Signing a commercial lease is like starting a long-term relationship, if expectations aren’t clear from the start, things can get messy fast. Mike McCluskey, a Commercial Litigation lawyer at McKenzie Lake Lawyers in Guelph says, “Misunderstandings can lead to costly disputes, strained relationships, or even legal battles. That’s why the key to a hassle-free lease is to ensure clear, upfront communication from the start.”
Many commercial landlords are seasoned professionals following industry “best practices”, while others are not and as such, may be using outdated lease terms. Another issue is the possibility of confusion among commercial tenants who may assume they have the same protections as residential renters. McCluskey says, “Because of that, I think tenants may sometimes be emboldened with the belief that they have all the power, and that belief can permeate and spread into the commercial tenancy context where tenants believe that they may have more power than they do.”
Unlike residential disputes which are adjudicated by the Landlord and Tenant Board, commercial lease disputes are handled in Superior Court through a litigation process. McCluskey says, “This distinction is crucial for both landlords and tenants to understand as assumptions about rights and remedies can lead to costly missteps. In the context of commercial tenancies, the landlord typically has more power because landlords in most cases are preparing the lease, very often it’s a landlord-friendly lease, and the tenant must abide by those terms.”
Clearing up lease confusion
Signing a commercial lease isn’t like renting an apartment. McCluskey says, “It’s typically the files that contain leases that are not overly clear that come to me. The way to avoid engaging in litigation from a commercial landlord perspective is to ensure your lease is very clear and to ensure that the terms, such as what happens in the event of default are clearly explained to the tenant. Late rent payments are among the biggest headaches in the commercial landlord-tenant relationship.”
Tenants typically do not appreciate the gravity of breaching a lease. A tenant might think it’s no big deal. but may be shocked to learn that if they default on a lease, they’re not just on the hook for the missed payments, but they could be liable for the entire remaining balance of the lease. McCluskey says, “That’s something that often surprises tenants and I don’t know if it’s a reflection of tenants being emboldened by a misunderstanding of the commercial relationship or if it’s a result of landlords not communicating what happens in the event of a default clearly enough to tenants.”
A landlord’s safety net
When a tenant defaults on a commercial lease, having the right terms in place can mean the difference between a minor inconvenience and a major financial headache. First, a Notice of Default clause ensures that the tenant is officially informed if they are in breach and typically gives tenants 5 to 10 days to fix the issue. McCluskey says, “If the tenants don’t comply, the landlord can either change the locks, take control of the premises, sue the tenant for rent amount missed as well as the amount of rent the landlord could have otherwise expected under the lease had the tenant fulfilled the full term of the lease.” If a landlord has allowed certain breaches during the tenancy relationship, it is even more important to deliver a notice of breach to ensure the tenant understands the breach is not acceptable and the lease terms will be enforced.
Next, personal indemnification and guarantor clauses allow the landlord to sue, not only the company but also an individual such as the president or director of the company. McCluskey adds, “If the tenant defaults, the landlord can sue both the company and the individual who signed the lease, going after personal assets like a home.” Accordingly, it’s important for landlords to do their due diligence to verify a tenant’s assets.
Mike McCluskey advises landlords to be crystal clear from the start - both in writing and in conversation about what happens if a tenant falls behind. McCluskey says, “It’s very important if you’re a commercial landlord to ensure that you’ve covered yourself in the event of a default by the tenant. The best way to do that is clearly communicating the terms in the lease and ensuring the tenant understands. McCluskey adds, “It’s surprising how many tenants wind up in a commercial tenancy dispute with a landlord thinking that their rights are wildly different from what they are in reality, as outlined in their lease agreement. And the reality is, many tenants have never even fully read their lease. They’ve never had it looked at by a lawyer – and that’s a problem.”
Pandemic complications
The pandemic didn’t start the fire in commercial real estate, but it did throw fuel on a landscape that was already burning. McCluskey says, “Government subsidies created confusion, leading landlords and tenants to relax lease obligations.”
Today, these obligations are back in force. The good news is that stability is returning to the commercial real estate market. McCluskey adds, “When you come out of a crisis and get back to a more traditional commercial business model, it’s a good time to ensure that we all understand what the lease obligations are, ensure the lease terms look good, and reestablish a sense of pre-pandemic normalcy in these relationships.”
Contact a lawyer
Mike McCluskey is urging commercial landlords to scrutinize their lease agreements, warning that just because a lease has been in use for years doesn’t mean it’s airtight. If it hasn’t been vetted by a lawyer, or tested in court, it could have serious deficiencies. McCluskey says, “If landlords have never run into an issue where they’ve had to sue a tenant, they would not be aware of the deficiencies. Just because a landlord has a precedent lease that they’ve been relying on, if they haven’t had that lease vetted by a lawyer and it hasn’t gone through the process of a lawsuit or trial and been upheld, then chances are landlords could be relying on a lease that could contain deficiencies.”
Landlords may want to re-evaluate their leases to be aware of issues such as personal indemnifiers, proper communication, and what happens in the event of default. McCluskey’s message to landlords is simple, “Don’t assume your lease is bulletproof just because it’s been around for years. Have a legal professional review it before you find out the hard way that it isn’t as solid as you thought. And if you find yourself in a lease relationship with a tenant who is consistently in default under the lease, then it’s definitely time to consult a lawyer to assist with the process of termination.”
Communication is crucial
If as a landlord, you intend to uphold the terms of your lease, ensure you’re being very clear and not leading a tenant into a false sense of security by allowing certain breaches. McCluskey says, “My advice would be if tenants miss a payment, send them a default letter immediately and make it clear that the terms of the lease prevail. You want to be consistent and ensure everyone knows what their obligations are under the lease. If termination of the lease is likely, you want to ensure you are proceeding through the termination process consistent with the lease. This will ensure you have “clean hands” when the matter eventually finds its way in front of a judge.”
Both sides want to ensure they have a good relationship and part of that is being aware of mutual expectations and to include those mutual expectations in the lease. It’s smart to see a lawyer at the beginning of the contractual relationship to highlight some of the issues you need to address. But it’s equally important, if something goes wrong and the landlord does not know how to navigate the terms of lease, to contact a lawyer to determine if litigation can be avoided.
Contact Mike McCluskey at (519) 826-4333 or by email [email protected].