Wednesday, January 27th, 2021

Leasing Retail Space: the good, the bad and the scary

By Chris Green on Nov 03 2010 • Filed under Chris Green's Legal Basics

All of us have been tenants at one time or other, whether it was a shared house during college, or our very first apartment after leaving home, so we all think we know a little bit about Landlord Tenant Law.

Unfortunately, what we know a little bit about is the law relating to residential tenancies: social policy legislation which is designed to protect the rights of the disadvantaged, and that little bit of knowledge is truly a dangerous thing once you dip your toe into the waters of commercial leasing.

If you intend to run a retail operation the very first thing you need to do is to forget everything you thought you knew about Landlord Tenant Law.

The basic principles of commercial leasing have changed very little since the time of Charles Dickens, and most assuredly in Dickens time there was no such thing as tenants rights. Commercial leases are drafted by the landlord, for the landlord, and are unfettered by social policy concerns.

New retailers are sometimes shocked to find that there is no automatic grace period for the payment of rent. Residential tenants can lead a landlord on a merry dance for weeks before the payment of rent becomes critical. Not so in a commercial setting. The rent is due in full and on time on the due date, and the landlord is completely entitled to padlock your premises and seize your goods if you are a moment late. A commercial landlord does not have to go, cap in hand, to the Residential Tenancies Branch for an eviction order, he simply has to send in the bailiff.

Another rude awakening for the retailer is the fact that the landlord can seize goods and have them sold in order to recoup unpaid rent. This is unheard of in a residential situation, but common place in a retail setting. The landlord can also tack his bailiff fees on top of the claim for rent, so you can safely add another $800 to the total owed if the bailiff arrives on your doorstep.

Even the basis upon which rent is paid is different in a commercial setting. Basic rent is typically calculated as an annual amount per square foot of lease space, so in response to an inquiry a leasing agent will often tell you " it's $15 per square." Unfortunately, that is only the beginning of the payments which the tenant will be expected to make. Most commercial leases are "triple net" leases, which essentially means that the rental return to the landlord is intended to be met of all of the operating expenses for the building. In other words, in addition to paying rent, the tenet is expected to pay all or most of the landlord's operating costs as well.

These costs, sometimes also referred to as "common area maintenance" or "CAM" costs, are allocated on a pro rata basis amongst all of the tenants in a commercial building. These costs can include insurance, security, janitorial services, waste removal, property taxes, and so forth. Typically these costs are estimated by the landlord, who asks for a monthly contribution towards them by way of "additional rent."

Lastly, tenants are sometimes required to pay "percentage rent" over and above their basic rent and their share of the operating costs. Percentage rent refers to a percentage of the tenant's gross sales. For many retailers the price of being allowed in a major regional shopping centre is the payment of percentage rent on their gross sales.

A commercial lease is about the closest thing we have nowadays to an ironclad contract that can't be gotten out of. Once the lease is signed, you are obligated to pay rent (and additional rent, and percentage rent) for the term of the lease, notwithstanding that the business has close its doors, or that the tenant herself has died. So, for example, if you sign a five-year lease at $5000 a month and your business has to close the doors after the first month, you still have an obligation to pay the full amount of the lease (which in this example totals $300,000). This is usually enforceable against you AND your estate, so dying does not erase the debt.

A commercial lease is about the closest thing we have nowadays to an ironclad contract that can't be gotten out of.

This makes for an interesting decision-making matrix. The longer the lease the greater your total obligation and your risk, but if you've managed to secure primo space that enhances your business, your only means to protect your location is by locking down the longest lease you can.

Finding the right location and negotiating the right lease is a true "make it or break it" proposition for any retailer, so take the time to do it right. Have a lawyer review the terms of the offer to lease BEFORE you sign it, and then have the lawyer review the formal lease document which follows.

Oh, and bear in mind one further wrinkle that distinguishes retail leases from their residential counterpart. Typically a commercial leasing transaction begins with a short, relatively informal document known as an "Offer to Lease" which sets out the essential terms of the transaction; rent, term, renewal options etc. which is then followed by a formal lease. Make no mistake however, an Offer to Lease is a seriously binding legal document, and you can be held strictly to its terms.

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