Tips on negotiating your commercial lease

Share

When you're negotiating a commercial lease for your business, there are a lot of things that you, your leasing agent or your lawyer will normally want to negotiate with the landlord: What is the term? How many options to renew are there? What are the common area and maintenance costs and are they expected to increase in the coming year? Do you have some sort of exclusivity that prevents the landlord from locating another business in the same mall that is in direct competition with you (i.e. to contractually prevent it from locating another pizza outlet in the same strip mall that you're in, cannibalizing your sales). Is there a rent-free period? What will the landlord throw in the deal in terms of tenant inducements? Is there a relocation clause that allows the landlord to move you to another spot in the mall if it and when it deems relocation appropriate (i.e. it has a bigger and better tenant than you). Do you have to pay for after hours HVAC? And a host of other issues.

I covered a number of these issues in earlier columns here and here

You may find you're in such a hurry to secure the location with the landlord before someone else does, that you're spending all your time – and all your bargaining chips – dealing with issues that arise at the beginning of the lease without necessarily considering your obligations at the end of the lease five, 10 or 15 years from now when you might decide you want to move out.

At the end of the lease's term, the landlord may choose to keep all the fixtures you've constructed or installed on the premises, which it's normally entitled to do as a matter of law. But if they're 'trade fixtures' or 'tenant's fixtures' installed to turn the premises into, say, a restaurant, you and the landlord may end up battling over the difference between a true fixture (and therefore stays on the premises) and what's 'trade fixture' (and goes with you when you leave.) The law can differ depending on your province. This is an area where you may need legal advice if it becomes an issue. It will also depend on the precise wording of the lease.

But what I really want to warn you about is the 'removal and restoration' provisions of a commercial lease. There might not be an issue regarding fixtures and trade fixtures because the landlord wants you to take everything out that you have built or installed on the premises. Not only will this oblige you to remove all of your equipment and improvements from the premises – including the ones a previous tenant installed, or the one's the landlord installed itself for a previous tenant – it will require you to demolish the premises and restore them to the landlord's then current base standards.

This can be problematic especially for restaurants, which spend thousands or even millions of dollars on improvements – the kind that make patrons drop their jaws the moment they walk in the door. They may also be required to remove large and unwieldy kitchen equipment which can't be taken out without demolishing walls that weren't there when the big piece of equipment was actually installed. Or it could necessitate the removal of the wood panelling and lighting all over the restaurant. Or, in the case of banks and other businesses that handle securities, the obligation may involve the removal of large vaults on the premises, which might only be removable with a backhoe! In the case of an office lease, with multiple offices, the removal and restoration provisions of a commercial lease may require the tenant to rip out all its carpeting and demolish all the individual offices that have been constructed, leaving a cavern for a new tenant to design and reconfigure its office space differently.

Not only will the obligation require a tenant to remove everything it or a previous tenant installed, the landlord may insist that the premises be restored or rebuilt to its base building standards. Dry-walled ceilings with expensive pot-lights might have to be removed because the landlord's base building standards require neon lights and T-Bar ceilings. If the sprinkler system installed 15 years ago doesn't conform with the landlord's current base building standards, you'll find you might have to rip it out and re-install it. It can be that onerous.

What's interesting is that, in my experience, the majority of commercial landlords are prepared to negotiate the removal and restoration provisions of their leases. It might be because they're interested in securing the new tenant and not because they're thinking about the end of the lease. Or maybe the landlord's representatives expect to be retired in 20 years.

So if you're a tenant, it's in your best interest to avoid this problem. Ideally, you or your lawyer should negotiate the option to remove your trade fixtures and leave the premises in a clean broom-swept condition. The option to remove your trade fixtures gives you the flexibility of removing the equipment that is easy to remove and which you might be able to use at your new premises (or sell). And having the lease provide that your only obligation is to leave the premises in a clean broom swept condition means you'll be passing on any demolition and restoration costs to the landlord – or a subsequent tenant – in 15 or 20 years.