Commercial Leasing: Adapting to Evolving Commercial Real Estate Dynamics

In today’s dynamic commercial leasing market, ESG concerns, rising office vacancies, densification and high inflation are reshaping the industry. 

Here are five key considerations for successful lease agreements:

1. Properties Undergoing Development. Landlords should ensure that their lease documentation contains sufficient flexibility to redevelop, such as by way of termination and relocation rights, as well as the ability to redefine what constitutes the project or shopping centre. At the same time, tenants can negotiate to exert control over the impact construction may have on their day-to-day use of the premises and mitigate risk by introducing parameters around the exercise of any related termination or relocation rights. 
2. Net Zero Carbon Leases. Whether a landlord or tenant, it is imperative to start thinking about a net zero carbon future. When drafting a net zero carbon compatible lease, landlords should retain the right to introduce renewable energy technology (e.g., solar panels) and require that their tenants use the energy produced by the technology. It is also important to include data-sharing provisions to monitor and report on energy and utility consumption. Many leases overlook the purchase of carbon offset credits, which are often required to achieve net zero carbon recognition. Landlords will want to recover these costs, while tenants may resist if they have met their obligations.  
3. Competition Act. Recent amendments to the Competition Act impact restrictive covenants and exclusives in leases and introduce potential private rights of action and significant financial penalties. The new rules could make it easier for private parties, not just the Competition Bureau, to litigate, and a disgorgement remedy would be available for successful private litigation. The financial penalties for violations are substantial, so navigating this evolving legal landscape requires a thorough understanding of these amendments and proactive lease management.
4. Turnkey Delivery of Premises. A landlord delivers “turnkey premises” when it completes all (or substantially all) of the improvements required for the tenant to operate. A well-drafted lease agreement will contain a clear scope of the work that the landlord must complete and a mechanism for either party to request changes in the work. The lease should also contain any cap on the landlord’s costs to complete the work (as is commonly the case) and who is responsible for cost-overruns (typically the tenant). Additionally, parties should consider any consequences for delays, such as rent abatement or termination rights. 
5. Subleases. Subleasing is increasing, especially in the office market. Conducting appropriate due diligence and understanding the head lease terms are critical to avoid potential legal issues. Beyond that, determining which of, and how, the tenant’s rights, benefits and obligations under the head lease will flow through to the subtenant is crucial for ensuring smooth subleasing transactions, avoiding the importation of unwanted terms into a sublease, and adequately protecting all parties.

Have more than five minutes? Watch our recent webinar on this topic or contact any member of our Commercial Real Estate group to learn more.