You have decided to relocate your business. There are many reasons why this decision has been made; a need for larger space, labour considerations, transportation requirements, proximity to markets, cost, etc., etc. All of these factors have been considered, the site selection team has narrowed the search down and you are about to enter into lease negotiations with the new landlord.

Many times both parties elect to shortcut the process and proceed to try and draw up a lease document without firmly establishing each others basic needs. Both tenants and landlords can reap substantial benefits and years of harmony simply by taking the time to ensure that the wants, wishes and special requirements of each are clearly defined early on, especially in the Offer to Lease.

From a tenant's perspective the best deal is going to be obtained before the commitment to a specific site is made and not after the Lease is signed.

Prudent landlords can take the opportunity before the Lease is signed to carefully review the tenant's financial status prior to doling out megabucks for leasehold improvements and before the tenant has taken possession of the leased premises.

This essay will point out some of the most important aspects of any lease negotiations and attempt to provide some insight into some often neglected but important clauses of both the Offer to Lease, and ultimately the lease itself.

Tenant: Who is the Tenant? Simple question, or is it! The answer will vary depending on the type of lease being entered into and the use. Most commercial leases are entered into by companies and not by individuals. Individuals are often reluctant to put their own name on a lease document, preferring instead to put the lease in the company name or in a shell or numbered company. Unless the company is a Fortune 500 company, many Landlords are weary of corporate covenants (particularly shell companies) and prefer instead to deal with the real thing: the individual. Where shell or numbered companies are used Landlords will often attempt to solicit a personal guarantee from the individual or in the case of start up companies, a guarantor (some third party of substance) as a fallback position in case tenant fails to make the rent payments.

Term: Many tenants, particularly new ones are reluctant to enter into long term leases (5 years and beyond) because of the commitment and the perceived liability incurred. These prospects prefer to enter into a one year lease and take their chances on the future. This approach leaves a great deal of uncertainty in the company's structure and forces the owners and managers to either go through lengthy rental negotiations barely six months after they moved in, or worse yet, start to look for new premises when they should be concentrating on developing the business.

Most landlords like the security of a longer term lease and are often prefer to negotiate more favourable financial terms for companies which have business plans geared to long term success, rather than speculate on a tenant who doesn't know if they're going to be around at the end of the year.

Many times tenant fit up costs are substantial. Generally landlords are prepared to fund some of these costs up front for qualified tenants and recover the cost as additional rent over the lease term. If that term is too short, repayment of the fit up costs by the tenant will be prohibitive and a strain on the tenant. In addition, there are tax implications to consider when structuring the lease term and extensions or renewals. Improperly structured lease terms can result in unfavourable recapture options.

Rental Rate: Rental rates come in many forms: Gross (all expenses included in one rental payment) to Triple Net (all operating costs such as heat, hydro, taxes, etc. in addition to basic rent) with many variations in between. Obviously the rent a tenant pays is one of the important factors a tenant considers during lease negotiations. The Offer to Lease must clearly define the type of lease which is ultimately written and must specify which Operating Costs are included in basic rent and which are not. Today, Operating Costs may exceed the basic rent paid and it's too late to talk about which party pays the operating costs after the deal is done.

Renewal vs Extension: Most leases include an option in favour of the Tenant to renew the lease for a further period of time on the same terms and conditions as contained in the Lease, usually save for rent which is renegotiated or arbitrated. All Tenants should insist on a lease extension instead of a renewal clause. A lease renewal occurs after the original term has expired. Typically, the new (renewal) term starts the day following the end of the initial term and this could result in the loss of some important covenants such as Options to Purchase and expansion rights. An extension agreement ensures the original lease term is extended and as such the continuity of the original lease term is maintained.

Expansion: Take the time to plan ahead. Try to find a building which will meet your needs today, five years from now and yes, even ten years from commencement. If your business plan assumes that you will need to double the plant size in five or ten years prepare for the expansion now. Ensure that the building selected has the expansion potential to grow with the business and let you achieve your goals. Usually a landlord with vacant space is more than willing to provide tenants with a "Right of First Refusal to Lease" or an "Option to Lease" additional space. Most often this option or right is free and protects the tenant's future space options.

Tenant Improvements: At RE/MAX we have rarely seen the building which suits a tenants needs to a tee. Quite the contrary, most if not all buildings require substantial Tenant Improvements (T.I.) or renovations in order to suit the tenants needs. Tenants should carefully analyse their needs and estimate the renovation costs before jumping in and signing the Lease.

The most common alterations needed by tenants are: changes to office layout, electrical distribution or transformer size, new shipping and receiving doors, and plumbing improvements. Tenant improvements are expensive, often exceeding the first year's rent payments. Its not uncommon for medium sized companies (30-50 employees) to spend hundreds of thousands of dollars to retrofit a new site.

Many landlords are willing to complete some of the renovations and spread the cost over the lease term. The Offer to Lease permits the parties to detail these improvements, propose cost sharing schemes and give each other time to estimate costs, all the while holding the property for the tenant.

Non-Disturbance Agreements: Many tenants mistakenly believe that once they rent a property it's theirs for the term and so long as the rent is paid on time, no one can disturb them. This is commonly referred to as a covenant for Quiet Enjoyment.

Leases are usually drawn up by the landlord's lawyer and as such tend to favour the Landlord. All leases contain clauses which ensure the tenant must pay its rent and provide the Landlord with remedies in the event of non payment or other forms of default by the Tenant. What happens to the tenant when the landlord doesn't pay its bills?

Less common are clauses which protect the Tenant from default of the Landlord. For example, what happens if the Landlord cannot make its mortgage payments and the bank takes possession of the building? Is the Lease valid and binding? Are the Tenant's assets protected and can the Tenant continue to occupy the premises and maintain it's right to Quiet Possession? In order for the lease to be enforceable (as against an existing mortgage) the Tenant should insist that the landlord obtain the consent of the mortgagee to the lease. For future mortgagees, generally the tenant is protected since the tenant will have priority over the mortgage. If the landlord wants a Subordination clause in the lease under which future mortgages will have priority over the lease, the tenant in turn should request a non disturbance agreement.

The inclusion of a Non Disturbance Agreement in the Lease will in most instances ensure that the tenant can carry on with its business despite the troubles of the Landlord. A Non Disturbance Agreement in a Lease forces the Landlord to get its creditors to agree, in advance, to leave the Tenant alone in the event of Lender/Landlord conflicts. These agreements are almost never offered by Landlords to Tenants since the presence of such an agreement adds additional obligations on the Landlord, its bankers and others, and limits their ability to sell the Landlord's assets without regard to the Tenant.

Tenants often put substantial investment in the Landlord's property and should protect that investment to the full extent possible. Tenants wishing to have a Non Disturbance Agreement in a Lease had better make sure the request is made during negotiations and is included as a condition in the Offer to Lease otherwise it won't be offered.

Certificate of Area Measurements: There are many ways to measure a property, outside wall to outside wall, inside wall to inside wall, allowing adjustments for common area, and yes, even by volume. Since most commercial rents are based on the area leased , it is extremely important that the method of calculation be defined in the Offer to Lease document and that everyone understand how the area is measured. A Tenant who enters into a lease without ensuring that the Lease contains a Certificate of Area Measurement clause is leaving himself to the mercy of the Landlord. Very often leases are silent as to the method for calculation of floor area or specifies that the Landlords' Architect or Engineer is the arbitrator in cases of dispute.

For the most part, Landlords want to be fair in the calculation of the rent due. But a Landlord's survival and a building value are both based to some extent on their ability to generate as much revenue from a given floor area as possible. By ensuring that a Certificate of Area Measurement Clause is included in an Offer to Lease, both Tenants and Landlords ensure that each uses the same calculation method and a common area of dispute is eliminated early on.

Environment: In the past few years the Environment has invaded and in some cases become the focus of Landlord/Tenant negotiations. Recent court cases have firmly established that Landlords can be held responsible for the sins of the Tenant. As such prudent Landlords are insisting on the inclusions of stringent Environmental warrantee and indemnification clauses in leases. Few Tenants object to these clauses, but Tenants should be careful to ensure that these clauses don't prevent it from carrying on its business. Carried to the extreme almost everything not native to the site has the potential to come in conflict with Environmental clauses in leases. Tenants must ensure that it will be able to operate its business and must read these clauses carefully and be prepared to propose amendments where the tenants process comes in conflict with the Environment. As with almost everything in the lease negotiations Environmental concerns are best dealt with in advance in the Offer to Lease and not at the last minute or worse yet, after possession has been granted.

Summary: In the rush to get on with or start a business, Tenants often want to skip the Offer to Lease stage and get on with the Lease itself. Landlords as well are just as anxious to tie up the Tenant and rush to the Lease. Both parties have much to gain and little to lose by taking the time to properly evaluate the other's needs and qualifications. The Offer to Lease, carefully thought out and properly drafted, can make everyone's job in lease negotiation much less harrowing and almost enjoyable. Taking a extra little time at the start of lease negotiations to discuss your obligations, requirements and needs with a knowledgeable and experienced commercial/ industrial REALTOR is often the real secret to harmony and peace in Landlord/Tenant matters. Lawyers on both sides appreciate it when the terms of a deal are properly articulated in advance. Clear and careful negotiations make for peaceful and profitable Leases.

Terry Landon is Vice President and the Broker of Record of RE/MAX Cornwall Realty Inc., Real Estate Brokerage, a founding Director of the Real Estate Council of Ontario, Past President of the Cornwall and District Real Estate Board and a proud member of Team Cornwall.

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