Commercial Real Estate Leasing Options

Leases for commercial real estate in Montreal are essentially long-term relationships. Most initiallly last at least 10 years, and renewal terms may expand that to 20 years or more. But what happens when the tenant’s needs are no longer met by that lease?

During the term of the commercial real estate lease, the needs of space are likely to change, sometimes in unexpected ways. The ability of the tenant to respond to these changing needs depends on the flexibility the commercial lease.

Options in a Real Estate Lease

When it’s time to negotiate your commercial lease, there are several options that you should make sure are included.

Option of Renewal

The most common is the option to renew. Since your landlord will want to raise the rent at the end of the initial agreed period, this issue will need to be addressed in advance. If you can get an option to renew at a predetermined fixed price instead of at the fair market price, you will likely save money when the initial lease term ends, especially if the rents for office space leases have escalated.

A short-term commercial lease with several options to renew gives you some flexibility. Typically, you have a certain time period before the end of the initial lease term in which you can notify the landlord in writing that you want to renew the lease at the predetermined amount. There may be an additional fee, also agreed upon in the initial lease for exercising your right to stay. Generally, with the exception of the rent increase, other terms of the initial lease will carry over into the renewal period.

Option for Additional Space

Another option you might include is the option for additional office space. Being able to expand is key for a growing business. A landlord who sees the potential of having an important commercial tenant that may attract other businesses, especially in a mall or similar retail situation, may be more inclined to grant an option for additional space. You will need to examine and negotiate the terms for renting such extra space and make sure the space is suitable to your business needs.

The option for additional commercial space may state that you will expand at the same per square foot rate that you are currently paying, at a fixed rate of increase or at the fair market rate at the time of the expansion. This will need to be determined when working out the initial option agreement. Such an option can only be included if the landlord can reserve or make such space available. A landlord may counter by offering you a right of first refusal, meaning you have first choice on any empty rental space at the same rental rate that any other tenant will pay. Again, it is a matter of which one of you is in the stronger position.

Option to Terminate Early

Becoming more common in Montreal commercial real estate leases is the option to terminate early. Landlords may offer such clauses to higher profile businesses to entice them to sign longer-term leases and help draw other established tenants into the facility. The landlord will receive some form of compensation if the tenant exercises the option to leave early.

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