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Are you caught in a commercial lease trap?

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  • Are you caught in a commercial lease trap?

It has been a tough year for some business owners. The other day, I took my fifth call in six weeks from a business owner who just found out at that their commercial lease has a ‘pass-through’ clause, meaning their landlord assesses them all property taxes associated with the facility they are leasing, on top of the monthly rent they’re already paying. 

In cities where property tax rates jumped between 20-70% over the last year, the results of this are catastrophic. Each and every one of these callers stated the very real possibility of having to close their business as a result. 

The reality is that most small businesses just can’t absorb a hit like this, of up to tens of thousands of dollars. Certainly not when they don’t even know it’s coming.

Be careful with contracts

Unlike residential leases, which are tightly regulated, there isn’t nearly as much legislation surrounding their commercial counterparts. While less legislation (and often less red tape) is usually a good thing, in this case it also means fewer protections for tenants. 

This means we have to refer back to the original contract to determine what rules govern the relationship. This is why it is critical to read the monotonous, and often difficult to understand, commercial lease contracts extremely carefully, and always have a lawyer review before signing.

What should you watch out for?
Be leery of any clauses which don’t address specific amounts and times (like this pass-through clause), and consider:

  • Length: How long are you assured control of the premises if you sign?
  • Costs: What are the general costs associated with the lease? 
  • Hint: Whenever you see unfamiliar terms or clauses, usually extra costs are involved. Look for "net costs/net costs/triple net costs" and know what they mean.
  • Responsibilities (i.e. more costs): What is covered and who pays for insurance to protect your business from fire, slip and fall or structural damage? What about shared costs for hallways and heating? Does the lease include the costs of the night watchman? Are taxes included?
  • Penalties (i.e. more costs, again): Unexpected circumstances could force you to cancel your lease. If so, would there be a penalty? In some cases you would be required to pay all costs that would have been incurred as if you had completed the term of the lease.

When in doubt, call a lawyer

While every province has legislation that covers commercial leases, little protection is offered beyond what is in the lease itself. Ask your lawyer what protections are afforded by such legislation should you ever need to rely on its provisions.

Why use a lawyer? A lawyer can help you understand the terms, implications and potential liabilities contained in the lease. 

Even more important is that the advice given by a lawyer is supported by the provincial law society and its insurance policy: were you to be given bad commercial lease advice and act on it to your harm, you could ask the law society for a possible remedy. Without a lawyer, you are on your own.