Commercial Leases in Quebec: What You Should Keep in Mind
What is a commercial lease?
A commercial lease is a written agreement that is made between a landlord and a commercial tenant. This agreement allows the commercial tenant to use the space provided for by the landlord for a specified period of time in exchange for payment.
The leasing process typically involves two-steps:
- It will first involve signing an offer to lease (also known as an “LOI”) whereby the main terms negotiated between the parties are included (ex. rent, space, use…etc.)
- After the negotiation of the terms of the lease are complete, the parties will sign a commercial lease containing the details of the negotiation.
What can you expect during the commercial lease process?
- The negotiation process is not expected to be short. It is normal for the parties to go back and forth several times on many points before signing the final commercial lease.
- Any agreement made between the parties should be written. Verbal agreements will not hold up in court.
- Review your lease thoroughly before signing and ensure that it is identical to the offer to lease (LOI) that was agreed upon. Additionally, have a team of professionals review your lease to ensure that it reflects the negotiations.
The main elements to consider when signing a commercial Lease
1. Know What You are Paying Rent For
Your commercial rent will most likely be based off of the size of the space and the square footage of the space. However, certain costs are often added on to your rent. In general, you will find one of the following rent calculations in your lease:
- Percentage Rent Lease: If you own a retail business, you will most likely pay your base rent along with a percentage of your sales.
Example: Your base rent is 120.00$/per square foot with 7% of the gross revenue in sales for all sales exceeding $1,300,000.00 in a calendar year.
- Gross Net Lease: With a gross net lease, the tenant will pay a flat rate (base rent) plus other specific expenses. The landlord will cover the operating costs.
- Single Net Lease (also known as “Net Lease”): In a net lease, the tenant will pay base rent and some of the taxes.
- Double Net Lease (also known as “Net-Net Lease”): In a net-net lease, the tenant will pay the base rent, taxes and insurances costs to the landlord.
- Triple Net Lease (also known as a “Net-Net-Net Lease”): In a net-net-net lease, the tenant will pay a flat rate (base rent), taxes and operating and maintenance costs.
2. Be Able Determine the Total Amount of the Lease
Once you have established the type of lease you are signing (ex. percentage rent, net-net…etc.), you should then be able to determine the total amount of your lease.
If you have for example a single net lease, you should know the total amount of base rent you are paying per month along with the amount of taxes you will be paying.
The lease may not indicate per say the exact amount in numbers. However, it should state how the amount will be calculated, if the amount will be increasing per month and if so by how much.
If you are unable to establish the amount by reading the lease, then the lease should be re-drafted to be clear on this pivotal point.
3. Length of the Lease
The commercial lease should indicate the length of the lease in years (ex. 3 years, 7 years, 10 years…etc.) or in months (ex. month-to-month).
Additionally, the lease should indicate if it will be fixed for a certain period of time or renewable once the term of the lease is up.
If this is your first commercial lease and you are a start-up business, we caution you not to sign a very long lease. As a start-up, if your business model changes or if your business closes, you will still have to abide by the lease for the length of the term. As such, we recommend that you choose a short lease for your first location.
4. Space and Services
Before signing your commercial lease, take the time to review which space and service is or is not included in your lease.
Regarding the locale that you are renting, ensure that the lease covers the actual square footage of the space. You should measure the space to confirm that you are getting the space that you are paying rent for.
Additionally, you should be able to establish which common spaces are included in your commercial lease and will be shared with the other tenants. For instance, is the usage of the lobby, bathroom…etc. included in your lease?
Finally, your lease should indicate which services are included in the lease. Is parking, heating, ventilation, air conditioning included? Will there be a cleaning service for the common areas? Will there be grass cutting, snow removal, landscaping, security? All these questions should be answered in your lease.
5. Type of Business Permitted to Operate on the Premises
Before signing your lease, it is pivotal to verify that the type of business that you will be operating is permitted in that area. It is your responsibility to ensure that you have the proper permits to operate within that select area.
For instance, if you are renting a space to open a car garage, it is possible that the municipal zoning in that area does not permit this type of business. As such, we caution our clients to contact the municipality to find out what type of business they can run in that select space and if their business qualifies. Additionally, we recommend obtaining any necessary permits before signing the lease in order to avoid any future problems.
6. Exclusivity Clause
In some cases, it is useful to negotiate an exclusivity clause within the lease. This clause would prohibit the landlord from renting another space in the building to a tenant with a similar business to yours.
For example, if you have a pharmacy, it can useful to prohibit the landlord from renting another locale in the same shopping centre to another pharmacy.
7. Lease Repairs & Improvements
- Repairs to the Property Before the Lease
Before the lease commences, we recommend doing an inspection of the property, and this especially if there was a previous tenant. During the walk through, take note of all the repairs that should be done on the property prior to obtaining possession of the locale. In general, the landlord should be providing a clean and decent shell meaning that the lights and voltage electricity should be properly functioning, the ceilings, walls and doors should be in good condition and there should be no garbage left over from a previous tenant.
At this stage, the parties will make an agreement as to what the landlord intends to repair before giving the tenant possession of the property. The agreement made with the landlord regarding these repairs should be clearly stipulated in the lease. If the landlord refuses to conduct any necessary repairs on the property before possession, then we recommend negotiating additional free rent in order to conduct those repairs yourself.
- Repairs to the Property During the Lease
The lease should clearly indicate which repairs are the responsibility of the tenant and which repairs are the responsibility of the landlord during the term of the lease.
- Lease Improvements
The lease should allow the tenant to make certain improvements to the property like installing equipment. However, the lease should indicate whose property it becomes once the lease is terminated and/or if the tenant will need to revert the property back to its original state after the termination of the lease.
8. Termination of the Lease, Sub-Letting and Transfer
- Termination
It is essential to establish which situations can allow for the termination of the lease for both the landlord and the tenant. In most cases, only the landlord will be able to terminate the lease and the tenant will have great difficulty in terminating the lease on their end.
For example, normally commercial leases will state that the landlord will be able to terminate the lease if the rent is still unpaid after one day of being due. We do not recommend signing a lease with this type of clause. Alternatively, we recommend the commercial tenant negotiate a grace period whereby they have a short period of time to pay the rent in the event of a default.
On the other hand, it can be interesting for a commercial tenant to negotiate a clause that will allow them to terminate the lease on their end. For instance, if the landlord decides to sell the building, will the tenant be able to terminate the lease? This is a clause that could be potentially negotiated into a lease.
However, as mentioned, in most cases, only the landlord will be able to terminate the lease before the term is up. It is therefore useful for the tenant to try to negotiate different situations in the lease whereby they will be able to terminate the lease.
- Subletting and Transfer
If the lease does not allow the tenant to terminate the lease on their accord, then the tenant can turn to the Civil Code of Quebec for some exit strategies. By law, the Civil Code of Quebec permits a tenant to sublet or transfer their lease. If a tenant does not have any right to terminate the lease, they can utilize this strategy to get out of the lease.
However, in some cases the lease will prohibit the tenant from subletting or transferring the lease. This would be burdensome on a commercial tenant and we do not recommend signing a lease with this type of clause.
9. Guarantee
In some cases, especially when dealing with a start-up, the landlord will require that the tenant personally guarantees themselves. As such, in the event of a default, the landlord would be able to sue the tenant personally to recover any sums that are due.
10. Revise the Offer to Lease (also known as the “LOI”) with the Lease
We always recommend our clients to review their commercial leases with the offer to lease (also known as the “LOI”). By reviewing both documents together, the tenant will be able to determine if there are any discrepancies or inconsistencies between the negotiations agreed upon and the lease.
11. Publish your Lease
The Civil Code of Quebec permits a tenant to register their lease on the Quebec land registry by way of a notice of lease. Although this step is optional, it is highly recommended as it can protect the tenant from expulsion in the event that the landlord sells the property. However, several leases can prohibit or limit what can be published on the Quebec land registry. If your lease permits a notice of lease on the property, then we recommend consulting a lawyer or notary to properly draft and register the lease on the Quebec land registry. Make sure to bring a copy of your lease with you when consulting a lawyer or notary.
To conclude, signing a commercial lease can be a difficult and arduous process. In most cases, the landlord has the upper hand on what can and what will be included in the lease. As such, we highly recommend that you consult a professional before signing a lease to ensure that you are well protected at this stage.
For more information on commercial leases, you can visit our commercial lease page.