Common Red Flags in Commercial Leases in Canada: What Tenants Should Know Before Signing

Why Commercial Lease Red Flags Matter for Tenants

Entering into a commercial lease is one of the most significant legal and financial commitments a business will make. Unlike residential leases, commercial leases in Canada are largely unregulated and heavily negotiated—often starting from a landlord-favourable position.

Understanding key risk areas before signing can help tenants avoid unexpected costs, operational disruptions, and long-term liability. Below are five critical red flags every tenant should be aware of, along with practical strategies to mitigate them.

1. Uncapped Additional Rent and Operating Costs

The Issue:
Many leases require tenants to pay “additional rent” (also known as operating costs or CAM charges) on top of base rent. These costs are sometimes poorly defined and uncapped.

Why It Matters:
Operating costs can increase significantly due to factors like property tax reassessments, repairs, or rising service costs. Without limits, tenants may face unpredictable and escalating expenses that strain cash flow.

Our Advice for Tenants:

• Negotiate a cap on controllable operating costs (e.g., 3–5% annually)
• Exclude or limit capital expenditures
• Ensure costs are clearly defined and reasonable
• Secure audit rights and detailed annual reporting

2. Broad Relocation or Demolition Clauses

The Issue:
Some leases allow landlords to relocate tenants or terminate leases early for redevelopment purposes.

Why It Matters:
Location is critical for many businesses. Being forced to move can result in lost customers, rebranding costs, and business interruption.

Our Advice for Tenants:

Remove such clauses from the lease form. If the tenant does not have the negotiating strength to have these clauses removed from the lease, then some mitigation strategies include:

• Require relocation to comparable premises
• Ensure landlord covers:
  
  • Moving costs
  • Build-out costs
  • Business interruption losses
  
• Negotiate a termination right if the new space is unsuitable
• Require advance notice (12–24 months) for demolition

3. Personal Guarantees and Broad Indemnities

The Issue:
Landlords often require business owners to personally guarantee lease obligations or agree to broad indemnity clauses.

Why It Matters:
This exposes individuals to personal financial liability, even if the business operates through a corporation.

Our Advice for Tenants:

• Limit guarantees by:
  
  • Time (e.g., first 2–3 years only)
  • Amount (e.g., capped at 6–12 months’ rent)
  
• Consider alternatives such as:
  
  • Security deposits
  • Letters of credit
  
• Narrow indemnities to apply only to tenant negligence or misconduct

4. Assignment and Subletting Restrictions

The Issue:
Leases often restrict a tenant’s ability to assign the lease or sublet the premises without landlord consent.

Why It Matters:
This can limit your ability to sell your business, restructure, or exit the lease early. In some cases, landlords may withhold consent or impose additional costs.

Our Advice for Tenants:

• Require that landlord consent cannot be unreasonably withheld or delayed
• Limit the landlord’s ability to:
  
  • Recapture the space
  • Increase rent upon assignment
  
• Allow flexibility for:
  
  • Transfers to affiliates
  • Sale of the business (i.e. landlord consent not being required for a change of control, or alike.)

5. Renewal Terms Controlled by the Landlord

The Issue:
Renewal options may be vague or allow the landlord to reset rent at “market rates” without a clear process.

Why It Matters:
Without certainty, tenants risk being forced into unfavourable renewal terms or losing their location altogether.

Our Advice for Tenants:

• Define how “market rent” is determined (e.g., appraisal process)
• Include a dispute resolution mechanism (e.g., arbitration)
• Lock in key terms where possible (e.g., renewal periods, use rights)

Final Thoughts: Lease Risk Is Manageable With the Right Review Process

Commercial leases are complex legal documents that can significantly impact your business’s financial health and operational stability. While these red flags are common, they are also negotiable—especially before the lease is signed.

Tenants who take the time to identify and address these issues upfront are far better positioned to protect their interests and avoid costly surprises down the road.

If you would like assistance reviewing a lease or negotiating more tenant-friendly terms, seeking Landmark Advisory Services’ legal advice early in the process can make a substantial difference.

---