The ins and outs of leasing
Whether you're negotiating a lease or a sublease for a new business, there are dozens of issues that can come back to bite you if you don't do them correctly at the outset.
And these issues don't always involve rent. One of the most important non-rent issues under a lease are “options” or “rights” to renew the lease.
Many leases have a “renewal option” as part of the contract. This is a provision in the lease that stipulates that if the tenant complies with its obligations under the lease, it has the right to renew the lease for one or more renewal terms after the completion of the initial term. Almost always, the provisions of the original lease will carry over for the renewal, except for rent. Rent for the renewal term will normally be “market rent,” whatever market rent is at the time of the renewal for similar premises. If market rent can't be agreed to, the lease will normally contain an arbitration clause where market rent is determined by an independent arbitrator.
If your lease (or sublease) doesn't have an option to renew, you'll only have the right to rent the premises from the landlord for the term of the lease, and then you'll have to vacate and find other premises. At the end of the your term, the landlord can rent the premises to someone else regardless of how much you've spent to construct and develop it for your particular business purpose.
So it's a good idea to negotiate one or more options to renew, because it gives you the flexibility to exercise the option to stay at the premises for the renewal term. Or not.
So here's the catch. Some landlords will draft their renewal options in such a way that the tenant will lose its right to renew for one minor transgression, like a late rent cheque or, my favourite example, using the wrong coloured garbage cans. In these cases, the lease will say the tenant has the right to renew, but only if “the tenant has punctually paid rent and other costs and charges as and when due and has fully and faithfully complied with all of it obligations hereunder,” or words to that effect. So the option is lost, even if there was one small default in the first month of the term that was cured immediately.
If the original lease has this kind of wording, and it is assigned during the term to a third party, that third party will not be able to exercise the option to renew because of the default of the previous tenant.
So when you're negotiating a lease, or acquiring a business with an existing lease, try to ensure that the only precondition to your right to renew is that the lease is not, at the time of such exercise, in default, and that any defaults that may have occurred during the term have been cured to the landlord's satisfaction. Otherwise, one late rent cheque or other default, no matter how small, will mean your right to renew is lost.
You should also take note of the timing by which you must notify the Landlord of your decision to exercise your right to renew. The lease will normally give you a “window” in which you must give notice to the landlord (such as “no earlier than 12 months and no later than eight months before the end of the term”). If you miss that window, even by a day, you lose the option.
And if you're buying a business that includes a lease, or you're taking an assignment of a lease, you should get written confirmation from the landlord that (1) there are no outstanding defaults by the tenant; and (2) that any option(s) to renew are valid and enforceable by the purchaser.
The same advice is appropriate for the negotiation of Franchise Agreements that contain options to renew. One late royalty cheque or other minor default could result in your right to renew being forfeited.
In long-term contracts like leases and franchise agreements, there will always be little transgressions during the term. It's important to ensure that if they're fully cured, you still have the right to renew.
Vancouver franchise lawyer Tony Wilson is the author of Buying A Franchise In Canada – Understanding and Negotiating Your Franchise Agreement and he is ranked as a leading Canadian franchise lawyer by LEXPERT. He is head of the Franchise Law Group at Boughton Law Corporation in Vancouver and acts for both franchisors and franchisees across Canada, many of whom are in the food services and hospitality industry. He is a registered Trademark Agent, an Adjunct Professor at Simon Fraser University and he also writes for Bartalk and Canadian Lawyer magazines.
Tony can be reached at: 604.684.1800 or via Email: firstname.lastname@example.org