"Commercial Leases: Bargain Hard Before Signing a Lease", Vancouver Sun

by Janice and George Mucalov

Many people believe commercial leases are standard, off-the-shelf documents. If they're looking to lease space for their business, they sign on faith the document presented to them by the landlord.

More sophisticated tenants recognize a lease establishes a long-term relationship - which can last for ten or more years - and involves a host of legal implications. Major shopping centre tenants such as the Wal-Mart's and Safeway's - the anchor tenants and magnets for smaller stores - will insist on certain concessions, which they usually get.

Deft negotiation can often net you a better deal than what's originally offered. You need to bargain carefully for those terms that will provide you with the most benefits in your particular situation.

Take the case of one software company interested in leasing prime downtown Vancouver office space from a major landlord. The landlord proposed to go forward based on its standard lease. But the lawyer for the software company presented the landlord's lawyer with 19 pages of closely spaced "standard" amendments covering the extra cabling, wiring, specially adapted floor heights for computers and other items the company always insisted on in its leases. After four months, the landlord finally agreed on the terms of the lease and put up a $500,000 allowance for tenant improvements.

As it turned out, the ink was barely dry on the paper when the software company decided to pull out of Vancouver. The landlord was properly protected, however. Because the lease also said the tenant had to repay most of the costs of the tenant improvements if it didn't stick around, the landlord ended up recovering more than 90% of what it had paid out.

Both sides in this case were careful to include points which made the deal work for them and protected their position if things went awry.

In another case, a landlord was negotiating with a drugstore chain known for its hard-nosed business dealings. The drugstore wanted the landlord to guarantee that a certain minimum number of doctors would operate from the centre's medical building, so there'd be a steady stream of patients needing prescriptions filled.

But after each round of negotiations, the drugstore would ratchet up its tenant requirements - one day it would agree to a minimum of six doctors in the medical building, the next day the minimum was eight. Frustrated, the landlord turned to a more accommodating pharmacy chain and struck a deal with them instead, much to the chagrin of the first drugstore chain.

In this case, the tenant's unreasonable demands scuttled the deal.

In yet another example, a major office tenant signed a lease for some 11 floors in a large new office tower being built. But because the tenant wanted more control over the building project than the landlord was prepared to give, the tenant threatened to transfer the lease to an affiliate and move to a different building. The affiliate would then sublet the 11 floors.

This would have been a problem for the landlord, who would have ended up competing with the tenant for the same market to rent out its remaining floors in the building.

The question in this particular lease turned on whether the landlord could require the tenant to actually occupy the floors it had leased. To convince the tenant to stay, the landlord ended up having to pay a whopping sum of money - which might have been avoided had the lease included an "operating covenant".

That is often thought important mainly in retail leases, for a couple of reasons. They often call for percentage rent, which depends on the tenant being open for business. Also, even if rent is paid, the landlord usually doesn't want "dark spaces" in a retail complex.

The bottom line is this: both landlords and tenants must understand that leases are sophisticated financial instruments - not cookie-cutter deals and documents.

For the landlord, the rental cash generated is the lifeblood of its business and an essential requirement to get financing and a return of and on its investment. For the tenant, the building space is its home, and the space has to work for it.

Each is at risk of losing out on important benefits and facing unexpected and unpleasant surprises if their lease isn't tailor-made to suit their particular needs.

A version of this column was first published in the Vancouver Sun. The column provides information only and must not be relied on for legal advice. Consult your lawyer if you need legal advice.

© Copyright by Janice and George Mucalov

A version of this column was first published in the Vancouver Sun. The column provides information only and must not be relied on for legal advice. Consult your lawyer if you need legal advice.