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Beware Of These Commercial Lease Clauses
Many tenants, on the first time, sign a 50+ page lease that has a lot of fine print and confusing references and terms, without having a lawyer review or negotiate any of the terms, because the landlord convinced them it's all just filler legal language.
For some of the lucky ones, not many issues arise in their lease and they go years and years without ever having looked again at that lease document. However, not all commercial tenants are so lucky, as when issues start to arise do they realize their fate: they are stuck in an unhappy marriage with the landlord with an unfavourable lease.
We have listed a couple of the most important clauses in commercial leases that every tenant should pay attention to before signing on the dotted line:
This clause gives the landlord the right to prematurely terminate a lease by giving notice in order to tear down or redevelop the premises and build condos. You will see this clause more and more nowadays since redevelopment is a regular occurrence in ever-growing Toronto.
Some landlords will be stubborn and refuse to remove this clause completely, but some are willing to give some breathing room. Our first request will be to have a time limit as to when the landlord cannot exercise this right to demolish, the longer the better. For example, if the landlord is insisting on keeping this clause in, then ask that the landlord cannot enforce this clause for 10 years.
If they refuse, and you still really want this location that badly then our next line of requests will consist of asking the landlord to relocate you to a near identical space with the similar layout and renovations and a reimbursement for the inconvenience. While it is not ideal, it is better than giving the landlord too much power.
There is a Definitions to most leases, which most people look over thinking it’s gibberish. Well, it’s not! How the word “redevelop” is defined in the lease is very important and should be carefully read. It could mean something as simple as a renovation of the separating walls that can allow the landlord to prematurely terminate your lease, which would suck for you.
If you plan to get a loan from the bank to renovate the place, banks usually want to see a 10+ year term with no demolition clause, since they are lending money to you because they think that location can be successful, and to ensure that you make enough money to pay them back.
If you eventually sell the business, the buyer will not be pleased to see a demolition clause in the lease that he will be taking over, and this clause alone can scare away potential buyers and lower your sale value.
So do your best to get rid of this clause completely, or limit it as much as possible!
A Right of First Offer, and a Right of First Refusal which we will discuss in our next post, are great ammunition to have in your arsenal if the reason the landlord is redeveloping is because someone offered to purchase the location and redevelopment is a part of the purchase arrangement.
Personal Guarantee Clause
If you're trying to get a lease signed for your business, landlords are increasingly asking for a personal guarantee, especially if it is a new business with no credit or financial history to reassure the landlord. This will ensure that the landlord can go after the owner directly in the event of a breach. Without a personal guarantee, landlords can only go after the business for any breaches, like non-payment of rent. If the business fails, the landlords were out of luck. Because of this, the landlords are increasingly asking business owners to personally guarantee the lease. After looking at the creditworthiness of this personal guarantor, sometimes, it is not enough for the landlord and they end up asking for another corporation to guarantee, or a spouse or family member!
If you breach the lease in the middle of the lease for non-payment, you could be liable for the total rent due for the remainder of the term, plus costs. That could be tens or hundreds of thousands of dollars.
Does that mean you have to be always personally liable for the full liability of your business? Not necessarily if you negotiate!
- The Term of the Guarantee: If you are doing a long-term lease, you should push to limit the term of the guarantee as far as possible. After a period of time, you can build trust with the landlord that can leverage your revoke the personal guarantee. For example, if you are signing a five year plus five-year renewal, you offer to provide the guarantee only for the first five years, then no personal guarantee on the renewal or transfer of the lease.
- Limit the Amount of the Guarantee: If the Landlord is putting work in the space to get it ready for you, then the landlord's concern will be the amount of monies put in by the landlord and the loss of rent he will lose if he has to replace you. You might be able to appease his concerns by offering an amount of personal guarantee that would cover the cost of work and a couple of months rent.
It is not going to be easy to convince the landlord to forgo a full personal guarantee, but if you are able to do so, it can mean a big relief for you personally should the business fail sooner than expected.
Consent To Transfer The Lease
When it comes time for you to sell your business and move on, you need to ask your landlord permission to transfer your lease. Landlords have a lot of discretion and power in deciding whether to accept the incoming tenant or not.
Some leases outline what the landlord could ask for, like the purchase and sale agreement, their credit history, audited annual financial statements for their company and other companies the incoming tenant owns (which are so expensive to have done and unnecessary for a landlord to review).
Some leases do not even outline what documents the landlord required to judge the tenant, and they allow the landlord to exercise his arbitrary discretion and act unreasonably, even if the tenant can be a perfect candidate!
You also need to consider the cost of transferring the lease and the landlord’s lawyer legal fees, which are usually never outlined in the lease. We recommend having a fixed figure for these fee amounts to provide you with some certainty, so the landlord does not hold you hostage and request a crazy amount from you to get out of the lease (we have seen a landlord ask $30,000 once!).
You could also ask the incoming tenant to split the fees with you so it isn’t so burdensome. The downside of transferring a lease is that regardless of if the consent is not granted, you will have to pay the lawyer fees!
Key Takeaway: never trust the verbal promises of your landlord – there has usually a clause in the contract called “Entire Agreement” clause which says any promises made that are not included in the lease agreement are not valid.
Please note the content on this web site is provided for general information purposes only and does not constitute legal or other professional advice of any kind.