How a BC commercial lease deal comes together
Commercial lease deals often start with a letter of intent (LOI) or offer to lease that sets out the business terms, followed by a formal lease drafted by the landlord's lawyer. The LOI stage is where the economics are settled. Once the lease draft arrives, reopening rent or allowances is harder, so the checklist below is worth working through before anything is signed.
BDC's guidance to small businesses makes the same point: the proposed lease "usually isn't fixed in stone," and a lawyer should review it before signing (BDC). What follows is a list of the terms that most often carry cost or risk, framed as the questions each side should settle. It does not suggest what is "market" for any building; that depends on property type, location, vacancy and the tenant's covenant, and a local leasing agent can provide comparable deals.
Letter of intent vs binding lease
An LOI can be entirely non-binding, entirely binding, or a mix. The problem cases are the ones where the parties are unsure which. Questions to settle in the LOI itself:
- Which clauses bind?State expressly which paragraphs are binding (often confidentiality, exclusivity of negotiation, deposit handling) and that the rest is subject to a formal lease.
- Conditions and deadlinesFinancing, landlord board approval, tenant due diligence, municipal zoning or business licence confirmation, and the date each must be waived.
- DepositWho holds it, when it becomes non-refundable, and whether it is credited to first month's rent or held as security.
- Form of leaseWhether the landlord's standard form will be used, and whether it has been provided for review before the LOI is signed.
Term, rent and inducements
| Term | Tenant's questions | Landlord's questions |
|---|---|---|
| Initial term | Does the term match the business plan and the payback period on improvements? | Is the term long enough to recover inducements and leasing costs? |
| Renewal options | How many, how long, how much notice, and how is renewal rent set (fixed, fair market, arbitration)? | Is renewal conditional on no default? Is there a floor so rent cannot fall below the last year? |
| Rent steps | Fixed steps or CPI? Are steps applied to the net rent only? | Do the steps keep pace with expected cost and market changes? |
| Free rent | Is it basic rent only, or also additional rent? When does it start? | Is it clawed back if the tenant defaults? |
| Tenant improvement allowance | How much, paid when, against what documents? Can unused funds offset rent? | Is payment tied to completion, lien holdbacks and proof of payment? |
| Fixturing period | How long to build out before rent starts, and is additional rent payable during it? | Who carries insurance and utilities during construction? |
On inducements, BDC notes that it is common for landlords to offer two or three months of free rent and that some contribute to renovation costs (BDC). Whether that applies to a particular space depends on local conditions and the length of term, so ask the landlord or its agent directly.
Whether rent is net, gross or somewhere between changes the value of every concession. See commercial lease types in BC for how basic rent, additional rent and measurement interact.
Permitted use, exclusives, assignment and subletting
Permitted use
A narrow use clause can stop a tenant from adapting its business or finding an assignee. A broad one can let a neighbour compete. Tenants should confirm with the municipality that the intended use is allowed under zoning and that a business licence will be issued before committing; the lease will rarely give that assurance. Landlords should consider how each use fits the existing tenant mix and any exclusives already granted.
Exclusives and competitor clauses
BDC suggests tenants check for a competitor clause, under which the landlord needs the tenant's consent before leasing to a competitor (BDC). Questions: how is the protected use defined, does it bind existing tenants, and what is the remedy if it is breached (rent reduction, termination, or only damages)?
Assignment and subletting
- Is landlord consent required, and is it "not to be unreasonably withheld"?
- Does a sale of shares or a change of control count as an assignment?
- Does the original tenant (and any guarantor) stay liable after assigning?
- Can the landlord take back the space instead of consenting (recapture), and can it share in any sublease profit?
Guarantees, deposits and indemnities
Personal guarantees. A landlord leasing to a new or small company may ask the owners to guarantee the lease personally. Points to negotiate include a cap (for example, a set number of months of rent), a declining guarantee as the term progresses, release on an approved assignment, and whether the guarantee survives renewals and amendments.
Security deposits. Unlike residential tenancies, where the Residential Tenancy Act caps a security deposit at half of one month's rent (RTA, s. 19), there is no statutory cap for commercial space. The amount, whether it earns interest, when it is returned, and whether a letter of credit can be used instead are all contractual.
Indemnities and insurance. Check whether the lease requires the tenant to indemnify the landlord for losses arising from the tenant's use and to carry liability insurance naming the landlord, and whether the indemnity is mutual, whether it excludes the landlord's own negligence, and whether insurance limits in the lease are realistic for the business.
Repairs, restoration, relocation and early exit
- Repair and maintenanceWho repairs and replaces the roof, structure, HVAC and parking areas? Are replacements treated as operating costs, amortized over their useful life, or excluded?
- Improvements and restorationBDC notes that fixtures attached to the premises are generally treated as part of the building and must stay unless the lease says otherwise (BDC). Agree in writing which items are removable and whether the tenant must restore the premises at the end.
- Relocation clauseCan the landlord move the tenant to other space in the project? If so, to comparable space, on how much notice, and at whose cost?
- Early terminationIs there a tenant right to terminate (for example after a set number of years, on payment of unamortized inducements)? Is there a landlord right tied to redevelopment?
- OverholdingWhat rent applies if the tenant stays past expiry? BC's Commercial Tenancy Act allows double the yearly value where a tenant wilfully holds over after written demand, and double rent where a tenant gives notice to quit and does not leave (Commercial Tenancy Act, ss. 15–16). The lease can set its own overholding terms instead.
- Default and cureHow much notice and time to cure before the landlord can act? Remedies on default are covered in the sister site's guide to tenant default in BC.
GST on commercial rent and inducements
A lease of commercial real property is a taxable supply unless specifically exempted, according to the CRA (GST/HST Memorandum 19.4.1). In BC the GST rate is 5% (CRA). The memorandum also explains how common inducements are treated:
| Inducement or payment | GST treatment described by the CRA |
|---|---|
| Rent-free period | No consideration is payable, so the landlord does not collect GST for that period. |
| Rent reduction | GST is calculated on the reduced rent. |
| Cash inducement to sign the lease | The tenant is considered to have made a taxable supply to the landlord. |
| Landlord pays for improvements directly | A registrant landlord may claim input tax credits on the GST it pays. |
| Cash allowance for the tenant to do improvements | The tenant charges and collects GST on the payment received from the landlord. |
| Payment by tenant to cancel the lease | Deemed a tax-included payment for the supply. |
Because treatment depends on how the payment is structured and on each party's GST registration, have an accountant review inducement wording before the lease is signed.
When to involve a lawyer
A BC lawyer should review the LOI before it is signed if any part of it is binding, and the full lease in every case. BDC's advice to tenants is blunt on this point (BDC). A lawyer is particularly important where there is a personal guarantee, a term (including renewals) over three years, which raises registration questions under the Land Title Act (Land Title Act, s. 20), significant tenant improvements, or a specialized use.
How Commercial Real Estate Group can help
Sean Phillips, REALTOR® with Coldwell Banker Executives Realty, represents landlords and tenants in lease negotiations across BC, from LOI to signed lease, working alongside the client's lawyer and accountant. See commercial leasing or book a free 10-minute Zoom intro.