Everything You Should Know About Commercial Lease Agreements in Canada

A commercial lease agreement is a legally binding contract between a landlord and a tenant for the rental of property for business use. Unlike residential leases, commercial leases cater specifically to the needs of businesses, whether they operate offices, retail stores, warehouses, or other commercial activities. 

These agreements outline the rights and obligations of both parties, and set clear terms on rent, property maintenance, and the duration of the lease.

Legal Context in Canada

In Canada, commercial leases fall under provincial laws. Each province has its own set of rules that govern these agreements, such as the Commercial Tenancies Act of the Province of Ontario or the Commercial Tenancy Act of British Columbia.

These laws define tenant and landlord rights, responsibilities, and remedies in cases of disputes. Unlike residential leases, commercial tenants have less statutory protection, making it vital to understand the specific legal environment of the province where the property is located​. Consulting a legal professional ensures businesses meet all legal requirements and protect their interests.

Read Also: Construction Act Ontario

Key Components of a Commercial Lease Agreement

1. Description of the Leased Premises

A clear description for using the commercial premises is essential in any commercial lease agreement. This description should include:

• The exact street address
• Square footage, and
• A detailed layout of the property. 

It may also specify the use of shared spaces, such as lobbies or restrooms, and identify any allocated parking spaces for business activities. A precise description avoids future disputes by ensuring both parties understand the exact property being leased. It also clarifies the boundaries of the leased area and any shared facilities the business tenant can access.

2. Term of Lease

The term of a commercial lease refers to its duration, which can range from short-term (e.g., one year) to long-term (e.g., up to ten years or more). Typically, commercial leases last between 3 to 10 years, depending on the needs of the business and the rental agreement between the parties. 

Some leases also include renewal options, which allow tenants to extend the lease for an additional certain period of time under predefined conditions. Having a clear understanding of the lease throughout the term and renewal options is crucial for long-term planning and stability for both the landlord and tenant.

Read Also: Principal Residence Exemption

3. Rent and Rent Increases

Rent is one of the most critical elements of a commercial lease. It is usually calculated based on the property’s square footage and can vary significantly depending on location and market conditions.

Leases often contain clauses detailing rent increases, which may be fixed or indexed to inflation or other economic indicators. Fixed increase clauses set predetermined rent hikes at regular intervals, while indexation clauses adjust rent based on economic changes, such as consumer price index movements.

Knowing the exact rent and potential increases helps tenants budget accurately and avoid unexpected costs.

4. Security Deposits

Security deposits serve as a financial guarantee for the landlord. In Canada, landlords typically require a deposit equivalent to one to three months’ rent. This deposit amount may cover unpaid rent or damages caused by the tenant. 

Some landlords may also require additional guarantees, such as a personal or corporate guarantor, to provide further security. Tenants should clarify the terms related to the security deposit, including the conditions for its return at the end of the lease term.

Read Also: Shareholder Agreement

Types of Commercial Lease Agreements in Canada

1. Gross Lease or Gross Rent Lease

A gross lease is a straightforward type of commercial lease where the tenant pays a fixed rent amount month-to-month. This payment covers all specific expenses related to the leased property, including:

• Property taxes
• Insurance
• Maintenance
• Utilities, and
• Other operating costs.

The landlord takes care of all these additional rent. Gross leases are often used for office spaces or retail environments where tenants prefer predictable expenses without the hassle of managing separate bills. 

This lease type is ideal for businesses that want simplicity and a clear understanding of their monthly financial commitments.

2. Net Lease (Single Net Lease, Double Net Lease, & Triple Net Lease)

A net lease shifts some or all of the property’s additional expenses to the tenant. There are three main variations:

• Single Net Lease (N): The landlord pays the base rent plus one incidental expense, usually property taxes. The landlord handles other costs such as insurance and maintenance.
• Double Net Lease (NN): The tenant covers the base rent and two expenses, typically property taxes and building insurance. The landlord still pays for maintenance and structural repairs.
• Triple Net Lease (NNN): The landlord is responsible for the base rent and all additional expenses, including property taxes, insurance, utilities, and maintenance costs. The landlord usually only takes care of structural repairs. Triple net leases are common in standalone retail spaces or industrial properties where tenants prefer greater control over the building’s costs.

Businesses that want more control over property-related costs or those that lease large spaces, such as warehouses or manufacturing facilities, might prefer net leases, especially triple net leases.

3. Percentage Lease

A percentage lease involves the tenant paying a base rent plus a percentage of gross sales revenue once it exceeds a specified amount. This lease type is often found in shopping centers, malls, and high-traffic retail areas. 

The landlord benefits from the tenant’s success, while the tenant enjoys a lower base rent. This arrangement works well for retail businesses, restaurants, or shops where sales volume can fluctuate, allowing for a flexible commercial rental cost tied to business performance.

Important Clauses to Consider in a Commercial Lease

1. Subletting and Assignment

Subletting and assignment clauses allow a tenant to transfer their lease obligations to another party. Subletting involves renting out part or all of the leased premises to a new tenant, while the original tenant retains their contractual relationship with the landlord.

In contrast, an assignment transfers all the tenant’s lease rights and obligations to a new tenant (the assignee), ending the original tenant’s leasehold interest.

Most commercial leases require a written agreement between a landlord and business before a tenant can sublet or assign the lease. This allows landlords to assess the financial stability and suitability of the proposed new tenant. 

Some leases may also limit transfers to specific parties, such as related companies, or require the new tenant to meet certain creditworthiness standards. Properly drafted clauses provide flexibility for tenants and protect landlords from unsuitable occupants.

2. Termination Clauses

Termination clauses specify the conditions under which either party can end the lease before the term of the lease expires. Tenants may seek early termination options in cases like business downsizing or relocation. These clauses often include:

• Notice requirements
• Financial penalties for early termination.

For landlords, termination rights might apply if the tenant breaches the lease terms, such as failing to pay rent or violating use restrictions.

3. Improvement and Maintenance Responsibilities

Improvement and maintenance clauses outline who is responsible for property upkeep and alterations. Typically, landlords handle structural repairs, while tenants maintain the interior of the leased space.

If tenants make improvements, such as installing new fixtures or renovating spaces, the lease should clarify who bears these costs and whether the tenant must restore the property to its original condition at the end of the lease.

4. Insurance Requirements

Commercial leases usually specify the types and amounts of insurance required. Tenants typically need general liability insurance to cover property damage or injuries related to their business operations.

Landlords might also require tenants to carry property insurance for any improvements or personal property within the leased space. Additionally, the lease should state that the landlord maintains insurance for the building structure itself.

Tips for Negotiating a Commercial Lease with Tenants

Understand Your Business Needs

Begin by assessing your current and future space needs. Consider your preferred location, the size of the space, and the specific layout requirements. Decide on your budget and think about how the space aligns with your long-term business goals.

Negotiate Favorable Terms

Be proactive in negotiating key lease terms. Start by discussing the rent amount and payment schedule. Explore different lease types to determine which suits your needs. Negotiate for a lease duration that offers the best balance between cost and flexibility. Ensure that renewal options are clearly defined, including the terms for extending the lease.

Get Legal Advice

Always involve a civil lawyer in Ontario in your negotiations. A civil law attorney can identify hidden costs, clarify complex terms, and ensure that the lease protects your interests. 

Avoid using a general lawyer who may not be familiar with commercial leases.

Common Mistakes to Avoid When Signing a Commercial Lease

Not Reviewing All Clauses Carefully

Take the time to review every clause in the lease thoroughly. Pay special attention to terms related to:

• Rent increases
• Termination conditions, and
• Renewal options.

Understand how and when rent can be increased, and what penalties may apply if you break the lease early. Clarify any ambiguous language and seek explanations for any unclear terms.

Ignoring Zoning Laws and Regulations

Ensure that the rental premises for business comply with local zoning laws and regulations. Confirm that the property is suitable for your intended use. Failure to check this could result in fines, forced relocation, or even closure of your business.

Read Also: What is Commercial Litigation

Failing to Consider Future Needs

Think about your long-term business plans when negotiating your lease. Avoid committing to a long-term lease without flexibility, especially if your business is in a growth phase or operates in a volatile market. Negotiate for options like:

• Expansion rights
• Subleasing, or
• Early termination

Planning for future needs can save you from being stuck in a space that no longer suits your business or paying for unnecessary space.

Conclusion

Understanding the details of a standard commercial lease agreement is crucial for any business looking to rent commercial property. A well-crafted lease outlines the rights and responsibilities of both the landlord and the tenant, protecting their interests and ensuring a stable business environment.

If you are navigating a commercial lease agreement and need guidance, Cowan & Carter Civil Law Firm in Toronto can help. As a leading Ontario civil law Firm, we practice commercial leasing and other matters. Our experienced team of civil lawyers in Toronto offers comprehensive civil law services including real estate law Ontario and construction law services to ensure your lease aligns with your business goals and complies with local regulations. Schedule a consultation and safeguard your business interests.

DISCLAIMER: Please note this article is not legal advice. You should always consult a lawyer for legal advice regarding your particular situation. The article is not necessarily a complete and/or accurate explanation of the law – it is an article of a general nature.

Published on September 20, 2024