I remember when I first spotted her – she was perfect! Bright, spacious and in the perfect location. Love at first sight of what I knew would be my first retail shop in Canada. With sweaty hands I picked up the phone and started dialing the number on that “For Lease” sign. When the agent picked up, I froze and immediately hung up. I realized I had no clue what to ask for other than the price, and because I really wanted that location, I didn’t want to mess it up. Ten years and four commercial properties later, below are the things I wish I had known back then.
Lease Lingo – a quick overview
Commercial property leases are riddled with terms that could be hard to understand sometimes.
Lease: same as “rent”
Gross rent lease: you pay a single amount to the landlord that covers base rent and all incidentals. Those typically include utilities, property tax, insurance, maintenance, repairs and common area expenses, such as snow removal, janitorial services, landscaping, grass cutting and property management.
Net lease, you usually pay for the base rent plus one of the following: property taxes (most common), insurance and/or utilities. Your landlord pays for all other expenses.
Letter of Intent (or commonly referred to as LOI): a letter sent to the landlord that specifies the intent to rent the premises.
Lease Agreement: one the LOI is approved by the landlord, they send the agreement, which is a long legal document that specifies all terms and conditions. You have the right to negotiate this – always use a lawyer!
HVAC: Heating, Ventilation and Air Conditioner unit.
Leasehold improvement allowance: a fixed dollar amount per square footage that some landlords give to tenants to help improve the premises (yup, free money) – usually done when units are a brand new shell or need a lot of work.
The first answer needed is how much the lease is. For units that are part of a big commercial group, most often it will be a net lease – base annual rent per square footage plus common elements. For example, if a unit is 1,000 sq/f, the information they’ll give you will look like this:
$30 sq/ft rent + $12 sq/ft common elements = $42,000 rent per year – which amounts to $3,500 per month. It is important to note that in most of the cases, this amount will increase by a dollar or two every year or two, depending on what you negotiate in your lease.
Make sure that you also budget for what is not included in the rent – always ask to get a list of specific things that are not covered in the common elements.
Like any rental, commercial properties also require a deposit once the lease agreement is signed. They usually are the total amount of the first and last month’s rent. As commercial properties are expensive, this can add significantly to your startup costs.
Think of this as an “incentive.” Sometimes commercial properties stay vacant for a long time and the landlord might be eager to entice you to rent it. You should always ask what inducements they can provide and you might be surprised what you may get offered. Some landlords can offer two of three months of free rent, and even pay for part of your renovations through a leasehold improvement allowance.
Repair and maintenance obligations
Read this section of you lease agreement thoroughly. Read it again and understand 100% what the division of obligations for maintenance will look like. I learned this the hard way in my first leased property.
The ventilation system in any property is probably one of the most important parts of the building. It is what keeps the air quality and temperature comfortable year-round. It is also one of the most expensive pieces of equipment of any commercial property. In my first experience, I did not pay attention in this clause and 4 years after signing my lease, the HVAC unit died. Turns out the obligation of maintenance, repair and replacement of the unit was my responsibility. It was an oversight that cost me $25,000. Ouch. When negotiating the HVAC unit, landlords will usually try to put the obligation on the tenant, but negotiating a 50-50 split or even full responsibility to them is always an option.
Other things to consider:
- Who is in charge of snow removal
- Who is in charge of landscaping
- Who is in charge of door maintenance
- Who is in charge of roof maintenance
When Things Get Real
At this point, you have seen the location several times, you have talked to friends and family, you’ve made sure the rent fits within your budget – it’s time to move things forward.
There are many stories of people skipping this step in an effort to save some money. Trust me, this will be money well spent. I have heard cases where tenants were evicted after four years of building a solid business because the landlord got approached by a national chain offering to lease the space for more money. And just like that, they were forced to leave their property and close their thriving business. Avoid this and many other problems by hiring a lawyer that will look after your interest.
Letter of Intent (LOI)
This is usually a one-page letter drafted by your lawyer on your behalf and sent to the landlord. It is a time-sensitive document and usually landlords have a set amount of days to approve or deny the intent.
This is the real thing. The landlord will send you a big (big, big) document that has all the terms, conditions and even engineer/architect drawings of the unit. One key point to look at is the lease terms – are they renting it for 5 years? 10 years? What will the rent increase be year over year? Will they give you an option to renew once the term is finished? This is very important! You want to make sure this is specified so you always have an option to renew your contract once the initial one comes to an end.
I have created a free download with the top 10 questions you can ask the landlord once you are ready to call the number on that “For Lease” sign. The more you know, the better chances of securing the perfect location for your business in Canada you will have.