While a full lease review is extensive and difficult to summarize in a single post, here are 3 lease review tips and 3 practical tips as helpful starting points:
Review Tip 1 – How much are you paying monthly?
Familiarize yourself with the types of commercial leases, including gross, modified gross, net, double net, and triple net. In a nutshell, a gross lease typically includes most or all expenses in the monthly rent. A net lease usually covers only base (or minimum) rent, and you need to pay additional rent to cover:
- Property tax
- Building insurance
- Maintenance and operating costs. Additional rent commonly varies annually, unless otherwise stated in your lease.
It’s important not to rely solely on the title of the lease. A document labelled “Gross Lease” may actually operate as a modified gross lease, with extra fees being allocated to the tenant.
Confirm with the landlord in writing if there are any additional fees to consider for the term, such as utilities, rent escalations (annual increases based on a fixed rate or CPI), parking fees, signage fees, snow removal fees, and security deposits.
Review Tip 2 – How long do you have for the space?
The term determines how long you have the right to occupy the space, but you also need to consider what happens when the term ends.
Including options to renew or extend is beneficial. These options give you the choice, but not the obligation, to stay for a predetermined period after the initial term ends. Review the holdover clause, which dictates what happens if you remain in the space past the term end without renewing or extending the initial term. Holdover rent rates are often significantly higher (commonly 1.5-2x the term rent!) Even if the end of term seems far off, consider the termination mechanism and ensure you have strong assignment and subleasing rights, so you can relocate or expand if your business evolves.
Review Tip 3 – What are you responsible for?
Most commercial leases are drafted by the landlords and therefore tend to be heavily landlord-favourable. It is crucial to review the lease line-by-line to understand what you are on the hook for.
Make sure the right professionals review specific clauses. For example, send your insurance clause to your insurance provider to confirm whether your policy must be amended (which may increase premiums). If you are completing any tenant build-out, make sure you have qualified contractors, architects, or other experts who can review repair, maintenance, and construction obligations.
Understand exactly which repairs are your responsibility and which belong to the landlord. Also, when the lease ends, confirm if you are responsible for restoring the rented space, which can cost thousands of dollars.
Pay close attention to indemnity clauses that may make you responsible for third-party claims and to clauses that survive the termination of the lease.
Practical Tip 1 – Get everything in writing
As with anything in business, it is always best practice to document all discussions and to verify that both parties are on the same page. After verbal conversations, send an e-mail summarizing important points and ask the landlord to confirm or correct your understanding. This practice helps prevent misunderstandings that are often frustrating and costly.
Practical Tip 2 – Consider hiring a professional
Where possible, it is a good idea to get a professional, such as a lawyer, to review your lease. Professionals can help identify unfavourable language, hidden costs, and risk areas. Accountants can help model total cost scenarios, including rent, taxes, insurance, and maintenance.
A professional also relieves you from direct negotiation pressure, and the cost of getting a legal review may save you thousands of dollars in future problems.
Practical Tip 3 – Start early, don’t rush, and keep everyone informed
A finalized lease can take weeks or months of negotiation and revisions. Rushing significantly increases the risk for the tenant, especially when the landlord’s standard form is used. Track changes across draft versions of the lease for continuity, accuracy, and ease of review.
Something that was agreed upon at the start of the leasing journey may have been forgotten or not passed along to the landlord’s representative assisting with the negotiations. Ensure your representative is given clear notes on all agreed-upon details (ideally in writing, addressed to the Landlord– see Practical Tip 1 above). This ensures everyone stays aligned throughout the negotiation.
Commercial leases can be complex, but understanding what you’re paying for, your lease term, and your responsibilities are some tips that can help start your lease review. Taking the time to read carefully, involving the right professionals, and documenting everything will help ensure your lease works for you, not against you.
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