Continuing with the topic of leasing, I made three main points in the last column:
• If you don't have an option to renew your lease (or, in the case of most franchise arrangements, your sub-lease), try to include an option to renew to give you greater flexibility at the end of the lease term.
• A breach by you (or, if you are an assignee of the lease, the previous tenant), even though fully cured, and even though small, might still disentitle you to renew your lease.
• If you wish to exercise your option to renew, don't forget to do it in the time provided for in the lease or the option could be lost.
One reader correctly pointed out that options to renew are great to have in your back pocket, but in some markets it's better to negotiate a new lease on new terms than to renew the old lease. Again, it depends on whether it's a rising or falling rental market and it depends on what city the premises are in.
A good strategy would be to talk to the landlord about a new lease two or three months before the date you have to exercise the option to renew. If a new lease on better terms than those provided in the renewal option can be concluded (and in a falling rental market, perhaps it can be), then you won't have to exercise the option to renew because you will have negotiated a new lease. But if a new lease on preferable terms can't be concluded by the date the option must be exercised, you can still exercise that option as long as you do so within the time period specified in the lease and (if the lease so provides) as long as you are not in default.
There is also case law that provides that, if the parties are involved in lease negotiations, a landlord can't take advantage of a tenant failing to exercise its option to renew on time. But there must be correspondence that proves these negotiations.
Another thing to note if you are exercising an option to renew: don't say in correspondence "I intend to exercise my option to renew." There's case law that says these "weasel words" just won't cut it. Intention to do something isn't a commitment to do something. You're either exercising the option to renew or you aren't.
Leases are complicated documents and a lawyer or leasing agent should be assisting you in the negotiations. There are many issues that arise in a lease negotiation that can't be covered in a newspaper column. But let me point out three more things that you should know:
The first is insurance. The lease will contain very comprehensive provisions dealing with insurance you must carry as a tenant. But many tenants discover to their dismay that the insurance requirements contained in the lease are either impossible to obtain or prohibitively expensive. So make sure you send a copy of the insurance clauses under the lease to your insurance agent before you sign the lease to cost out coverage and assess if coverage is even available.
Second, be very wary of relocation clauses. In many commercial leases, the landlord will have the right to require the tenant move to alternate premises elsewhere within the building. It might not be problematic for an office tenant to relocate, provided the lease requires the landlord to pay the full cost of the move and the new premises are comparable to the old ones, but a requirement to move a retail or restaurant location may be commercial suicide if the original location has excellent visibility, ample foot traffic and it is close to an anchor tenant. So it's essential from a retail or restaurant tenant's perspective to ensure that if it can't negotiate the clause out of the lease, then if it has to relocate, the relocated premises are of a comparable quality, size, visibility and proximity to the anchor tenant as the original premises. And of course, the lease should provide that the landlord must pay the full costs of the relocation, including construction and development costs, moving costs, rewiring, re-venting and all other costs associated with putting the tenant in the same position it would have been in had the relocation not occurred. You'd be amazed, but some leases are silent on who pays for the cost of relocation.
Finally, heating ventilation and air conditioning (HVAC). There's a lot to know about HVAC systems, especially in restaurants where there are smoke and food odours that have to be vented outside. If the venting of odours affects other tenants (or neighbours who aren't tenants, such as smoke from a pizza oven being sucked into the next building's air intake vent), this can amount to nuisance at law and a court could order it to be stopped. Air filtration and ecologizer systems are very expensive to install and maintain to remedy this problem. But if your business generates smoke or other odours, you may well have to add that cost to the cost of running your business. So who pays? And if your restaurant is in an office tower, you might find you're paying the cost of the entire building's HVAC system after 6 p.m., when the office tower's system is shut down but has to be turned on - just for you. Again, who pays? If you don't negotiate it right, you will.
Obtain representations from the landlord that the HVAC system is suitable for the tenant's use and will not amount to a nuisance between the landlord and the tenant. And use a lawyer to negotiate the lease.
Special to the Globe and Mail
Vancouver franchise lawyer Tony Wilson is the author of Buying A Franchise In Canada – Understanding and Negotiating Your Franchise Agreement and is ranked as a leading Canadian Franchise lawyer by LEXPERT. He is head of the Franchise Law Group at Boughton Law Corporation in Vancouver and acts for both franchisors and franchisees across Canada, many of whom are in the food services and hospitality industry. He is a registered Trademark Agent an Adjunct Professor at Simon Fraser University and also writes for Bartalk and Canadian Lawyer magazines.
Tony Wilson