COMMERCIAL LEASES IN ONTARIO
A commercial lease is an agreement between a landlord and a commercial tenant for use of the leased space for commercial purposes. In Ontario, commercial leases are governed by the Commercial Tenancies Act, which affords less protection to commercial tenants than residential tenants are typically granted under the Residential Tenancies Act. The commercial lease agreement will generally list the parties of the lease, the term of the lease, the price of rent, any rent increases during the term, requirements for insurance, repair or maintenance obligations, and any renewal clauses for the lease. Depending on the type of commercial lease entered into, there may be additional rental costs on top of the base rent. Common types of lease agreements we encounter in our practice include gross leases, net leases, double net leases, triple net leases, and percentage leases. Below you will find more information about the common commercial leases we frequently encounter.
In a gross lease, the commercial tenant will generally pay a fixed rental price each month which covers all expenses associated with the lease. A gross lease will not include any additional rent for items such as property taxes, building insurance, maintenance costs, snow removal, or window cleaning. Since the landlord is responsible for all the above-mentioned additional costs the base rent in a gross lease is typically higher than the base rent in a net lease or percentage lease. Tenants with a gross lease have the benefit of knowing exactly how much rent they will pay throughout the term of the lease, and they will not have to worry about an increase in additional rent throughout the term.
NET AND DOUBLE NET LEASES
Other types of commercial leases you may come across include a net lease and a net-net lease, commonly referred to as a double net lease. In a net lease and a double net lease, the commercial tenant is responsible for the base rent and either one incidental cost or two incidental costs respectively. Examples of incidental costs include property taxes, utilities, and building insurance, as well as other costs associated with maintaining the commercial building. In a typical double net lease situation, the tenant is responsible for paying base rent and the cost of property taxes and building insurance.
TRIPLE NET LEASES
In a triple net lease, the commercial tenant is responsible for rental costs as well as all other additional rents. Examples of additional rents include building insurance, maintenance costs, property taxes, and expenses associated with maintaining the rental premises, such as snow removal and cleaning. Since commercial tenants are responsible for all additional rents, triple net leases typically have lower base rent when compared to gross leases. In our experience, triple net leases are the most common type of commercial lease used by commercial landlords. This is because commercial landlords are interested in passing on all expenses associated with maintaining the property to tenants.
In a percentage lease, in addition to being responsible for payment of base rent and possibly additional rent, the landlord collects a percentage of the gross revenue generated from the commercial tenant. The landlord may only begin collecting a percentage of gross revenues after the commercial tenant reaches a specific breaking point in gross revenues. Percentage leases are typically used by landlords of lucrative and prime real estate such as landlords of malls and other shopping centers. In this scenario, the tenant may be required to provide the landlord with monthly, quarterly, or annual financial statements as required.
If you are looking for an experienced business lawyer to review, draft or negotiate a commercial lease on your behalf, contact us today to book an initial consultation.
Disclaimer: The information contained in this article is not to be construed as legal advice. The content is drafted and published only for the purpose of providing the public with general information regarding various real estate and business law topics. For legal advice, please contact us.
About the Author:
Shahriar Jahanshahi is the founder and principal lawyer at Jahanshahi Law Firm with a practice focus on representing business star-ups and investors in the province of Ontario. For further information about Shahriar Jahanshahi, click here.