Ever wonder how tenants and landlords coincide for 5, 10, or sometimes even 20 years together? Cory welcomes Scott McInnes founder of McInnes Law Group breaking down what a commercial lease is, how it applies to commercial real estate and how it differs from residential leases. Scott walks you through what you need to know whether you are looking to become a landlord, a tenant looking to open your first business and how COVID 19 has impacted commercial leases forever plus our best MLG 6-pack yet………Mobb Deep anyone? If you have ever thought of investing in commercial real estate this is a must listen to episode.
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Tell us about yourself.
I’m a lawyer and was called in 2019. I articled in a big downtown law firm and then began practicing in a smaller two-lawyer law firm in North Burnaby. I just opened my own practice in 2021.
What is a commercial lease?
A lease of any kind grants the right of the tenant to the exclusive use and enjoyment of the property. What makes it different with commercial leases is commercial leases aren’t constrained by statutes, like the BC Residential Tenancy Act. The BC Residential Tenancy Act has very strict rules for residential leases but we don’t have that for commercial leases. There are some rules and regulations but not to the same extent as in residential.
A residential home is a lease for where a family lives. The rules help to protect families because there is a power imbalance. In the commercial context, it’s more open ended. A commercial lease is an agreement that governs the rights between landlord and tenant for a commercial property. That will be your bible for moving forward with your relationship between landlord and tenant.
Is there a government entity regulating the commercial space?
No, not really. If you have a schedule of rules and regulations in your commercial lease, you can put in the rights and remedies a landlord has if a tenant violates those rules. The power for landlords is much broader. It’s up to the parties’ agreement.
Oftentimes tenants will have a lease reviewed to ensure things like immediate termination aren’t in there. But that’s what makes commercial leasing so interesting. It’s very open to negotiation and you’ll see the power dynamic play out.
On the residential side, it seems like the rules are in favour of the tenant with evictions taking months. It seems different on the commercial side. Can you kick a tenant out sooner than you could in residential?
It depends on the type of breach. There is nobody that governs commercial leasing like there is with residential leasing. There’s no commercial tenancy branch where you’d have to file notice.
Is there an instance in commercial real estate where you wouldn’t need a lawyer to draw up a lease?
I’m not a neutral party on that. But I’d never suggest trying to tackle commercial leasing on your own, whether you’re a landlord or a tenant. These documents are very complex; the difference between a couple of words can mean a large amount of money. Even lawyers who don’t have commercial leasing experience will struggle through these documents. It takes a skilled eye to draft these documents.
What costs are we looking at to have a lawyer involved in a commercial lease?
It’s difficult to provide a ballpark price because there’s a lot of variance between firms and between properties. I like to work on a set fee which I think clients appreciate. You can expect to pay anywhere from $850-2000 or beyond for drafting a commercial lease. Reviewing would be a different rate depending on the complexity and the firm involved.
How long are these leases for?
The tenant has the opportunity to offer the term that they want at the price that they want. The hotter the market, the longer the lease term will likely be. With industrial, five years ago we were seeing 1-3 year leases. But now because demand has risen, we’re seeing 3-10 year leases. Generally speaking, you won’t see a lease for less than two years but you may see up to 15 years.
Landlords look for security. If they can get a tenant they believe in, landlords want them in there for 10 years or longer.
Is there any benefit to being a tenant in the commercial space or is it just beneficial for landlords?
In terms of the power dynamic, being a commercial landlord is far more advantageous, even if the tenant is able to negotiate down a lot of the provisions in a lease.
Is there one commercial lease out there? Or is every lease different?
Each lease is different. The reason there’s one residential lease just shows you how constrained the rules are with residential tenancy. In the commercial context, lawyers are drafting leases from scratch. And that’s what drives up the costs for tenants because we have to review these long leases. No two leases look the same.
Throughout covid we saw the ability for rent deferral on the residential side. Was there anything like that on the commercial side?
There was a government program that came out where landlords could enter into rent reduction agreements with tenants. They had to be specific and use the government’s form. For four months the landlord would agree to receive 25% of the monthly rent from the tenants, the government would pay 50% and the landlord would eat the remaining 25%.
The landlords had to give their tenants a break of a minimum of 75% but some landlords were offering free rent.
What happens if you’re a tenant in the middle of a lease and you want to walk away?
Generally speaking, the landlord has a few rights. First ,if the tenant does not take their stuff, the landlord can seize their goods and property. The next thing the landlord could do is terminate and re-enter the lease. The landlord would have to find a replacement tenant and the current tenant is liable for all the months that the property sits empty. Lastly, the landlord could affirm the lease, suing the tenant for the amount that is due.
If a tenant is entering into a lease in the middle of a pandemic, is there any protection on the landlord’s side? What about force majeure?
Force majeure clauses allow for an event to occur that was not within the control of the parties and prevents one of them from fulfilling the obligations set out in the lease. Those obligations would be suspended until the unforeseen event is over. Sometimes that helps tenants but other times, depending on the wording of the clause, it may not help.
Examples would be war, strikes, embargos, acts of god, etc. But it all depends on the wording. If a tenant entered into a lease during a pandemic, that would no longer be an unforeseen event so force majeure is unlikely to be applicable.
What are some tips for someone just starting out as a commercial landlord?
Hire a lawyer to get your lease done. I know landlords care about the bottom line but don’t skimp on the lease itself. Secondly, do your due diligence on your tenants. Review their financials and make sure you have a personal guarantee.
Lastly, think about how you want to structure your lease. There are generally two types of leases: a gross lease where the landlord wants $5000/month or a net lease where the landlord wants to walk away with $3000 and charges any other expenses and maintenance to the tenant. That allows for the contemplation of unforeseen costs.
What’s the difference between a guarantor and an indemnitor?
A guarantee is a secondary obligation. Only when the corporate tenant defaults does a guarantor arise. If you try to collect and the tenant doesn’t have it, then you can go to the guarantor. An indemnitor would have simultaneous obligations – you don’t have to go after the tenant first. You can sue them all together.
What about leases drawn up by the tenants?
We’ve talked about a landlord lease. But sometimes landlords will enter into a lease that the tenant drafts, such as entering into a lease with Starbucks or McDonald’s. The tenant may have a termination clause and be able to serve you notice. From a landlord’s perspective, it can be scary. If you’re a local investor and Starbucks calls and says they’re not paying rent, what can you do? That’s why bigger isn’t always better.
Do you need a team in commercial real estate?
Having a good team is everything. A lawyer from day one is going to prepare the lease and protect your interests. An insurance person will ensure you have proper coverage. You’ll also need a good mortgage broker, good accounting advice, a commercial broker, and a commercial property manager.
I can’t stress enough how important it is to get a lease properly drafted, if you’re a landlord, or properly reviewed, if you’re a tenant. This is a multi-year partnership you’re entering into. Life is unpredictable. Spend the extra money to ensure you’re protected from day one; it’ll probably be the best money you’ve ever spent.
For more information https://mlglaw.ca/