to go out of business or won't renew its lease.
"It's called a co-tenancy clause," Borsook said. "And, landlords are more amenable to these types of clauses than they used to be, what with the problems people have had with major tenants (like Eatons) that have gone dark or just gone into bankruptcy."
Borsook advised that smaller tenants negotiate a clause in their document that permits them to terminate their leases when a percentage of the rentable area of the shopping centre is not being used actively for business. She also said that tenants routinely negotiate the right to "go dark" themselves. This feature allows tenants the flexibility to continue paying monthly rents, and to continue to lease the premises, but not necessarily to employ people to operate the store in times when that doesn't make financial sense.
5. NB: Don't sign an Agreement to Lease with these words â€¦
One clause in an Agreement to Lease that tenants should avoid like the plague reads: "The Tenant agrees to execute the Landlord's standard Lease form." The tenant should never sign any agreement that has this, or a similar clause, said Borsook. Why? Because at the end of the day, these forms don't give the tenant any rights and may expand on amounts payable by the tenant and affect the tenant in ways that the tenant may never have anticipated, said Borsook.
"Some forms contain a right to relocate clause," Borsook said. "Let's say you bargain to be the end-unit and you put a drive-thru in, but you sign a Landlord Standard Form of Lease that entitles the landlord to relocate you to the middle of the centre, you're going to be a little ticked off."
Final Lease Agreements are complex, 40-page documents that contain seemingly harmless clauses but in actual fact may require you to "give away the shop." It's important for entrepreneurs to analyze the Offer to Lease and the final Lease Agreement with a skilled professional who will go through the documents with a fine-toothed comb and help you avoid costly mistakes and negotiate the best possible deal.