Commercial Lease nearing its end? What you should know before you renewJul 16 2021
The Fraser Valley currently has an extremely low market availability for commercial lease space. As a result, many commercial landlords are looking to increase their lease rates, while tenants are looking to maintain the status quo. Understanding your obligations and rights at the end of a commercial lease is critical.
Commercial leases vary widely and the Courts will always look first at the wording of the contract. That being said, here are five basic things to consider:
1. What does the lease say will happen on expiry?
The lease will provide a lease end date (or it can be calculated from the start date of the lease and the length of the term). The lease likely also includes terms about the amount of a deposit and how that deposit is to be applied or returned. It may be applied as your last month’s rent, or it may be a security or damage deposit.
2. Is there an option or a right to extend or renew?
Options to renew or extend are often included in commercial leases. Whether or not a tenant exercises a renewal option depends on the current market condition, the tenant’s needs, and the wording of the option to extend or renew.
The wording of the option is critical. Some options are unconditional, some require that the tenant provide notice of its intent to renew within a certain window of time, some require that the tenant not be in default, etc. Where the option to extend requires that notice be provided in a specific way, the courts have held that the notice must be provided exactly in accordance with the terms of the lease. For example, if notice of the tenant’s intent to renew is required in writing more than 60 days before the end of the lease, the courts will typically require exactly that.
Similarly, if the option to extend or renew requires something specific from the tenant, for example, to not be in default, the landlord is generally entitled to strictly enforce those terms and the tenant may lose the right to renew or extend.
The option to extend or renew usually sets out a mechanism for determining the rates that will be paid during the new term. Sometimes, this is express. Other times the renewal clause provides for the rent to be agreed upon between the parties, stipulated by one of the parties, set at the prevailing market rate, or fixed by arbitration. These types of renewal clauses often lead to difficult questions of interpretation.
3. Is there an option to overhold?
A holdover clause describes what will happen if a tenant remains in the premises after the lease expires. Ideally, holdover tenancies don’t happen because the parties have agreed on a renewal or the tenant is able to line up alternate premises before the expiry of the lease, but this isn’t always possible. Holdovers typically convert the commercial lease into a month-to-month lease at an increased price. If there is no holdover clause, the BC Commercial Tenancy Act provides that the tenant must pay double the yearly value of the lease.
4. Is there no right to renew or option to overhold?
If the lease has no right to renew, and no right to overhold, the premises need to be surrendered in the manner provided for in the lease. The lease ought to provide for the state in which the premises need to be left, and many tenants are surprised that the lease requires that they remove any fixtures or improvements.
If a tenant decides not to exercise an option to renew, or is not entitled to stay, the tenant needs time to sort out where to move. The process of finding new space, negotiating a lease, designing, renovating and furnishing a new space takes time. Depending on the market, it could take a tenant close to a year to complete all of the necessary steps.
So, if you’re a commercial landlord or tenant, take a look at those lease terms well before the lease expires and understand your rights or obligations.
CONTACT RDM LAWYERS
Need help navigating a commercial lease expiry or renewal? Already disagreeing about the interpretation of an option to extend? We can help. Contact our office at 604.853.0774 to set up a consult with one of our commercial litigation lawyers today.