Negotiating The Commercial Lease(Slides)

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Tips and traps in commercial property leases in Alberta, Canada


<ul><li>1.Negotiating theCommercial Lease Peter Collins, Kevin Schouten, Katherine Kowalchuk </li></ul> <p>2. Seminar Focus Review of major areas of offer to lease andlease with a view to identifying commonissues and typical solutions Viewed from both Landlord and Tenantperspectives 3. Know Your Limitations Your ability to get the lease deal you wantdepends mostly on factors out of yourcontrol: Leasing market conditions Importance of tenant to the development Strength of tenants covenant 4. The Offer and the Lease Two main steps in most lease negotiations: Offer to lease/Agreement to lease Lease (a.k.a. Beauty and the Beast) 5. Offer to Lease An outline document of essential terms Can act as an interim lease if it has the fiveessentials: Parties Place Term Commencement Date Rent 6. Bridge to Lease The offer might compel tenant to signlandlords standard lease Landlord will want to preclude Tenant fromnegotiating changes to Lease Tenant will want ability to negotiate change 7. Bridge Common Stepdowns Sign standard lease, amended to include terms of Offer Stepdowns And amended to include Changes agreed to by both parties Changes of a non-financial nature requested by tenant, acting reasonably Changes of a non-financial nature requested by tenant Changes requested by tenant 8. Offer to Lease, contd. Might permit landlord to terminate if tenantdoesnt sign lease Might deem landlords presented form togovern: Until lease actually signed, or If tenant goes into possession 9. The Tenant Covenant Goal of landlord: have maximum ability torecover against Tenant and its principal(s) Financial statements of corporation Security agreement Personal guarantees from principals Security against assets of principals Letters of credit Security deposit Prepaid rent 10. The Tenant Covenant, contd Goal of Tenant: Avoid personal liability, if possible Use a corporation (preferably singlepurpose) Avoid guarantees/indemnities, if possible Or limit by time Or limit by amount Letter of credit as alternate security 11. Lease Lengthy formal comprehensive agreement Usually heavily weighted in landlords favour May carry over construction and leasestartup provisions from Offer/Agreement There is no government or CSA approvedstandard lease REALPAC has an approved form of officelease favours landlords 12. Developing the Space Tenant should: Review landlords development criteria Theme/design restrictions Review insurance requirements forconstruction/fixturing period Review contractor requirements Who chooses contractor? If landlord, must the contractors prices be competitive?(Beware Cousin Bobs Construction Co.) Union affiliation 13. Developing the Space, contd. Landlords work v. Tenants work Landlords work base building (what isincluded?) Tenants work plans approval process Fixturing period Fixed v. open for business Pay for utilities only 14. Term, Extensions and Renewals Initial term usually 5 years for retail, officeand commercial Longer initial term on full building build-to-suit Monetary risk of longer term lease tenantis locked in Shorter term lease - tenant can reducerelocation risk through extension/renewaloptions 15. Rent Three basic types: Gross rent Net rents + additional costs Percentage rents 16. Gross Rent Read the definitions carefully Should be all inclusive Landlord should pay all operating and repaircosts and taxes Tenant should pay only rent and GST 17. Net Rent Net/ triple net etc. Landlord shifts some portion of ownershipand operating costs into tenant Most leases require Tenant to pay Landlords operation costs Landlords insurance Property taxes 18. Net Rent, contd If multiple tenants pay only proportionateshare Floating proportionate share is moreaccurate than a fixed/stated percentage Landlord might exclude some tenants Anchor tenants Separate pad tenants 19. Percentage Rent Often found in retail premises leases Landlord charges a percentage of tenantsgross revenues Definition of gross revenue is flexible Tenants should beware cash flow inclusions Lotteries Vending machines 20. Percentage Rent, contd Usually subject to a (high) floor amount ofbase rent Tenant should seek to make it adjustable forrevenue fluctuations 21. Operating Expenses Three main categories Operating/administrative cost recovery Property taxes Insurance 22. Operating/Admin. Cost Recovery Typically is limited to recovery/reimbursement of actual costs tenantshould avoid surcharges Typically limited to operating, not ownership,items Typically excludes capital costs recovery Difficult to negotiate changes to Op Costsclauses with larger landlords 23. Operating/Admin. Cost Recovery Management fee tenant should ensurevalue for fee, or negotiate reduced fee Retail - typically 15% of operating costs (or 4or 5% of Rent) Industrial/commercial properties - 0 to 5% Tenant should seek to exclude admincharges if management fee charged Or, only payable when tenant is defaulting 24. Audit Provisions Tenant should seek to include right to auditthe landlords Statement of Operating Costs If Landlord grants audit right, Landlordshould limit the exercise period Tenant should seek right to audit at leastone year back 25. Audit Provisions contd. Procedure: Selection of auditor Compensation of auditor Confidentiality Audit cost who pays 26. Financial Inducements Three common major types Free rent - base or all rent? Straight inducement - cash payment onopening Tenant improvement allowance - linked toconstruction costs Excluding GST 27. Financial Inducements - contd. Notion of Net Effective Rent Is landlords financing rate better than bankslending rate? Might ease cash flow - especially on startup Potential ability to expense capital items Landlord usually wants security to recovercost of inducements 28. Use of Premises/Conduct of Business Landlords define permitted use narrowly Change of use might require consent canaffect tenants ability to sell business Controls on classiness of use Landlord will usually set hours of use, forretail leases Landlord may require continuous use -esp. in retail 29. Exclusivity Landlords are reluctant to grant exclusivity Exclusivity might be critical to tenantssuccess Exclusivity is usually narrowly defined Major tenants are often excepted Tenant should ensure it applies torenewals/extensions 30. Insurance Landlord and tenant each insure. Typically: Landlord insures building Tenant insures own (interior) premises andcontents Landlord will require extensive insurance bytenant Fire/damage Liability Rental payment/business interruption 31. Insurance, contd. Tenant should protect itself by obtaining Waiver of subrogation Waiver of cross claim Tenant should always review insurancerequirements with tenants insurance broker Change in insurability can permit landlord tocancel lease 32. Maintenance and Repairs - Landlord Landlord only liable as expressly set out inlease Landlord usually responsible for structuralrepairs Should not be recoverable as an operatingcost Landlord usually responsible for generalnon-premises repairs/maintenance Recoverable as operating cost 33. Maintenance and Repairs - Tenant Usually limited to the (interior) premises Tenant should ensure no obligation to repairstructure Restoration obligation on leaseexpiry/termination Improvements tenant should avoiddefixturing obligation Trade fixtures usually removable if tenant notin default Permanent fixtures usually not removable 34. Transfer Assignment v. sublease If lease silent, no restrictions Most leases tightly control lease transfers Can affect ability to transfer lease as part ofsale of business 35. Transfer - contd. Typical transfer control provisions include Landlords consent Approval of financial strength and characterof assignee Review and approval fee Original tenant remains liable after transfer Change of corporate ownership triggeringtransfer clause 36. Transfer - contd. Tenants should beware: Unreasonable and arbitrary withholding ofconsent Long list of tests to meet Take-back right by landlord No change of use on transfer 37. Default and Termination Landlords have extensive common lawrights Most leases expand on common law rights There is no commercial tenancy legislationin Alberta Tenants should ensure written notice ofdefault and right to cure default Match default events to lease rights (ex.,continuous use/abandonment) 38. Default and Termination, contd. Right of entry on default Default will not necessarily result intermination Landlord has no obligation to re-lease Landlord can claim rent for balance of lease Distress rights (unless/until leaseterminated) 39. Subordination and Non- Disturbance Mortgage lender wants top priority Tenant wants security of tenure Lease usually requires tenant to subordinateto lenders Quid Pro Quo get a Non-DisturbanceAgreement Lenders agree to not evict, so long as tenantnot in default Landlord covenant to obtain NDA 40. Estoppel Certificates Tenant certifies facts to thelandlord/lender/potential buyer Can result in tenant waiving claims againstlandlord Tenant should limit scope of certificateduring lease negotiations Tenant should compare requested certificateto lease obligation Nothing in it for tenant tenant shouldntgive more than tenant contracted to give 41. Lease Renewal Limits on right to exercise/timing of exercise Ensure rent is set or there is a rent-settingmechanism Definition of fair market value Improved space? What comparables? Tenant should avoid floor on renewal rent Variance from market Net effective rent issue 42. Bells and Whistles Option - expansion space Right of first refusal - expansion space Co-tenancy and right to terminate Arbitration/Mediation 43. After Lease is signed Tenant should register a caveat Not required if lease term &lt; 3 years Landlord should ensure all initial deliveries: Lease commencement certificate Proof of insurance Measurement 44. Summary Leases are usually heavily weighted against most tenants Your ability to negotiate improvements to your position is limited by many factors out of your control Keep your perspective Small tenant = small changes Small landlord + big tenant = big changes Good luck! Youll need it 45. Questions?? </p>