Key Caveats in Commercial Leases

Why Legal Review Is Essential for Business Tenants

Commercial leases differ fundamentally from residential leases and require a higher level of scrutiny. Unlike residential tenancies, which are governed by legislation such as the Residential Tenancies Act, commercial leases are largely unregulated. The rights and obligations of both landlord and tenant are determined almost entirely by the written lease agreement.

For commercial tenants, this means that there is no default legal protection beyond what is explicitly stated in the lease. If a provision is not included, the tenant may have little to no recourse. As a result, professional legal review is a critical step before entering into any commercial lease.

Below are several commonly overlooked clauses that can have significant operational and financial consequences.

1. Landlord Termination Clauses During a Fixed Term

Some commercial leases include clauses that allow the landlord to terminate the lease with advance notice, even during a fixed term.

Such clauses undermine the certainty typically associated with a fixed-term lease. If a landlord retains the right to terminate with notice, a tenant may be required to vacate despite having made substantial investments in leasehold improvements or renovations.

For businesses that rely on long-term location stability, such as schools, daycares, or medical practices, this risk can be particularly disruptive to operations, staff, and clients.

For example, the tenant could have signed a 10 years fixed term lease with the landlord, but if the agreement has a termination clause. Then the tenant must leave the building upon the Landlord notice. The tenant will lose all their spending on the renovation and it’s very difficult to find another location to move which will be devastating to the business.

2. Demolition or Redevelopment Clauses

Demolition clauses grant the landlord the right to terminate the lease if the property is slated for demolition or redevelopment.

While these clauses may seem unlikely to be exercised in the short term, they introduce long-term uncertainty. Many businesses require a decade or more to fully recover renovation costs and achieve sustained profitability. A lease that can be terminated for redevelopment purposes may compromise that long-term planning.

Understanding how and when such clauses can be exercised is essential. It’s recommended that if that clause is required by the Landlord, the tenant should just step away from this lease to begin with. It’s not worth the money and time to invest into a location whose future is to be demolished.

3. Tenant Liability for the Full Lease Term

It is common for commercial leases to hold the tenant responsible for the entire lease term, even if the tenant vacates early.

This means that if a tenant signs a 10-year lease and exits after five years, the tenant may remain liable for the remaining five years of rent, subject to the landlord’s duty to mitigate losses. In practice, this can represent a substantial financial obligation.

Occasionally, landlords may agree to early termination options with predefined penalties, but such provisions are not standard and should not be assumed.

Furthermore, some landlords will ask for personal guarantees on the rent. This is also a common practice. The tenant should try to limit the potential liability by reducing the number of years on the personal guarantees.

4. Charges for Outdoor or Ancillary Space

Some commercial leases include rent and additional charges (such as taxes, maintenance, and insurance) for outdoor areas, including playgrounds or exclusive-use exterior spaces.

This practice is uncommon and can materially increase operating costs. Outdoor areas typically do not incur the same level of maintenance or expenses as interior space, yet tenants may be charged at comparable rates. These provisions should be carefully reviewed and negotiated where possible. Tenants should not accept these kinds of terms.

5. Renewal Options and Rent Determination

Well-structured commercial leases often include options to renew, allowing the tenant to extend the lease term beyond the initial period.

However, renewal clauses should clearly define how rent will be determined during renewal terms. A common and balanced approach is to specify market rent, with a dispute resolution mechanism such as mediation or arbitration, if the parties cannot agree.

Without clear rent-setting provisions, a tenant may face significant uncertainty or unexpected rent increases at renewal. This risk is heightened by the fact that ownership of the property may change over time, and future landlords are bound only by what is written in the lease.

For example, if a commercial lease did not specify how the future rent will be determined during renewal time, the landlord will have the right to increase the rent 10 folds and the tenant can only choose to renew at a 10-folds rent or leave the premises. This puts a tenant in a disadvantageous situation.

6. Lease Continuity Upon Sale of the Property

A properly executed commercial lease typically continues even if the property is sold. The new owner assumes the role of landlord and is bound by the existing lease terms.

This continuity can provide important protection to tenants, but only if the lease is well drafted. A strong lease safeguards the tenant’s rights regardless of changes in property ownership.

Conclusion: The Importance of Professional Legal Review

Commercial leases are complex legal documents with long-term implications. Tenants should not assume that standard protections exist or that informal understandings will be enforced.

Engaging a qualified commercial real estate lawyer ensures that: