Top 10 Factors To Consider Before Signing An Industrial Lease

Signing a commercial or in this case an industrial lease creates a serious, long-term financial commitment. Unlike the Residential Tenancies Act which heavily protects the tenants, the Commercial Tenancies Act highly favors the landlords and bestows limited protection for commercial tenants. This article is designed to turn your mind towards some of the issues that you as a prospective tenant should consider before entering into a lease on an industrial property.

1. Offer to Lease

Depending on the size of the industrial unit and/or the specific Landlord the process of lease may involve one or all of the following steps: Letter of intent -> Offer to Lease Agreement -> Landlord’s custom long form Lease agreement.

1. The letter of intent is exactly just that. It is a short outline of the agreed-upon principal business terms, such as the rental rate, the length of the term, options to renew or extend the term, and right to transfer the lease agreement. The letter of intent is supposed to be non-binding, but you have to be careful.
2. The next step is to submit an offer to lease. Many offers to lease include an agreement whereby “the Tenant agrees to enter into the Landlord’s standard form of Lease”. You must delete this provision. Instead, you want to insert a sentence stating that “the offer to lease is conditional upon the landlord and tenant entering into a formal lease that sets out terms and conditions that are acceptable to both the landlord and tenant.”
3. This simple change to the offer to lease is crucial. It enables the tenant to negotiate a better lease for him or herself, rather than being forced to sign whatever the Landlord gives to you.
4. Once the Landlord delivers the formal, long-form lease agreement to you after signing the offer to lease, you need to begin thinking about what kinds of changes you want to negotiate for.

2. Physical Requirements of Your Business

1. Consider the physical requirements of your business
2. What is the configuration of space you require: clear height, clear span, do you require a loading dock or drive in door? And their sizes.
3. How much space do you really require? is it really 10,000 sqf? Can you get by with 5000 sqf? Recent trend in industrial is going vertical. With help of fork lifts and other equipment handling vehicles, businesses are choosing higher ceiling industrial units to save overhead costs.
4. Opposite consideration is how much space do you need now vs the future. Will you be expanding? Will you need the space within the same building or your business will be fine with moving to a different building.
5. What are other unique features that you require or could use for your business to maximize the commercial value of your location. For example, if you are running a trucking business that requires continual access to a significant portion of the parking lot, this should be discussed with the landlord and accounted for in the lease.
6. You want to be thinking about these kinds of business viability issues and raising them with us, so we may coordinate with your legal representative to translate these concerns into the lease agreement and represent you in the best form with landlord.

3. Operating Costs

1. Unlike other commercial properties, industrial properties have significantly lower operating expenses, however they do have operating expenses. These operating expenses are otherwise referred to as TMI (Taxes, Maintenance, Insurance) or simply as additional rent. These operating expenses require the tenants to contribute toward the landlord’s cost to operate, maintain the building within which the lease premises are located. At times these may represent a significant chunk of your rent.
2. That’s fine, its an understood aspect of leasing an industrial unit. However, what you may not want to occur, is to pay more than your share of rent. As a result, it is best to ensure the lease to include positive provisions that require the landlord to provide reasonable supporting documents and information to support landlord’s calculation of the operating expenses as well as to respond to Tenants questions with respect to them.
3. For example: When the landlord is fixing the roof, he has the right to recover these expenses within the additional expense. However, this must be done amortized over the useful life span of the roof. This will avoid a tenant with limited terms to bear major costs but derive very little benefit from the expenditure.

4. Repair Obligations

1. The operating expenses as discussed above is a vital consideration to give. Within the TMI, the taxes and insurance costs and responsibilities are easily determined and verifiable. However, general contention occurs with the maintenance of the TMI.
2. The repair and maintenance responsibilities generally depend on the type of lease, such as gross lease, net lease, triple net lease, however irrespective of the type of lease, the general consideration to give in this regard is to ensure there is no ambiguity or gap in the allocation of responsibility between the Landlord and the Tenant.
3. Sometimes a lease may not contain or clearly specify the Landlords obligations towards repairs or maintenance, or the obligations are kept ambiguous. This leaves unclear who is responsible for certain elements of a building. In such cases, it is important to amend the lease to illuminate these ambiguities to avoid future headaches and problems both for the landlord and for the tenant.
4. Generally speaking, the Landlord should be obligated to perform repairs and maintenance as related to the foundation, structure and roof of the building to an agreed-upon standard, such as that of a prudent owner of a similar property.
5. The Tenant is generally responsible for repair and maintenance within their unit. However, what is important to consider in the lease, is that their obligations are subject to reasonable wear and tear, and the standard of the repair is reasonable in light of the quality, condition and age of the building.

5. Insurance

1. Insurance provisions in industrial leasing’s are complex and beyond the scope of simple presentation such as this, however here are a few tips for you to consider while negotiating a lease.
2. Depending on your business, you may require additional insurance protecting both you and the building. For example, if you are operating a wood working unit, what happens in the case when small fragments of wood accumulate and get dislodged in other parts of the building, or if your business may potentially contaminate other units within the industrial building.
3. Consult with your lawyer as well as insurance consultant to both review the insurance requirements of the lease and of your business.
4. The Landlord will have insurance of his own. Tenants should negotiate for a provision in the Lease stating “the tenant is released in respect of damage or loss suffered by the Landlord which is covered under any of the property damage insurance policies that the Landlord is required to carry or otherwise carries.”
5. Most tenants will carry business interruption insurance in case of unforeseen circumstances that prevent the tenant from carrying on their business during the term of the lease. Tenants should negotiate for a provision in the lease stating that in the event that business interruption insurance expires (EG — after 12 months) and they still cannot carry on their business, the rent should be forgiven or reduced until they are able to start conducting business again.

6. Subletting and assignments?

1. Subletting: Leasing the property to a sub-tenant OR Assignment transferring of the lease to another party is a powerful tool at the disposal of a Tenant for the worst case scenario to mitigate your damages.
2. Your Landlord is not allowed to unreasonably withhold consent to a transfer of your Lease. If you find yourself in trouble, start making efforts to do this immediately. Gather as much information about the prospective tenant as you can and forward it to your Landlord asking for permission. Do this early and often (in writing) once you decide that you can no longer afford the Lease. If the Landlord refuses to cooperate with your efforts to find a new Tenant, you may be able to get off the hook.
3. When you are negotiating the Lease, try to avoid agreeing to a term that allows the Landlord to raise the rent in the event of a transfer of the Lease.

7. EVENTS OF DEFAULT

1. Majority of leases contains a clause known as Events of Default. These are the certain “events” that need to occur where the Landlord becomes entitled to terminate the lease. As a result, reviewing these provisions is paramount to make sure you are both familiar and understand the various situation where the landlord can terminate the agreement on you.
2. Certain times these provisions could be uncontrollable situations by the Tenants. Such as redevelopment of the building, or combining multiple units with an industrial condo to welcome a larger tenant in the future.
3. Other default provisions are related to the Tenant, such us non payment of rent. Tenants should resist a term that allows the Landlord to terminate the lease without notice, for instance, in the event of non-payment of rent. In order to avoid a situation whereby a tenant is in default simply because someone in the Tenant’s mailroom forgot to mail the cheques, these provisions should include a cure period and notice requirements.
4. The Landlord should be required to give written notice of any default by the Tenant and a period of time (EG — fourteen days) for the tenant to remedy the situation before the Landlord is allowed to come in and change your locks.

8. Extension Clauses

1. Many industrial leases contain extension clauses that the Tenant may exercise at the end of term. There are a few considerations to give in this regards.
2. First of all, when this can be exercised is provisioned in the lease, i.e. 6 months before the termination of the lease, and if you do not exercise it, you loose your right. Pay extra attention to these dates towards the end of your tenancy.
3. Secondly, consider the agreed upon rent for the extension term. Consider whether you want to negotiate this now or use a phrase such as “fair market value” which can be negotiated at the time of the extension.
4. In a “fair market value” situation, make sure to add a clause to go to arbitration in the event of disagreement of “fair market value”

9. INDEMNITY AGREEMENT

1. Certain Landlords may push an indemnity provision within their lease. As a tenant, if there is one thing you could get rid of, it should be the indemnity agreement.
2. Indemnity Agreement holds the signee personally responsible for the Tenancy even if the Tenant is a corporation

10. SURRENDER/RESTORATION

1. Landlords typically have a surrender/restoration provision within the lease agreement. This provision dictates the condition of the property the Tenant is responsible to restore to. This typically involves removals of all leasehold improvements, or generally the premises should be brought back to the “base building condition” or “shell” condition.
2. This is generally a serious concern for the Tenant as the restoration and removal obligations can be extremely costly both financially as well as time wise. All the while the Tenant is turning its mind to transitioning its business to a new location.
3. Tenant’s should try to negotiate out of their restoration obligations.
4. Alternatively, a compromise position is the removal at the end of the term of those leasehold improvements installed by or on the tenant’s behalf. The advantage of this step-down is that the tenant is not obligated to remove leasehold improvements installed by the previous tenants, nor restore the leased premises back to base building condition.
5. Another useful compromise term is one that requires the tenant to only remove leasehold improvements which the landlord has indicated at the time it grants its consent to the installation of such leasehold improvements that it will require to be remove at the end of the term. This provides the tenant with the opportunity to perform the cost-benefit analysis as to whether it wishes to install the leasehold improvement in the first place, bearing in mind the end of term cost to remove such item.