Offer to Lease and Working with a Lawyer in Leasing for Commercial and Industrial Tenants

When learning about non-residential (commercial or industrial) leasing, the first thing one should note is that both the drafting and operation of such leases can be significantly different from that of residential leases. Here are some important differences between the two:

Residential Leasing:

• Governed under the Residential Tenancy Act, SBC 2002, c.78

• Conflicts are generally dealt with through the Residential Tenancy Branch (Tribunal)

• Standard form agreement available, and readily provided by the Residential Tenancy Branch

• Heavily restrictive on Landlord’s rights (eviction procedures, rights, rental increases)

Commercial and Industrial Leasing:

• Governed under the Commercial Tenancy Act, RSBC 1996, c.57

• The legislation primarily deals with the recovery of rent and is generally not intrusive on Landlord’s rights

• In effect, remedies and enforcement of commercial or industrial lease becomes almost entirely governed by contract law. It follows that the strength of a commercial or industrial lease is highly dependent on the drafting of the lease agreement

• Conflicts are typically dealt with through arbitration (if an arbitration clause is available), otherwise through courts directly

Aside from categorizing the leases based on the zoning or usage of the leased property, one can also categorize leases into two main types depending on how rent is structured under the lease:

Gross Lease

• Almost all residential leases are gross leases (as the Residential Tenancy Board standardized lease is a gross lease)

• Tenant pays a fixed rental amount, and the landlord assumes responsibility for property taxes, insurance, maintenance and repairs (and strata fees)

• Sometimes the Landlord will also assume the responsibility for some utilities (especially those that run with the land, such as water and sewage costs).

Triple Net Lease (NNN)

• Tenant pays for Base Rent + all related costs in the operation of the Premises + all insurance cost, maintenance of the leased premises (interior) and all utilities

• Sometimes the Tenant may have to contribute to structural maintenance and repairs, or capital expenditures on the structural components of the building (depending on how the lease is drafted)

• While triple net lease is the most common iteration of a "net lease", there are technically other variations where the lease is "single net" or "double net", whereby the Landlord is responsible for some of the otherwise excluded items found on a triple net lease. For example, the landlord may agree to be responsible for insurance costs, thereby making the burden of dealing with fluctuating insurance cost the landlord's responsibility (subject to the terms of the actual agreement itself; note that even in this type of example where the landlord may have agreed to deal with the insurance cost, it is common for the tenant to be responsible for any increase in premium of deductible if such is caused by the fault of the tenant.)

Here is a list of the common terms and concepts you may encounter when negotiating the terms of a lease for a client:

Base Rent, Basic Rent, Minimum Rent

• In a Triple Net Lease, this is essential the Landlord’s “Profit”.

Additional Rent

• With exception of sales Tax (GST), any amounts payable in a Triple Net Lease that is NOT Basic Rent is considered “Additional Rent”

• Note distinction with Operating Cost: Additional Rent has a broader definition and can include administration cost associated with enforcement, interest accrued on unpaid rent, reimbursement for landlord’s work, etc.

CAM (Common Area Maintenance) Cost, Operating Cost, Operating Expenditures

• Can have a variety of definitions, but will generally include, at a minimum: Landlord’s insurance costs, Property Taxes, Utilities, Common area maintenance.

• Can also include many other types of costs: bookkeeping costs, cost of employees or contractors of the landlord that are serving the Building / Project (consider mall employees); marketing costs, structural maintenance and repairs, HVAC maintenance and repairs, Equipment and Machinery maintenance and repairs, structural repairs, maintenance, capital expenditures (amortized and unamortized), interest on unamortized portions of capital expenditures, market rent of office used for employees / managers (actual or hypothetical), leasing or rental agent costs …. The list goes on.

• Takeaway: Do NOT assume each lease is the same just because they fit into the broader category of being a “triple net lease”.

Management fees (between 3% of Basic Rent to 10% of Basic + Additional Rent (excluding Management Fees)

At its core, an offer to lease should lay out whether the lease will be on a gross rental basis or a triple net rental basis, as well as the cost of rental, length of term, renewals and potential convenators or indemnitors. However, beyond these basic terms, a good agent must also consider various incentives and possible issues raising with the client:

Consider the following potential tenant inducements you can ask for (non-exhuastive list):

• Decorating Allowance – Cashback for fixturing of the Premises

• Fixturing Period – Typically a period where the Tenant is allowed occupancy without having to pay for anything except utilities.

• Rent Free Period – Typically means Basic Rent free, but operating cost still applies

• Restrictive Covenants – Restrictions on the building/plaza/mall whereby no other tenant renting the same building/plaza/mall can operate similar or competitive businesses. This would only be applicable for a larger landlord who owns the entire building / mall / plaza, and there are other tenants occupying the same building / mall / plaza.

You must also consider whether the landlord or the landlord's agent may insert any of hte following clauses which may be problematic for your client (non-exhaustive list):

• Demolition Clause – Ability for the Landlord to terminate the Lease for the purpose of demolition

• Termination on Sale Clause – Ability for the Landlord to terminate the Lease upon sale of the leased premises

• Restrictive Covenants – Restrictions on the Tenant on their specific business use, typically provided as a favour to other tenants of the building / mall / plaza.

In working with clients, it is important to instruct the client properly to ensure that the client is properly informed and that all the proper due diligence is done prior to subject removal.

Prior to subject removal date, the following due diligence and inquiries should be made:

• Title Search – Correct Owner on the registered title? Is the property held in trust (if so, what evidence do you have that the recipient of the offer to lease is really the beneficial owner of the lands? Did you see a bare trust agreement? Do the Land Owner Transparency Register information match with what is being provided?)

• Can the Premises be used for the would-be Tenant’s intended purpose? (Zoning? Suitability? Licensing Requirements?)

• What do the plans show? Any unauthorized structural components?

• Is it necessary to recommend the client to conduct an environmental investigation? Are there any prior uses that may suggest the current or prior presence of contaminants?

• Did the would-be Tenant consult a lawyer for the review of the standard form of lease?

  • a "standard form of lease" is essentially a lease template from the Landlord's representative. Reviewing this along with the offer to lease should allow the tenant's lawyer to have a good idea of what the finalized lease would look like without requiring the landlord's side to expend large sums of legal fees to draft a lease for a potential tenant that has not yet committed to leasing.

• Did you obtain a drawing of the Premises? (especially important if the leased premises is not the entirety of the lot) Consider industrial Leases, which may include usage of loading bay and yard space.

• Have you obtained relevant strata bylaws if applicable?

• Have you written or obtained the relevant information on parking?

When conducting a commercial or industrial leasing deal, the procedures should look like this:

1. Initial offer to lease with subjects

2. Due diligence and obtain standard form of lease from Landlord’s lawyer

3. Have Tenant review standard form of lease with Tenant’s lawyer, and obtain feedback from Tenant’s lawyer

4. Add in necessary terms considering the results of the due diligence and feedback from Tenant’s lawyer, and remove subjects

5. Tenant’s lawyer to finalize lease terms with Landlord’s lawyer

6. Completion when finalized lease signed

Special note that as leasing is not like “conveyance”. It is common that no funds will pass through the lawyer’s trust accounts. Please ensure that you arrange with your brokerage on how to receive your commission, as lawyers will likely not have “excess deposit” to be released.

If you are an agent for a landlord or tenant, or you yourself are a would-be tenant or a landlord, and wish to work with us, please feel free to reach us at 604-242-1578, or through the contact us page shown on the above header.