Caring For Your Commercial Lease

You have successfully negotiated a Lease for your Practice, but that does not mean that you can just put it away and forget about it. Your Lease and your relationship with your Landlord require care and attention throughout the term of your Lease and particularly at certain critical milestones.

As a practice owner and commercial tenant, your premises lease is one of the most significant assets of your Practice. It can also be a significant liability if you do not secure essential terms and maintain your Landlord relationship, which both serve to underpin the value of your Practice.

Looking Back
Though beyond the scope of this article, hopefully your Lease was well negotiated in the first instance, with the following points covered:

Sufficient terms and renewals
No demolition rights for the Landlord (or at least a freeze on such rights for a sufficient period of time and compensation in the event of termination)
No right of the Landlord to relocate your Practice (or alternatively, relocation at the cost of the Landlord to a premises of similar size, access and visibility)
No recapture rights of the Landlord (being the right of the Landlord to terminate the Lease in the event of a request for an assignment of your Lease (i.e. sale of your Practice))
Exclusivity for your use (and perhaps for broader uses, such as specialties and dental hygiene), except for medical / dental buildings
Clear, unambiguous and valid renewal rights with clear methodologies for determining rent (or alternatively, a clear dispute resolution mechanism)
Clear and unqualified rights of assignment (in the event of the sale of your Practice)
First right-of-refusal for adjacent space (if desired or beneficial)
First right-of-refusal to purchase the Landlord’s property (if desired)

Ongoing Matters
Throughout the term of your Lease (and any renewals), there are matters that will require your attention on an ongoing basis, or as they arise. A few examples would include:

Review Additional Rent
In the event that you have entered into a “triple net lease”, you have agreed to also pay “Additional Rent”, which could include such items as the Tenant’s proportionate share of common area maintenance and operating costs, utilities consumed in the premises, realty taxes applicable to the premises, insurance premiums, promotion and advertising, heating ventilating and air conditioning, legal and audit costs, and administration fees. These fees can add up to be greater than the net rent. They are typically passed through to the tenant on a pro rata bases based on square footage. While leases often require the Landlord to provide a summary of Additional Rent for the past and upcoming year, it is prudent to request such an accounting every year, review the line items and request any clarifications that you might require.

Keep Record of Landlord Defaults
It is important to put the Landlord on notice in writing of any failure on their part to fulfill their obligations and require their action to address the matter. Not only is it helpful to have a clear written record of any such default, it is also evidence that you have not acquiesced to the Landlord’s acts (or failure to act).

Estoppel Certificates
Your Landlord may at some point present a document to you for your signature called an “Estoppel Certificate”. This may happen when the Landlord is refinancing or selling the property. Estoppel Certificates basically set forth and confirm key terms of the Lease and are intended to “estop” a party who signs the Certificate from thereafter asserting a fact inconsistent with what is set out in the Certificate (including whether there has been or is a Landlord default). There are factors to consider when determining whether signing an Estoppel Certificate may prejudice you, so you should have your lawyer review the document before signing.

Looking Forward – Lease Renewals and Assignments
Also important is how you manage your Lease on an ongoing basis and very importantly, that you preserve an unfettered right to remain in the premises and ensure that the terms of your Lease are consistent with your business, personal and professional objectives. Further, if any of the above points were not attained and are important going forward, the renewal process may be an opportunity to renegotiate certain terms.

Make a Note of Your Renewal Deadlines
Most Leases provide for a window during which you must deliver notice of your renewal, failing which you may lose that right. Make a note of the dates and contact your lawyer well in advance of the window or deadline. It is not every lawyer’s practice to track renewal dates, so be sure that you keep track of this.

Speak to Your Advisors
With the passage of time, your business priorities will change and it is very important that your Lease (and its terms) is consistent with your priorities and objectives.

As you approach the end of the current term of your Lease (typically every 5 years), you should examine your medium and long term objectives, as that may dictate to some degree the terms and conditions under your Lease that deserve greater attention.

If you are in your prime years and perhaps contemplating significant capital or leasehold investments, you will wish to be sure that you are able to remain in the premises for a period long enough to justify your investment.

If you are approaching your sunset years (ie the sale of your Practice), it is critical that you are able to offer your Practice to prospective purchasers with long term security (ie sufficient renewals). Lenders almost invariably require purchasers (borrowers) to secure a Lease with terms and renewals being not less than the term of the loan (often 10 years). Purchasers themselves may require even more time to make their investment viable.

If in either of the above cases you find yourself at an impasse with your Landlord, you may regrettably need to consider other options.

Research the Market (know your options)
There is no better leverage in negotiations than having options. In order to assert negotiating strength, you need to have a clear idea of what your options are. To that end, rigorous research of available comparable space in your area (as well as locations of your potential competition) is critical. You should also determine what fair market rent is in the immediate area for comparable locations.

Your Approach to the Landlord
One big rule to remember is to never exercise your last option to renew. What this means is that you could experience a significant loss of negotiating leverage if you find yourself approaching the end of your Lease without additional renewals. One possible approach is to contact your Landlord (preferably through your lawyer) on an exploratory basis, seeking their agreement to provide you with additional renewal options (and perhaps other changes to your Lease) if you formally exercise your upcoming option. This approach, if taken well in advance of the end of your current term and if you are armed with market research, should send a message to the Landlord that you have other options that you may pursue. Sometimes Landlords will show more flexibility if they understand that they may lose a good tenant.

Your (pre) renewal discussions may also be an opportunity to address other areas of concern that you may have missed in the initial negotiations, or areas that may have become more significant with the passage of time.

The foregoing are only examples of many aspects of your lease that may require your attention. Speak to your advisors.

Disclaimer
Please note that the information in this article is NOT to be treated as legal advice and is provided for information purposes only.

About the Author
John McMillan, LL.B. is a Toronto corporate/commercial lawyer serving health professionals. He can be reached at 416-364-4771 or johnmcmillan@bellnet.ca

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