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What’s in Your Commercial Lease

What’s in Your Commercial Lease 

For a growing business entering into a lease for a new restaurant, bar, office, retail, or other space can be very exciting, nerve-wracking, and full of questions and concerns. Among the many things that run through an entrepreneur’s mind, costs to execute the vision for the new space are at the top.

Lease agreements are filled with complex legal items pertaining to every aspect of a space. Related to construction, we need to focus on some key items that have huge ramifications, before signing the lease agreement.

  1. Tenant Improvement Allowance

This can be one of the most significant items in a new lease. A tenant improvement allowance is an allowance intended to provide an incentive to build or renovate an existing space – but not to provide for the entire construction cost. Not to say that a complete renovation can’t be achieved with this allowance, although attempting it would likely result in significant sacrifices on the aesthetics of the finished product. This incentive is also meant to help with some added costs incurred for the use of the Landlord’s contractors – including roofing, fire alarm etc.

In many cases, a landlord provides a per square foot amount that will be reimbursed to the tenant upon completion & occupancy of the space. These rates vary significantly depending on the location (shopping mall, office tower, strip plaza etc.), size, length of lease, and type of occupancy (i.e., restaurant, retail, office etc.), and can be into the hundreds of thousands of dollars.

  1. Fixturing Period

A Landlord typically gives a month or more to the tenant to build out their new office, referred to as the fixturing period. It’s important, not just for the tenant, but the contractor. It’s the timeframe outlined in the lease whereby the rent is not charged, although the tenant has access to the space.

Often, a tenant is focused on the construction schedule & how it impacts the fixturing period without considering the time required to create permit drawings, apply for, and issue the building permit. The end goal is to ensure a minimal overlap from when rent is being charged to when construction is completed, so it’s important to attempt to extend this as close to the completion date as possible.

  1. Requirements of the Tenant

Even though the Landlord may have agreed to reimburse the Tenant for upgrades to the space, clarifying and specifying when this payment will be made is critical for cash flow. If this money is critical for contractor or supplier payments, this information should be relayed to the construction team so there are no delays due to non-payment.

There may also be particular requirements to be fulfilled by the tenant before the landlord remits payment of the tenant allowance. If there are any specific conditions, these should be addressed upfront with the construction firm to avoid additional costs. Some of these requirements could be as-built drawings, municipal certificate of construction completion, certificate of publication, consultant’s and engineer’s compliance reports, fire alarm verifications, and statutory declarations of payment, among others.

  1. The Space

It’s important to ensure there is access to existing drawings or as-built drawings (in CAD) to ensure that the contractor, architect, or interior designer has a starting point for their permit and design drawings. If they aren’t available, extra costs will be incurred to survey the building to establish areas of the space, load-bearing and immovable walls or columns, and existing electrical, plumbing, and HVAC services that would need to be altered during the renovation.

  1. Surprises

There’s one big caution to be aware of when entering into a commercial lease and that is the dreaded “as-is” clause, or maybe better stated as the “not the landlord’s problem” clause. Not to say that all landlords are trying to get something past the client, but be aware that if the lease has an as-is clause included there are a number of site conditions that can arise that will fall under the tenant’s responsibilities including flooring conditions, fire separations and other Build Code related items.

In Ontario, regardless of the as-is clause, the tenant will not be liable for any costs incurred for mould, asbestos, or any structurally related items. However, irrespective of who has the incur these hard costs – there will always be an extension in time, which adds costs on the back end.

Let’s be clear, these are a very condensed list of the many things that can make or break the experience of setting up a new location. If you’d like to know more about this or other topics related to ICI construction, please reach out or check out our other blogs, vlogs, and the podcast, “Build Our Future Podcast” by our Director of Construction, Rahul Faria, on our website at www.one-oak.ca