Agreement to Lease—Commercial Section II
Chapter 7

An agreement to lease must contain all elements essential to a lease; e.g., identification of the parties, description of the premises to be leased, consideration (amount of rent) and a definite term (commencement and termination dates). The form must also provide for execution of a lease.

As with its residential counterpart, an agreement to lease is legally referred to as an agreement for lease without settled form of lease. Essentially, the lease confirms that not everything has been settled, but full and detailed consensus will be included in the lease.

All substantive or material matters must be addressed in the agreement, with only minor amendments contemplated in any final lease.

Obviously, the legal strength of an agreement to lease rests in how well that document details the understanding of the parties. The Agreement to Lease—Commercial Long Form is illustrated (see Focus: Long vs. Short Form for further discussion). Salespeople must ensure that this form (or any another other form used) is complete in all respects. Any confusion is not only a matter of legal concern, but also of poor service and lack of professionalism in drafting offers.

A tenant negotiating with a landlord who requires unique or unusual clauses in the lease is advised to seek appropriate advice, obtain the landlord’s prior approval of the lease terms and include the lease as a schedule to the agreement.

Long vs. Short Form
Focus
 

The Ontario Real Estate Association provides two commercial agreements to lease: a long form illustrated in this text (OREA Form 510) and a short form (OREA Form 511). The short form is best suited to smaller commercial buildings and straightforward leasing agreements; e.g., gross leases in older buildings. The long form is used throughout this chapter, as it contains key topic areas not found in the shorter version, such as graduated rents and additional rents/charges.

Agreement Preparation

A fully-completed Agreement to Lease—Commercial (OREA Form 510) is included showing typical information required for an office lease along with signatures. Selected clauses have been identified for additional discussion (see Preparation Guidelines). Registrants are cautioned that every real estate transaction is unique and different clause wordings are necessary to properly address buyer and seller needs. Registrants should fully discuss the drafting of agreements to lease with the broker of record and/or manager. Where appropriate, expert legal guidance should also be sought.

Additional forms relating to commercial leasing are reprinted in the Appendix.

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Preparation Guidelines

Clause 4 sets out specific rents due under the Agreement to Lease—Commercial. Following are three related topics that can impact these arrangements.

Rent-Free Period

This is a period of time granted to a tenant to occupy premises at no cost as an incentive to signing a lease. If a free rent period is negotiated, clearly identify the number of months and exactly what portion(s) of rent is free; e.g., typically base (minimum) rent only. In some leases, free rent is not specifically referred to, but is effectively provided by the difference between the date of occupancy and the date on which the rental period actually begins. In most instances, rent free periods occur in advance of the commencement date of the lease.

The phrases rent-free and at no cost require qualification. Generally, the rent-free concept applies only to base (minimum), and not additional rents. Registrants must ensure a clear understanding of exactly what is meant. Also, rent-free periods may exclude both base and additional rents, but include a flat rate payment (per square foot) for services rendered and utilities used during the installation of tenant improvements; e.g., temporary lighting, garbage facilities, maintenance, security, etc.

Rent-free periods are normally found in new commercial buildings where the landlord is seeking to rent-up (fully occupy) the building. Such periods are also common in the re-lease market when excess square footage exists within a defined market area. Rent-free periods are popular as the landlord can maintain a desired per square foot rate on leases while offering a tangible incentive to tenants. On the other hand, tenants can use rent savings to offset relocation expenses.

EXAMPLE Rent-Free Period

Tenant Smith is interested in 2,150 square feet of space in the new Anycity Executive Complex. Less than 30% of the tower is occupied and the landlord is seeking to rent-up the building. In return for signing a four-year lease with a base rent of $12.50 per square foot, Smith will receive three months rent-free occupancy (base rent only) prior to the start of the lease. The value of the rent free period is:

(2,150 x $12.50) x 3/12 = $6,718.75

Expense Stop

Landlords may include a concession relating to expenses as an inducement to the tenant. The expense stop sets out the maximum landlord contribution concerning any or all of the concessions and the tenant assumes responsibilities for applicable payments. This type of incentive improves tenant cash flow, normally for a predetermined period at the beginning of the lease.

EXAMPLE Expense Stop

Salesperson Ward is representing a commercial tenant and is comparing various offerings in Anycity. In one of the properties under consideration, Landlord Wilson is agreeing to pay for HVAC (heating, ventilation and air-conditioning), to a maximum of $4,500 yearly and, above that amount, the tenant would be responsible.

In the yearly cash flow analysis, Ward must allow for this expense stop and estimate the tenant’s HVAC expense for each year of the lease to arrive at an accurate analysis. Salesperson Ward is then in a position to compare this offering with others in the marketplace.

  Note: Cash flow analysis and comparisons are discussed in the articling course titled Real Estate Investment Analysis.
Early Occupancy

A landlord will require certain assurances in order for a tenant to obtain early occupancy (often in conjunction with a rent-free period). These will vary, but generally landlords who agree to early occupancy will require that:

  • the lease has been fully executed and any rental amounts/security deposits paid;
  • all landlord’s work is completed; and
  • the tenant provide the necessary insurance certificates as required by the lease.

EXAMPLE Early Occupancy—Sample Clause Wording

It is understood and agreed that, provided a formal lease has been executed by both the Landlord and the Tenant, and upon Tenant providing evidence of Tenant’s insurance satisfactory to the Landlord, the Tenant shall be granted possession of the demised premises on the _____ day of ________, 20___, gross rent free to the Lease Commencement Date, in order to prepare the premises for the operation of its business, provided that, during the said rent-free period, the Tenant shall comply with all the terms and conditions of the lease.

  NOTE: This Clause should be used in conjunction with an insurance clause specifically outlining insurance requirements.
GST

The preprinted wording, Clause 4, provides for GST. Do not include GST in rental amounts.

Measurements

The agreement provides that the minimum rent will be adjusted, if actual measurements differ from the approximated area. Interestingly, discrepancies between plans and as-is built dimensions can be found even in new office buildings that were built using CAD (computer aided design) systems. If potential discrepancies are anticipated, the services of a professional measurement company are strongly recommended. Any dispute will be resolved using the BOMA standard.

Usable vs. Rentable

Sometimes listing information does not clearly state whether measurements provided are rentable or usable. Clarification is always required, particularly when the lease involves base and additional rents, as the gross-up factor increases rent obligations through apportioning costs based on rentable area. For a single tenant leasing the entire premise, the discussion is somewhat academic as the tenant is paying for the gross leasable area. Also, in gross leases, the issue is obviously irrelevant.

Services

The preprinted wording begins with an option that either tenant or landlord is responsible for payment of services. Checkmark the box as required to meet individual circumstances (see Clause 6). If arrangements differ from the pre-printed statements, amend as necessary or set out correcting details in a schedule.

Additional Rent and Charges

Checkmark the box if additional rent applies. Carefully review the list of additional rent and charges with the parties to ensure agreement. Amend as needed. Keep in mind that additional rents and charges, as set out in the lease document, require careful scrutiny and expert advice is strongly advised.

Schedules

While schedules vary based on property type, at minimum, provide one copy of the floor plan including demised premises showing all sizes (including rentable and usable square footage), details of any landlord’s and/or tenant’s work, and additional terms and provisions. Often, the landlord will provide a standard set of schedules that align with the base lease used for that particular development.

Lease Document as Schedule

The inclusion of the entire lease provides further assurances that the tenant fully appreciates the obligations surrounding the proposed tenancy. Remember that the Agreement to Lease—Commercial, while generally legally enforceable in the absence of a lease, is typically viewed as a partial consensus leading to final agreement (the lease). The attachment of the lease document better insures that the tenant fully understands all substantive issues. Some landlords, particularly those involved with complex retail leases, may insist on this procedure.

Rules/Regulations as Schedule

Increasingly, landlords are inserting specific rules and regulations as a schedule to the lease, particularly for large commercial complexes.

EXAMPLE Rules/Regulations

The landlord of a multi-storey office building requires a detailed schedule to the Agreement to Lease—Commercial, outlining rules and regulations that apply to all tenants. An excerpt is provided:

The tenant will not:

  • install equipment that overloads any utility—electrical or mechanical;
  • use any device that overloads floor load capacities;
  • obstruct any portion of the building used for access or egress;
  • use any portion of the premises for lodging, sleeping or any illegal purpose;
  • canvass, solicit or peddle in or about the building;
  • use the premises for any activity that directly or indirectly involves hazardous substances; and
  • use elevators for any shipping or receiving of fixtures, furniture and equipment, except as set out by the landlord.

  Note: These shall not do’s are provided for illustration purposes only. The list can be extensive.
Landlord’s and Tenant’s Work

As an example, a schedule of landlord’s and tenant’s work might include the following:

  • The landlord will supply outline drawings showing such things as overall dimensions, cross-sections, location of rear door (if required) and entry points for heat and airconditioning, water, sewers, electricity and sprinkler layout.
  • The landlord will also specify the extent of structural finishing; e.g., framing, finished roof, concrete floor, party walls and entrance doors.
  • The tenant will submit complete drawings for the finishing of the premises; e.g., underfloor electrical or plumbing systems (if any), floor plan, ceiling plan, ductwork, electrical wiring, distribution panels, washroom facilities, interior partitions and finishing.

The schedule may also set out any special provisions; e.g., right of first refusal by landlord to complete the tenant’s work, limitations on live loads, required completion of work by tenant, compliance with provincial building code and approval of all improvements by landlord.

Signage

Be specific regarding signage location. Include references to any applicable tenant directories in lobbies, sign pylons, corridor signs at suite entrance or window signs. Signage issues can be complex, particularly when group pylon signs are involved that are located at a distance from the leased premises (e.g., a retail complex or a power centre). The preprinted form states that the tenant is responsible for signage. Tenants should be aware that such costs can include initial installation, required approvals, separate amounts levied by the landlord for freestanding pylons, ongoing maintenance and removal at the end of the lease term.

Parking

The standard wording does not provide for tenant’s exclusive use of parking spaces. If such is the case, include details by way of an attached schedule.

Need for Independent Advice

Clause 19 requires specific emphasis when negotiating an Agreement to Lease— Commercial. Make certain that the tenant and landlord clearly understand that the brokerage is not providing legal, accounting, tax or environmental advice. Also, make certain that the parties have been advised to obtain independent professional advice.

Credit Check

The standard wording for a consumer report is not included in the Agreement to Lease— Commercial. The Consumer Reporting Act defines a consumer as someone not engaged in a business, therefore, the requirements of the Act do not apply to commercial transactions. However, many agreements include a reference to a report. Insert wording if required.

Schedules and Clauses

A schedule is often needed that forms part of the Agreement to Lease—Commercial. A typical schedule is provided containing selected clauses for illustration purposes. Various clause wordings are included in the Appendix (see Guidelines for Residential and Commercial Clauses).

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