Commercial Leases in Ontario: What Business Owners Should Review Before Signing?

Leasing commercial space is a significant commitment. Whether you are opening your first location, relocating an established company, or expanding into additional premises, the terms of your lease can affect your costs, operations, and flexibility for years.

Unlike most residential tenancies, there is no standard form that must be used for commercial leases in Ontario. The signed agreement can also take precedence over certain provisions of Ontario’s Commercial Tenancies Act. This makes it important to understand and negotiate the lease before signing it.

The following are some of the most important provisions for business owners to review.

1. The Offer to Lease

A prospective tenant may initially receive an offer to lease, letter of intent, or term sheet. Although these documents are often shorter than the final lease, they may create binding obligations and establish the commercial terms that will be incorporated into the lease.

The offer should clearly address matters such as:

• The premises being leased
• The length of the lease
• Base rent and additional rent
• Deposits and prepaid rent
• Conditions relating to financing or approvals
• The permitted use of the premises
• Improvements to be completed by the landlord or tenant
• Any rent-free fixturing period
• Renewal, assignment, or termination rights

Legal review at this stage can be particularly valuable. Once the offer is signed, it may be difficult to renegotiate important terms in the final lease.

2. Base Rent and Additional Rent

The monthly amount quoted by a landlord may represent only the base rent. Many commercial tenants must also pay additional rent covering some or all of the property’s operating expenses.

Additional rent may include:

• Property taxes
• Building insurance
• Utilities
• Maintenance and repairs
• Property management fees
• Security and cleaning
• Snow removal and landscaping
• Common-area expenses
• Capital repairs and replacements
• Applicable taxes

The lease should explain how these amounts are calculated, allocated among tenants, and adjusted. Tenants should also determine whether they have a right to receive annual statements, review supporting records, or challenge incorrect charges.

Understanding the total expected occupancy cost is essential when comparing locations and preparing financial projections.

3. The Permitted Use

The permitted-use clause defines the activities the tenant may conduct from the premises. If it is drafted too narrowly, it can restrict the business as its products, services, or operating model change.

The proposed use should also be reviewed against:

• Municipal zoning requirements
• Building and fire codes
• Licensing requirements
• Condominium rules, if applicable
• Restrictions imposed by the landlord’s other leases
• Environmental or insurance requirements

The lease should address what happens if the tenant cannot obtain a necessary permit or approval. Depending on the transaction, the tenant may seek a condition allowing it to terminate the agreement if required approvals are unavailable.

4. Repairs, Maintenance, and Capital Costs

Responsibility for repairs can vary significantly between leases. A tenant may be responsible only for the interior of the premises, or it may also assume obligations involving plumbing, electrical systems, heating and cooling equipment, structural components, or major replacements.

Before signing, determine who is responsible for:

• The roof, foundation, and exterior walls
• Heating, ventilation, and air-conditioning systems
• Plumbing and electrical systems
• Windows, doors, and storefronts
• Building systems serving multiple tenants
• Accessibility requirements
• Capital repairs and replacements
• Damage that existed before the tenant took possession

A tenant should consider obtaining an inspection of the premises and documenting its condition before occupancy.

5. Leasehold Improvements

Many businesses need to renovate or customize their premises. The lease should establish which improvements are permitted, who must approve them, and who will pay for the work.

Important issues include:

• The landlord’s approval process
• Construction plans and specifications
• Building permits
• Contractor and insurance requirements
• Tenant improvement allowances
• Ownership of improvements
• Construction liens
• Restoration obligations at the end of the term

A tenant should not assume that improvements can remain after the lease ends. Some leases require the tenant to remove fixtures or restore the premises to their original condition at its own expense.

6. Personal Guarantees and Security

A landlord may request a personal guarantee from the business owner, particularly where the tenant is a new corporation or has a limited financial history.

A broadly drafted guarantee can expose the guarantor’s personal assets if the tenant defaults. Before agreeing to one, consider whether the guarantee can be:

• Limited to a specific dollar amount
• Reduced over time
• Limited to a portion of the lease term
• Released after the business meets certain financial conditions
• Terminated following an approved assignment of the lease

The lease may also require a security deposit, letter of credit, or prepaid rent. The conditions governing the landlord’s use and return of that security should be clearly stated.

7. Renewal and Extension Rights

A renewal option can help a business remain at a successful location after the initial term. However, the option must usually be exercised within a specific period and in strict compliance with the lease.

Review:

• The deadline for providing renewal notice
• The length of the renewal term
• How the new rent will be established
• Whether the tenant must be free of default
• Whether the option can be exercised by an assignee
• Whether incentives or improvement allowances continue
• What happens if the parties cannot agree on rent

An option that leaves every material term open for future negotiation may provide less certainty than expected.

8. Assignment and Subletting

A business may eventually need to sell its operations, relocate, reduce its space, or bring in a new owner. The assignment and subletting provisions determine whether the lease can be transferred or the premises shared with another occupant.

The lease should address:

• When the landlord’s consent is required
• Whether consent may be unreasonably withheld
• Information the proposed assignee must provide
• Administrative or legal fees charged by the landlord
• Whether a change of control is treated as an assignment
• Whether the original tenant and guarantor remain liable
• Whether the landlord can terminate the lease instead of consenting

These provisions are especially important when the value of a business depends on its ability to operate from a particular location.

9. Insurance and Indemnities

Commercial leases normally require tenants to maintain specified insurance coverage and provide certificates of insurance to the landlord.

The tenant should confirm the required coverage with an insurance advisor before signing. Requirements may include commercial general liability, property, business interruption, equipment, or environmental insurance.

The indemnity provisions should also be reviewed carefully. These clauses allocate responsibility for claims, losses, injuries, and property damage arising from the premises or the parties’ conduct.

10. Default and Termination

The lease should explain what constitutes a default, whether the tenant receives notice, and how much time is available to correct the problem.

Potential defaults may include:

• Failure to pay rent
• Breach of a lease obligation
• Failure to maintain insurance
• Unauthorized alterations
• An unapproved assignment or change of control
• Insolvency or bankruptcy events
• Abandonment of the premises

Ontario law may give commercial landlords significant remedies when a tenant defaults, including termination or, in certain circumstances, seizure and sale of the tenant’s goods for unpaid rent. Ontario’s Commercial Tenancies Act

Tenants should understand these provisions before committing to the space, particularly if the lease limits notice or cure periods.

11. Relocation, Demolition, and Redevelopment

Some leases allow the landlord to relocate the tenant or terminate the lease if the property will be demolished, renovated, or redeveloped.

These rights can be disruptive to a business that depends on its location. If the lease contains such a provision, consider:

• The amount of advance notice required
• Whether the replacement space must be comparable
• Who pays the relocation costs
• Whether rent will change
• Whether the tenant receives compensation
• Whether the tenant can terminate instead of relocating

The significance of these clauses will depend on the type of business and the importance of the particular location.

Review the Lease Before You Commit

A commercial lease is more than an agreement to pay rent. It allocates financial obligations, operating responsibilities, legal risks, and future rights between the landlord and tenant.

Early legal review can identify unexpected costs, unclear obligations, and provisions that may restrict the business later. It also gives the parties an opportunity to negotiate important terms before commitments are made and expenses are incurred.

DJC Law assists landlords, tenants, entrepreneurs, and established companies with offers to lease, commercial lease drafting, review, negotiation, renewals, assignments, and amendments. If you are considering commercial space in Toronto or the GTA, contact DJC Law to discuss the proposed transaction.

This article provides general information only and does not constitute legal, tax, financial, or insurance advice. Commercial leasing rights and obligations depend on the agreement and the circumstances of each transaction. Obtain advice concerning your particular situation.