Commercial Leases Are Like Snowflakes

Snowflakes? Didn't expect that for a start to a discussion on commercial leases, did you? But it is true, commercial leases are just like snowflakes, no two are alike.

Residential property leases are governed in Alberta by the Residential Tenancies Act and when you've seen one, you've pretty much seen them all. But commercial leases are not closely regulated and just about anything goes. So what are the common things to look out for? Let's have a look.

Rentable Area and Useable Area

Most office tenants would be surprised to find they are actually paying rent on an area larger than the area they are occupying. You may find that you occupy 2800 sq ft but are paying rent on 3050 sq ft. The bad news is that this is normal and it totally acceptable. The good news is that it is fair. Most office buildings have what are called "common areas". These are things like stairwells, lobbies, and common washrooms that all tenants share, and, someone has to pay for these. So, by grossing up everyone's useable area a proportionate amount, everyone pays for their share of the common areas.

This is commonly referred to by names such as gross-up, R/U Factor, load, and efficiency, and you should ask for these numbers from landlords of any buildings you are considering leasing.

Operating Expenses, Op Costs, CAM costs, Additional Rent

These terms are somewhat interchangeable, but they are usually referring to the same thing, taxes, insurance and maintenance costs for the builiding. The terms vary from industrial to office to retail settings but they all refer to the same thing. Like basic rent, they are usually calculated on a price per square foot so that everyone pays their fair share. Additional rent can also mean percentage rent, a retail phenomenon whereby tenants pay more rent if their sales exceed a certain level. While this doesn't sound so good on the surface, it serves as an incentive for the landlord to have a pleasing centre that people want to come shop at.

Special Clauses

The next few clauses are examples of specialty clauses that look innocuous but can cause you a lot of trouble if things don't go according to plan. Whether you are a landlord or a tenant, your ability to negotiate these in or out of the lease depend upon your relative bargaining position.

Continuous Occcupancy Clause

This is mainly a retail clause but it is sometimes seen in office/retail situations. This clause requires the tenant to maintain a continuous presence in the place. It is not good enough to just pay the rent, you need to be occupying the space.

Expense Stops

Generally used when a landlord is paying part of the taxes or operating expenses, an expense stop usually refers to the maximum amount the landlord will contribute towards operating expenses.

Demolition Clause

A clause giving the landlord the right to demolish the building upon some period of notice to the tenant. The notice provision should be long enough to give the tenant a reasonable chance at relocation. a landlord with an old building in a redeveloping area would likely have this clause in the lease.

Radius Clause

Also called a non-competition clause, this retail clause demands that a tenant not have a competing operation within a specific distance of the landlord's building.

Summary

These are just a few of the many clauses in a typical lease. The shortest landlord's lease I've seen was a friendly 15 pages but the longest is over a hundred. The longer the lease, the more important it is for you and your lawyer to review it. And watch for the important clauses buried in the middle somewhere.