Real Estate Talk:
Commercial lease basics

Commercial and retail leases – how they work

By Joseph Marovitch

October 14, 2021

A client wants to rent a commercial space for a business endeavour, such as a restaurant or clothing store. At first, the client visits spaces for rent. The spaces are between 1500 and 2000 square feet. The owners of these spaces, called landlords, respectively indicate their spaces are $25 to $50 per square foot. What does $25 per square foot include? For that matter, what does it mean?

$25 per sf x 1500 sf space = $37,500 per year /12 months = $3,150 per month (plus GST and PST which are refunded quarterly)

When one rents a commercial retail space, one must find out what the rent is and the additional rent before deciding to sign the lease.

The potential renter says that would be fine and agrees to sign a lease. When the prospective renter examines the lease, one clause states the rent is $3,150 per month for the first year. The next paragraph states the rent is $3,250 for each month of the following year. The renter notices there are annual rent increases like any other business dealing with rising costs and inflation.

When one rents a commercial retail space, one must find out what the rent is and the additional rent before deciding to sign the lease.

RENT

ADDITIONAL RENT

Now the renter, called the lessee, and the landlord, called the lessor, have agreed on the price, but what about the terms?

Terms include:

• Number of years the lessee will rent the space
  .
• Will there be a renewal clause indicating the lessee’s right to renew the lease after it expires, and for how long?
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• Will the lessee have time to prepare the space in which they intend to operate a business? Must the lessee pay full rent while they prepare the space and are not operating with income? Standard practice is for the lessor to permit the lessee time to prepare the space dependant upon the term of the lease and the amount of money the lessee intends to invest in the rented space. This period of preparation is called fixturing. During this time, it is agreed the lessee will not pay base rent. However, as the lessee is consuming in the space, the lessee is usually required to pay the electricity and taxes.

There is much more involved in commercial leasing such as protocol for default payments, insurances required, guarantees the lessee must provide, rules to follow, and much more. If one intends to rent a commercial space, I highly advise using a commercial broker, and/or lawyer, and/or notary, but someone to protect your interest. The least expensive person who will protect your interest is a good commercial broker.

‘If one intends to rent a commercial space, I highly advise using a commercial broker, and/or lawyer, and/or notary, but someone to protect your interest.’

Should you have questions or comments, please refer to the comments section at the bottom of the page. As well, to view past articles, click here.

Next article: Market forecast for 2022

State of the market

The market is in a state! What is heard most is the market is surging and prices are rising across Canada. I am told over and over, “business must be good because prices are high, and everyone wants a property.”

‘The market will remain this way until the virus is eradicated and people move about and spend capital, causing interest rates to rise.’

What is also heard, but not as much or as loud, is the reason the market prices are surging. If we have 6 or 7 buyers for every house, and all are bidding on the same house, that house’s price will rise. The bottom line is there is high demand and low inventory. This is great if one is selling. It may not be so great for buyers who simply need a place to live.

The market will remain this way until the virus is eradicated and people move about and spend capital, causing interest rates to rise. The only way to stop the virus is to wear a mask, wash the hands, keep a distance and/or best of all, to get vaccinated.

Have a great week!

Let’s not forget that people with cancer are vulnerable too!

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Feature image: AndrewBurlone

Other articles by Joseph Marovitch