Your Lease is Your Business

Your Lease Is Your Business (Part II) www.leasecraft.net

Copyright © 2003-2004, Leasecraft Leasing Solutions. All rights reserved. Please feel free to reproduce this article and distribute it to friends and colleagues, provided all copyright and link information remain intact.

In the last installment, you discovered the importance of being aware of the contents of your lease. Not only can your lease impact your business directly, by payment of rent, but can also affect your long -term viability. But how is one supposed to know what is in their lease and how can they even determine if its fair?

One of the biggest problems with commercial leases is in the way they are written. If there is any document that is thoroughly incomprehensible to most people, it is a commercial lease. The y use language like “wherefore”, “hereafter” and “whereas”, speak of obscure concepts like subrogation, and often make you look at 4 or 5 different parts of the lease to understand the ramifications of a single concept. In short, they are unbelievably cumbersome.

Short of reading hundreds of leases to become familiar with their nature, the best way to determine the contents of your lease is to look for keywords. While virtually every lease is as different as a fingerprint, they often use common words or phrases that may help you to find what you are looking for. If you can scan the document for these key words, you can often find what you are looking for.

Let’s look at some of these key phrases that will lead you to some of the most important parts of your lease:

Assignment/Transfer These key words will usually lead you to the part of your lease dealing with your rights to get out of the lease, should you need to. Tenants often need to end their lease early for a number of reasons, including expansion, contraction, and financial concerns. Most leases give a tenant some limited right to move out, provided that they first find a replacement. The requirements are usually quite onerous and the lease often permits the landlord to terminate the lease rather than be required to grant consent to the transfer. This portion of the lease must be closely inspected to ensure that the tenant’s rights are as broad as they can be. A good assignment/transfer clause will:

• Require that the landlord not unreasonably withhold consent.

• Not permit the landlord to terminate the lease if the transfer is as a result of the sale of the business.

• Not commit the tenant to perpetual guarantee of the replacement tenant.

Option to Renew

One of the sections of the lease with which most tenants are at least slightly familiar is the “Option to Renew” provision. An Option puts the tenant in control of whether they will stay at the end of the current term. Unfortunately, most tenants are not aware of the various pitfalls that can be in the Option clause, including being written in such a way that it is not even enforceable.

A good Option to Renew clause:

• Is valid and enforceable.

• Determines the rent to be paid during the renewal term in a reasonable way.

• Does not state that only the original party signing the lease has the right to the Option (thereby making it void if the original business owner sells the business).

Default/Non-performance

A lease almost always spells out what will happen if the tenant fails to observe its obligations under the lease. The Default clause usually states what particular failures are the most serious, and how the landlord can deal with them. Usually, any failure by the tenant to do as it is supposed to can lead to the landlord terminating the lease.

Because of the onerous nature of leases, it is very important that the Default clause be written properly. A good Default clause:

• Should always give the tenant the opportunity to be notified (in writing!) by the landlord if the landlord thinks that the tenant has done something wrong, and should give the tenant a reasonable length of time to fix the problem before the landlord can take steps to remedy the breach.

Guarantee/Indemnification

Many landlords request that owners of businesses p rovide a “personal guarantee”, especially the owners of small businesses. This is an agreement between the landlord and the actual owner of the business (assuming that the tenant/business is a corporation) that if the tenant fails to pay the rent, the owner of the tenant will pay it directly out of their own pockets. This effectively nullifies the safety that a business person’s assets are provided by an incorporation. The landlord is now able to sue the owner of the business, potentially putting the owner’s house, car and other family assets at risk, even though their corporation is the tenant. While personal guarantees are often ok, they should be limited, both in time and dollars. There should never be a full guarantee of the lease by the owner of the tenant.

These are only a few of the important sections in a lease that require review. A tenant should also be aware whether a landlord has a right to relocate them within the building, whether the landlord can terminate the lease if he or she wishes to sell the building, and how the operating costs for the building are being calculated. Unfortunately, these and many others can be better hidden within the lease and more difficult to interpret.

Reading your lease can be time-consuming, difficult, and unbelievably boring. However, you don’t want to be surprised by a sudden termination, relocation, or a change in your space mid-way through your term. You also don’t want to invest tens or hundreds of thousands of dollars improving the space, only to find that you’ll only be there for five years or less. If you don’t want to spend the time and energy to do your lease review before you sign it, you can also pay someone to do it for you. While most lawyers do not have enough experience in lease review and negotiation to provide you with the best possible service, a well-qualified lawyer is virtually indispensable. You can also look to lease consulting firms, such as Leasecraft Leasing Solutions, to help you through the process at a more affordable rate. Your Lease to Toronto Commercial Real Estate Home Page