The portfolios of many of Canada’s largest commercial landlords have grown from small and local to vast and national over the past decade. With baby-boomer-money investment managers looking for stable and secure yields, capital is likely to continue to be available to allow these landlords to continue to grow. However, as commercial vacancy rates in certain Canadian cities edge up, these large commercial landlords will be offering terms attractive enough to draw small and medium sized businesses away from the typical go-to “B” buildings and into “A” buildings owned by these large landlords. Smaller commercial landlords will have a difficult time competing with the generous tenant inducements offered by the larger landlords with their easy access to capital, larger portfolios and longer-term horizons regarding return on investment. Rent-free periods of as long as one-year and generous renovation budgets are a couple of the inducements being used to court commercial tenants, particularly in cities such as Ottawa where the commercial vacancy rate is trending higher.
If you are considering a building owned by a large commercial landlord such as Dundee or Brookfield Properties, you should expect a two-step lease negotiation process. Step 1 is the negotiation and signature of an “Offer to Lease” which sets out the financial terms of the commercial lease i.e. basic rent, operating costs, space size, term of lease, commencement date, etc… Step 2 is the negotiation and signature of the landlord’s standard form of commercial lease. Typically, the Offer to Lease will require the tenant to sign the landlord’s standard form of lease subject to reasonable negotiation of “non-financial terms”. Essentially, the landlord is attempting to bind the tenant with the Offer to Lease. This helps the landlord in two fundamental ways: 1) the landlord doesn’t incur legal costs associated with the drafting and negotiation of a lease until it has a tenant locked-in and 2) when it comes time to negotiate the actual lease agreement, the tenant has already agreed to accept the landlord’s standard lease terms, even if such terms are very, very landlord-friendly.
As a commercial tenant negotiating an Offer to Lease with a provision requiring you to sign the landlord’s standard form of commercial lease, we strongly recommend that you get legal advice at the Offer stage and be sure to ask your leasing agent to obtain and provide to you and your lawyer a copy of the landlord’s “standard form” of commercial lease. Most clients want to avoid incurring legal costs until the Offer to Lease is signed and the deal is firm, but by doing so the client risks being compelled to sign a very one-sided commercial lease. Whether the Offer to Lease is actually enforceable on its own and whether a tenant can be compelled to actually sign the definitive standard form of lease is almost academic because most tenants will not have/want to incur the legal cost of having this battle. Best to avoid getting into this up-hill battle situation in the first place. Don’t sign an offer to lease that binds you to accept the landlord’s standard form of lease without first reviewing the landlord’s standard lease agreement.
If you have ignored our good advice above, or only reading this post after having signed an Offer to Lease, all is not lost. The provision in the Offer to Lease that provides that you must accept the landlord’s standard form of commercial lease is likely unenforceable and, although they may not admit it, the landlord and its attorneys or legal counsel, know this to be true. Our position is that with the exception of those certain terms expressly set out in the Offer to Lease agreement, all of the other terms in the commercial lease remain open to negotiation notwithstanding a signed Offer to Lease.
In our next Commercial Leasing post, we’ll discuss provisions of the commercial lease you should pay particular attention to.