There are two main types of arrangements allowing a person, company or other organization to occupy real estate for a limited period of time without buying it outright.
The first is a lease, which grants the right of exclusive possession of the property for an agreed period of time. A lease confers on the tenant contractual rights and a proprietary interest in the real estate, which can be transferred to a third party subject to specific restrictions set out in the lease. Most commercial leases broadly fall into one of two categories: ‘gross leases’ where the tenant’s financial responsibility is primarily limited to the payment of rent and the landlord is fixed with the operating costs of the property; and ‘net leases’ where the tenant is also responsible for some or all of the cost of operating, insuring and paying taxes on the real property. Leases may be for a building or portion of a building, for land alone (commonly referred to as a ‘ground lease’) or a combination of land and building.
The second is a license which grants permission to occupy or use the property in common with the owner or others authorized by the owner. Unlike a lease, a license is merely a personal contractual arrangement between the original parties and confers no transferrable interest in the real estate to the licensee, and is not binding upon future owners of the land.
In granting a license, property owners need to ensure that they are not inadvertently granting a lease. The courts will not consider whether the document is called a lease or a license but will instead look at the substance of the agreement to determine whether it constitutes a lease or a license.
Last modified 10 May 2023
There is no minimum or maximum term for a commercial lease. The duration of the lease term can be for any number of years or up to a fixed date.
Generally, a commercial office or retail lease for a larger tenant will be for five to ten years with one or more option terms (exercisable by the tenant) usually of one to five years each. Ground leases tend to be for longer terms such as 20 to 99 years, and in many cases the rent is prepaid for the entire term.
In most Canadian jurisdictions, leases for a period greater than three years may be registered on a public register maintained by the relevant government authorities subject to certain statutory requirements. The main benefit of registering the lease on a public register is to provide third parties with notice of the tenant's leasehold interest in the property. In some Canadian jurisdictions, registration of long-term leases (for example, for a term greater than 30 years in British Columbia) will attract land transfer tax in the same manner as a transfer of freehold title.
Last modified 10 May 2023
Parties are generally free to contract as they wish in commercial leases covering industrial property, offices, and retail property, subject to case law and specific provisions in the relevant legislation which generally impact on their terms in minor ways. There are also statutory regimes in each Canadian jurisdiction that govern the registration of leasehold interests. Certain uses of leased property (eg hotels) may also be subject to specific legislation that varies across each Canadian jurisdiction and advice from local counsel should be sought as to local laws affecting specific property types.
Residential tenancies are also governed by specific legislation in each jurisdiction (eg the Residential Tenancy Act, SBC 2002, c. 78 (British Columbia)) and residential tenants have specific rights imposed by such statutes, so specific advice should be sought.
Last modified 10 May 2023
A tenant can continue to occupy the relevant real estate when a commercial lease has expired in two ways. Firstly, it is common for a lease to contain an option for the tenant to renew the lease for an additional term; however, this must be negotiated between the parties.
Alternatively, a lease may contain a holding over clause which allows the tenant to remain in occupation of the leased premises on the basis of a monthly tenancy once the lease term has expired, terminable by either party on a month’s notice. However, where the landlord does not consent to the tenant continuing possession past the expiry of the lease, the landlord is entitled to immediate possession of the leased premises.
Last modified 10 May 2023
Unless a common law or statutory rule is engaged, or unless the lease permits a holding-over period, tenants who continue to possess the leased property after the lease’s termination can be treated as trespassers and the landlord can take immediate action to remove the tenant, which may include an order for possession from the relevant Court.
Last modified 10 May 2023
Absent a specific term included in the lease permitting the landlord to prematurely terminate the lease, or unless the tenant has breached a term of the lease, a commercial lease cannot be terminated before its term concludes. Most commercial leases contain a term permitting early termination upon the non-payment of rent, the destruction of the building or the breach of another material lease term. Rights of a landlord or tenant to terminate a residential tenancy is strictly regulated by statutory provisions under the applicable Provincial or Territorial legislation and specific advice should be sought.
In situations where the tenant has breached a non-essential term of the lease, the landlord may issue a notice of breach and, if the breach is not rectified within the time frame specified by the lease and recorded on the notice, the landlord may terminate the lease. Breach of an essential term of the lease may, in certain circumstances, entitle the landlord immediately to terminate the lease by notice or by re-entry.
Where the landlord becomes entitled to repossess the property, it may generally do so either by an express power of re-entry under the lease or by obtaining a Court order for possession. The landlord may need to comply with notice requirements under the relevant Provincial or Territorial legislation. Canadian courts and tribunals may allow tenants relief from forfeiture of the lease and allow them to rectify breaches of the lease and retain possession of the premises, except in the most aggravated circumstances. For example, if the tenant pays rent arrears then the court may allow it to remain in the premises and exercise any option for a further term, unless there is a long history of rent arrears.
Last modified 10 May 2023
The federal and Provincial governments’ inherent power to take land for public purposes so long as compensation is paid to the land owner is commonly known as the power of ‘expropriation’ in Canada. Upon complete expropriation, any leases affecting the land will automatically terminate and, subject to the provisions of the lease, the affected tenant will have a claim for a portion of the compensation award to cover the value of the unexpired lease and the tenant’s fixtures. Whether a condemnation of only part of the land will result in terminating a lease will depend upon the materiality of the land taken and the provisions of the lease governing this circumstance.
Last modified 10 May 2023
The most common types of security are guarantees given by either a parent company or key individual, and security deposits given either in cash or in the form of a letter of credit issued by a bank.
Last modified 10 May 2023
A lease will commonly limit the purposes for which a tenant can use the leased premises. Typically, the lease will specify certain permitted uses (eg office use) and will expressly prohibit other uses. In addition, municipalities commonly impose zoning laws which limit the lawful uses of property within a given area.
Last modified 10 May 2023
The tenant’s right to alter the leased property is defined in the lease terms. Structural alterations are frequently prohibited, particularly where the tenant only leases part of the building. Non-structural alterations normally require the landlord's consent. Many leases deem improvements to become the property of the landlord on installation, but reserve the right for the landlord to require those improvements to be removed by the tenant at its cost on termination of the lease.
Last modified 10 May 2023
Because leases grant tenants a property interest in the leased premises, a tenant’s interest in a lease can be legally transferred. The terms of the lease will dictate whether the tenant is permitted to assign its lease for the remainder of its term, sublease all or a portion of its leased premises, mortgage its leasehold interest or otherwise grant rights in the leased premises to a third party. Even if not absolutely prohibited, the tenant’s ability to assign or sublet will usually be conditional upon obtaining the landlord’s prior consent in most cases. If the lease is silent as to whether transfers are prohibited, the law will allow the tenant to transfer its lease. Many commercial leases will deem a change of voting control of a corporate tenant to be a transfer requiring consent of the landlord.
If a party is in occupation other than pursuant to a lease (ie by a simple license) any rights of occupation are personal and non-transferrable except with consent of the licensor.
Last modified 10 May 2023
Whether the rent amount can be changed is dependent on the terms of the lease. The length of the lease’s term will likely influence the inclusion of rent review clauses. Rent increases for residential tenancies is typically controlled by applicable Provincial legislation.
Last modified 10 May 2023
The rent payable following a review will normally be the current market rent for the premises at the date of the review or the same rent as the immediately previous period, whichever is higher. The lease may provide a mechanism, such as a procedure for appraisal by an independent expert, for determination of the new rental rate and may also specify whether the expert is required to make certain assumptions about the use and location of the premises and its improvements. If the determination of the expert is not explicitly binding on the parties, the lease may also provide for an arbitration procedure under the applicable Provincial arbitration statute.
Last modified 10 May 2023
Canada has a federal VAT called the Goods and Services Tax (GST). The current rate of GST charged on taxable supplies of goods and services is 5%. The supply of a commercial or retail lease is deemed a taxable supply and the landlord will need to charge GST on the rent and other consideration received from the tenant and will then need to remit the GST received from the tenant to the Canada Revenue Agency. Certain provinces have harmonized their provincial sales tax regime with the federal GST regime, and in those provinces the landlord will need to charge the combined rate of GST plus the rate of provincial sales tax (generally 8–10%), which is referred to as the Harmonized Sales Tax or HST.
Last modified 10 May 2023
The costs payable upon lease commencement are governed by the terms of the lease. Most leases provide for the first fixed rent payment to be made upon signing the lease, together with the delivery of any required security deposit.
Last modified 10 May 2023
The lease’s terms will dictate tenants’ liability for the property’s maintenance. Generally, tenants in multi-tenanted properties will be proportionally responsible for all costs and fees associated with the operation, repair and maintenance of the common areas. Leases may also require tenants to pay a separate fee for parking facilities.
Last modified 10 May 2023
Generally, the tenant is responsible for maintaining the interior lease space while the landlord is typically responsible for maintaining the exterior, structure and common areas of the property, subject to reimbursement by tenants through the shared operating expense mechanism whereby all of the tenants proportionately share the cost of maintaining and operating the common facilities. Responsibility for the costs of major capital replacements, particularly for items such as heating and cooling systems, or roof structures and membranes, are negotiated terms in the lease.
In general, the tenant will not be responsible for carrying out structural repairs, repairs to correct inherent defects or repairs for reasonable wear and tear of the real estate they lease. The landlord may or may not be liable for the cost of these repairs depending upon the terms of the lease. Tenants tend to be liable for any repairs in relation to damage caused by the tenant and to be under an obligation to repair and maintain the leased premises.
Last modified 10 May 2023
Tenants under commercial leases tend to arrange and pay for their own utilities and telecommunications directly from the suppliers where they are able to obtain a separate connection. Otherwise, the landlord can arrange to supply the utilities and telecommunications and provide these services to the tenant, often with an additional administrative fee.
Last modified 10 May 2023
The landlord will generally be responsible for taking out insurance in respect of any building or improvements on the property. Policies are usually taken out for the replacement value of the building/premises and cover usual risks such as fire, storm, malicious damage or earthquake. Landlords may also take out general liability policies to cover risks and liabilities associated with the occupation and use of the property by tenants and their employees, customers and invitees. The cost of the landlord’s insurance premiums is typically passed on to the tenants as part of the shared operating expenses.
The tenant will normally be responsible for obtaining the necessary insurance policies for its business and property including general liability insurance and property damage insurance with respect to the tenant’s property, and are often required to procure business interruption insurance and insurance covering injury to employees and workers.
Last modified 10 May 2023
If the rent is to be changed or increased how will the new rent be determined?
The rent payable following a review will normally be the current market rent for the premises at the date of the review or the same rent as the immediately previous period, whichever is higher. The lease may provide a mechanism, such as a procedure for appraisal by an independent expert, for determination of the new rental rate and may also specify whether the expert is required to make certain assumptions about the use and location of the premises and its improvements. If the determination of the expert is not explicitly binding on the parties, the lease may also provide for an arbitration procedure under the applicable Provincial arbitration statute.
Last modified 10 May 2023