What Constitutes a Corporate Lease?
The corporate lease is a rental agreement between a business and a landlord that is fully, partially or not guaranteed by a parent company or another entity. This type of lease is commonly used for office space and can provide businesses the space they need without forcing the business owners to sign personally on a long-term lease.
A corporate lease is a commercial real estate contract in which a landlord receives some or all of the terms from the parent company of the business that will occupy the property. Corporate leases are often 10 years or more in length , which means that a landlord will not be doing business with the same company that enters the lease. Common costs included in a corporate lease include rent, utilities, maintenance, property taxes, repair, security, improvements and debt.
A corporate lease agreement is an essential aspect to operating a business. A good lease agreement protects the business in the event it needs to relocate, it provides protections that standard business contracts do not, and it allows a business to operate in a location without forcing its owners to risk their personal finances.
Essential Components of a Corporate Lease
The fundamental component of a corporate lease agreement is the lease term, which refers to the length of the lease. A multitude of variables impact the lease term including the tenant’s industry and financial position, owner’s financial needs, property location and occupancy. In accordance with generally accepted accounting principles ("GAAP"), leases in excess of 12 months must be reported on the balance sheet as long-term liabilities, which encompass both lease payments and asset depreciation. In general, the lease term is typically three to five years, the lengthiest time period under GAAP, but leasing programs run by large corporations may have considerably longer terms. Upon execution of the agreement, the landlord will conduct a credit search of the tenant to ascertain the financial strength of the business. The lease is then tailored to the financial health, stability and creditworthiness of the corporation through the negotiated rental rate and contribution to tenant improvements, the allocated capital resources to build-out tenant improvements for the leased premises. For example, a corporation with solid financial footing may receive a more advantageous rental rate and be required to contribute less to tenant improvements than it would be required to under the same provision if it had a weaker balance sheet. An unstable corporation may even be required to provide financial statements or sublease the premises if the business has no credit history. At the close of the lease term, the corporation may be required to return the premises to a "reasonable" condition, which is determined by the age of the premises at the time of the lease.
Legal Obligations for Corporate Leases
A corporate lease must comply with the requirements of the statute that set out the formalities for execution and to which are subject any modification or release of obligations (see below). The signed copy of the corporate lease must satisfy the legal requirements.
The statutory provisions against sale by a company to itself of real property are found in Part III of the Land Titles Act, R.S.O. 1970, c. 247. Under s. 48(1) the Crown has a lien or charge upon the interest in land which the corporation has reserved or taken, situate in Ontario, by lease for not more than twenty-one years from the date of the lease, except for certain exemptions. Under s. 48(2) if, before registration of the lease, other transactions dependent on it take effect or the lease is registered contrary to s. 48(1), the lease is void. A conveyance or transfer by a corporation to itself is void.
Section 48(4) prevents the obtaining of title by adverse possession against the Crown in respect of property leased contrary to s. 48(1) unless the owner who would have been entitled to sue were the property in the position of property of a natural person may sue, etc., within ten years after the date of the lease. Section 48(7) defines "conveyance" as meaning a deed or other instrument whereby a company disposes of an interest in land. The definition applies to corporations other than companies.
The formalities required upon execution of the lease may be found in s. 124(2) of the Business Corporations Act, 1971, as amended. Under s. 124(1) the by-laws of a corporation shall provide for the manner in which, among other things, deeds, transfers, assignments, acceptances or endorsements or cheques, notes, drafts and orders for the payment of money and contracts, instruments or other writings shall be signed on behalf of the corporation. However, the manner of signing corporate deeds, etc., under s. 124(2) need not be in accordance with the by-laws if the manner in question appears in particulars filed with the Director requiring a manual signature for each signatory. Under such circumstances the manual signature is sufficient for the purpose of any agreement. The particulars would therefore permit a corporate lease to be executed by a director or officers, such as a Secretary-Treasurer, without the need to follow the execution requirements contained in the bylaw.
For the warranty of the covenants in the lease see s. 61 of the Land Registry Act, 1977, as amended. Under s. 61 if a lease is made for a term exceeding twenty-one years and out of the proceeds of sale of the land leased the owner or lessor acquires other land, the covenants for title in the lease operate in favour of the owner or lessor, his heirs or devisees, the persons deriving title under him, and his grantees of the land so acquired. This section is also applicable to a grant of a lease or conveyance or transfer from a company to itself.
Corporate Lease Terms to Negotiate
Negotiating the terms of a corporate lease is an essential step in the leasing process and requires careful planning and execution. Here are some tips and strategies that can help you secure a favorable corporate lease.
Start by working with a real estate attorney or a commercial real estate broker who has experience with corporate leases. As you go through the negotiation process, your advisor will be able to provide guidance on the commercial lease process and advice on market rates and trends. Advising might include a review of the property being leased including the square footage required and analysis of current market conditions. These types of advisors can also assist in the negotiation of the terms of the proposed commercial lease so that you are protected should things go wrong. For example, important items that may require a lawyer’s review include the rent amount, the proposed length of the lease and the type of maintenance responsibilities and property management that will be required.
Keep in mind that corporate leases come in all shapes and sizes. Your company may be negotiating its first lease or it may be its fifth lease at a specific location. Each lease has unique features and areas that require attention and careful consideration. Below is a summary of some of the ways to negotiate favorable corporate leases.
Examine the specifics of the lease offer including the rent, the length of the lease, whether there are break clauses, guaranties and whether the rent is fixed, or whether there are annual rent increases or "market rent" increases and clauses. Annual rent or market increases can have significant impact on the long term costs of the lease especially for properties or premises that require significant up front improvements or enhancements.
Consider a longer term as opposed to a shorter term. While a three year lease may seem attractive it could place your company at a disadvantage both from a time perspective and financially because the lease will be up for renewal in three years and your attorney will have to negotiate an entirely new lease agreement.
Request options for future leases. Consider requesting options that permit a company to extend its lease after the expiry of the initial lease term and also possibly to negotiate with your landlord for additional space to be leased in the building.
Corporations should also consider negotiating exclusive partnership using the premises among grocery stores. For instance if the corporation is a grocery store, negotiatng an exclusivity clause might provide for a clause in the lease that no other grocery store will be permitted to open in the building or on the property.
Make sure there is adequate parking for your employees and customers at the proposed site. If your customer base will be visiting the premises it is very important to make sure that their visit will include a parking space. For example if you are a bank and you have customers that will be coming to the bank, then it is very important to ensure that your banks parking spaces will be available for your customers.
Common Issues with Corporate Leases
"Even the best intentioned corporate lease is complex, but regular effects of real estate populate its terms. These issues arise frequently and its critical that they be dealt with properly. Otherwise, the potential liability to the business could be significant.
Many companies assume that their lease will be exempt from any extreme economic change. Not so. Parties to commercial real estate leases have to deal with the realities of the real estate market, such as rent increases in the middle of a lease term, increases in expenses associated with common-area maintenance, other types of rent increases, and tenancy issues .
Another issue is renewal. Most corporate leases require the tenant to make a decision regarding renewal or extension of the lease in advance of the renewal date. In the modern world where business is ever changing and there are many factors that can cause a tenant to have to move, the simple lease has to provide for flexibility.
In order to combat these realities, both tenants and landlords should consider comprehensive lease provisions that address the key components of any lease and allow for flexibility. While they do not guarantee a perfect lease, they have the potential to blunt negative impact of the many issues that arise in a lease."
The Role of Real Estate Agents and Attorneys
The commercial real estate market can be a daunting space for corporations. It is worth taking the time to get familiar with the types of properties available, and the different leasing structures. Fortunately, there are numerous professional resources that can ensure you make an informed decision for your business’ future. Real estate agents and lawyers play an important role in seeking out listings and writing the lease to confirm that your company is protected.
Real estate agents work on a commission basis. They do not get paid until you sign on the dotted line. However, it is important to validate which agents can work on a specific listing. Sometimes agents do not specify who they are ‘co-operating’ with. This can lead to 2 agents trying to work on the same deal. A tenant should make sure the agent is working only for the tenant. Alternatively, if both agents are acting on behalf of the tenant, it is extremely important that the tenant appoints one agent to be its exclusive agent with the other agent being the landlord’s sales agent.
Real estate agents can provide information that will help you narrow down your search. They can suggest buildings in your price range and provide information on where the buildings are. They get paid based on commission so they are easily incentivized to find you the lowest rate even if the building is not suitable for your business.
When you first meet you can sit down with your agent and explain the type of building you are looking for. This might include: location, amenities, size, budget, number of employees and other essential features. The agent has access to all the commercial real estate listings in the area and will be able to compare features and prices. The agent can then give you a list of buildings that meet your criteria. You will then be able to arrange visits to see the buildings for yourself.
Once you have been able to visit a number of buildings and have narrowed down the search to 1 or 2 buildings, be sure to have your lawyer review the lease before you sign it. The terms and clauses of a lease can vary wildly depending on the type and age of the building. Ideally, you want to ensure that your interests are adequately protected. It is helpful to have your lawyer draft a rider with additional clauses that protect your business. Registering the rider at the Land Registry office will ensure that everyone who looks at the registry will know that the property is now subject to the rider.
Some common clauses we commonly include in leases are: Right to assign and sublet: This clause allows you to assign the lease to another entity (but it still has to be a good tenant) or sublet (with the landlord’s consent) a portion of the space. Just remember, you as the tenant are always responsible for the landlord’s obligations.
Deliverable space clause: This clause allows you to walk away from the lease if the space indicates the landlord needs to perform major work before it is deliverable. In addition, you may wish to insert a clause that states that no payment of rent is required until the premises are delivered for fit-up. This clause should also state what happens to the tenant’s rent free period if the premises are not delivered on time.
Holdover clause: This clause allows you to stay in the premises beyond the expiry of the term. It is extremely useful in an emergency.
Tenant inducement clause: This clause entitles the tenant to an inducement. The tenant may wish to see if it can extend any rent free periods or cash bonuses in exchange for a longer term lease. Use this clause to your advantage.
Best Practices Tip for Managing Corporate Lease Compliance
Corporations should be proactive in managing their leases and this process should involve processes for timely lease renewals and terminations. It is generally a good idea to track the following items: It is important to include the above items on a tickler system in order to meet critical deadlines and timeframes. Some of these deadlines are dictated by corporate or company policy and some are dictated by statute. For instance, under section 124 under the Business Corporations Act (Ontario), a corporation that carries on business in Ontario and that leases land in Ontario may, not later than three years after a lease is entered into, terminate the lease, without penalty, by giving written notice of termination at least sixty days but not more than ninety days in advance of the termination date. Once a corporation has determined that it needs to terminate a lease , it is prudent to determine (i) the process that needs to be followed (this would include the timing for the lease termination) or (ii) the terms upon which a corporation is willing to renew its lease (for example, increasing the rent). Having this information in advance will provide the board of directors of the corporation with options for dealing with the lease renewal or termination. In most cases, the process in (i) or (ii) should fall within the authority of the board of directors, however if uncertain, the directors should obtain legal advice. Track all deadlines and documentation in a tickler system to take better control and reduce the legal costs associated with a lease renewal or termination.
