Commercial Leases: 5 things to check before signing

1. Maintenance and repairs: who pays for what?

Tread carefully, the pitfalls are everywhere! A leaky roof, broken furnace in the dead of winter, burst pipes... who foots the bill? It all depends on the lease.

It's often assumed that:

• The lessee (tenant) handles routine maintenance (cleaning, minor repairs, seasonal maintenance, wear and tear).
• The lessor (landlord) handles major repairs (roof, foundation, load-bearing walls, essential systems such as heating, air conditioning, plumbing, electricity).

But be careful! When it comes to commercial leases, nothing should be left to interpretation, everything has to be written down.

2. The roles of the lessor and lessee

Lessors want to protect their buildings. Lessees want to protect their businesses. The lease must therefore clearly reflect this.

In general, the lessor will have a comprehensive insurance policy to cover the:

• building’s structure (walls, roof, foundations, fixed installations)
• common areas (entrances, stairways and elevators)
• civil liability (accidents and injuries)

This policy will not cover the lessee’s property, business operations or any improvements they may have paid for. That is why it’s important that your coverage, as lessee, meet the requirements of the lease and protect your business.

Your commercial insurance should therefore cover:

• the contents of the premises (furniture, equipment, merchandise) and any improvements you have paid for
• civil liability in the event of property damage or bodily injury caused to others
• business interruption to compensate for loss of income in the event of a temporary shutdown of operations
• damage caused by you to the leased premises

Some leases go further and impose specific conditions such as:

• proof of insurance upon signing, and then annually thereafter
• a minimum amount of civil liability insurance
• adding the lessor as an additional insured on the policy

Beyond the lease, your insurer may want your coverage to apply to all your actual activities and not just the minimum requirements.

3. Risky clauses: watch out for hidden expenses

A cheap commercial lease can come with hidden expenses. Before signing, ask for a detailed list of operating costs and utilities. Check the lease indexation (escalation) clause to see if there is a cap or limit. This can make all the difference between an affordable lease and one that drains your finances.

Operating expenses

In many leases, specifically single net, double net and triple net leases, the lessee pays a base rent plus at least one of the building's expenses:

• Maintenance (parking, hallways, stairways, elevators, snow removal, lighting, security, etc.)
• Property taxes (municipal or school taxes)
• Insurance

In a gross lease, the lessor covers most or all of the property’s operating expenses. The more "net" expenses are added to the lease, the higher the rent.

Indexation (escalation) clause

Many leases stipulate automatic rent increases to keep pace with specific economic factors. Rate increases can be based on an annual percentage, linked to the consumer price index or based on other indicators, which means that your rent could increase faster than expected.

4. Lease termination and transfers: what are your options?

Commercial leases are rarely short term, typically spanning three to 10 years, with a number of renewal options. However, business needs can change quickly as a result of declining sales, the need for more space, strategic relocation, closure, etc. What are your options for breaking a lease?

Early termination is not automatic

In general, commercial leases can be terminated when the lessor agrees to it or there is a termination clause. If not, then there will be notice periods, penalties or very specific obligations.

When there is nothing in writing, you will have to negotiate directly with the lessor. And nothing guarantees that they will agree.

You should also be aware that some lessors reserve the right to terminate the lease under certain circumstances. You want to avoid having to deal with conditions that are for your business.

Assignment or subletting

When the space no longer suits your needs, assignment or subletting may be a solution. Nevertheless, this must have been provided for in the lease. Some leases strictly prohibit assignment and subletting, and may impose very specific conditions on them.

Assignment and subletting are not the same

• Assignment is the transfer of the lease to a new occupant, who takes over your rights and obligations.
• Subletting is renting the space to another a third party, while remaining responsible for it.

5. The trap of rushing into things

When dealing with a lessor who pressures you to sign or when vying for a coveted location, it's tempting to not want to get bogged down in the details.

However, it’s important to take a step back. If necessary, speak to the experts:

• A lawyer can explain your rights and obligations, and point out the risks associated with certain clauses.
• An insurance agent can verify that your commercial insurance coverage satisfies the requirements of the lease and suggest coverage tailored to your activities.

Remember that a poorly negotiated commercial lease can jeopardize years of effort. Reading and understanding each clause is not a waste of time—see it as financial protection. The clearer your obligations are, the more energy you can devote to growing your business.