What is a Rental Space Agreement?
Part of securing a business in commercial space is signing a rental space agreement (sometimes referred to as a lease), which is a binding contract between lessor and lessee that outlines the terms under which the lessor gives the lessee the right to occupy space in his building, and who is responsible for paying rent. The rental space agreement may come in many forms. It can be either oral or written, with written agreements generally containing more detail and being better able to hold up in court as proof of the rights afforded the parties . It can be long or short, with the most effective rental space agreements addressing all of the essential details that give each party the information needed to live up to his respective obligations under the contract.
A rental space agreement is beneficial to both the lessor and the lessee, in that it sets forth clear expectations as to the rights of the parties while providing documentation as to any legal issues that may arise during the course of their relationship. For example, the rental space agreement can clarify who is responsible for taxes, who pays for maintenance and repairs, and what happens if either party breaches (fails to perform his obligations under) the contract.
Essentials of a Rental Agreement
The agreement is the bedrock of any leasing relationship, whether it is on a familiar form or a customized lease. In either case, the essential terms of a rental space agreement include a description of the rental space, the lease term, rent terms, security deposit and other fees, maintenance responsibilities, and termination conditions.
Description of rental space. The rental space must be described clearly so that the tenant knows exactly where the rental space is located and understands what the rental space consists of. Is it a 2-bedroom suite with an office at St. Andrew’s Place? Is it a 800 square foot office with a toilet down the hall at Quayside? Whether a master key is provided to open all doors or if the rental space has any common areas that the tenant may enter should also be included.
Lease term. The lease term will state whether the rental space is being rented on a periodic (such as a week-to-week or month-to-month) basis or for a fixed term (such as 6 months, or 1 year). If the lease term is a fixed term, the lease will indicate when the lease commences and when the lease terminates. The rental space should be available for occupancy on the commencement date of the lease. If the rental space is available earlier, it is advisable that the rental agreement be amended to state the provisions for early occupancy (if any). The rental space will not be ready for occupancy by the termination date and there will be no extension of the lease term unless the rental agreement has been amended.
Rent terms and how the rent is to be paid (cheque, electronic funds transfer).
Security deposit. The rental agreement can state whether a security deposit is required. A security deposit in relation to residential tenancies is unnecessary. However, a landlord may request a security deposit from a business tenant at the commencement of a lease agreement in order to deter a business from abandoning the premises. Although the security deposit may be held by the landlord, it’s advisable that the tenant and landlord agree in writing at the time of entering into the rental agreement that a security deposit is being held and the terms of the holding of the security deposit (whether interest is payable and when the security deposit will be returned), in order to avoid any misunderstanding between the parties. For residential tenancies, Section 106 and 107 of the Residential Tenancy Act (RTA) deal with security deposits and interest payable on the deposits.
Maintenance and termination conditions. It is the responsibility of the landlord to maintain his rental premises in a habitable condition. If specific maintenance is the responsibility of the landlord or the tenant, such as cleaning, heating and landscaping maintenance, then it is advisable that the rental agreement state the specific maintenance obligations so there is no misunderstanding. The conditions of termination by either the landlord or the tenant should also be stated in the rental agreement, for example, advance notice of the termination for the rental space should be clearly stated.
It’s important to have a complete rental space agreement in place containing all the essential components so that there are no misunderstandings between the landlord and the tenant. A complete rental agreement will specifically state all of the obligations of the parties so that misunderstandings can be avoided.
Common Provisions to Consider
Now let’s look at some of the common clauses you might want to include in a rental space agreement.
Payment Terms
Starting with the payment of rent. This should be the first thing in is how much rent you are due and how and when is it to be paid? Payment guides everything that has to do with this space contract, it’s why they signed on the dotted line in the first place. You should be as clear as possible on details of payment including how it will be delivered to the landlord. Details like payment plans, late fees, etc.
Duration of the Agreement
How long is the rental space to be used by the client? Is there a short term agreement or is this space to be used for a year or more? How is this contract terminated? Failing to include this could be a disaster if both parties are not on the same page on dates for initial rental or termination.
Renewal Options
Does the rental space have an expiration date, say two weeks out, three months, six months, etc.? Can the client renew the rental agreement once the time is up? What are the costs associated with renewing the contract for another duration? In other words, what are the terms of renewal?
Subleasing
Can the client lease out the space to a third party? If so, it should be spelled out the restrictions on the subleasing, if any, and how it will work, should it be allowed.
Modifications
Can the client make changes to this rental space for their own use? If not, you must spell out what they are and are not allowed to do. This can be things like hanging art on the walls, or bringing in state-of-the-art technical equipment. You can expect some space modifications will happen once your rental spaces have been leased out on occasion. Make sure to protect yourself from unwanted renovations, however minor.
Misrepresentation
If either party misrepresents themselves in any way to each other, they are in violation of the rental space agreement. Spell out what constitutes "misrepresentation" and the action the other party can take should it occur. This is about as standard as clauses come and just about every contract needs a misrepresentation clause. It protects contract violators on both sides.
Dispute Resolution
Should a dispute arise in this contract, how are disagreements to be handled? Do you want the dispute to go to arbitration or court? Again, this is another clause that all contracts should have. It’s not uncommon for one of the parties to try and break away the dispute and settle it on their own. When this happens, the dispute must go through the channels set in the rental space agreement, however clear.
Interpreting Legal Responsibilities and Rights
Both landlords and tenants have certain obligations and rights under a rental space agreement. It is vital for both parties to understand these provisions to ensure compliance with the law.
Landlords have an obligation to disclose certain things to tenants in a rental space agreement or lease, including:
Landlords are also prohibited from collecting or requiring a tenant to pay a fee related to rental enforcement processes. If a tenant is charged a re-rental or any other fee, he or she can recover it back from the landlord by deducting the amount from the next month’s rent or from any deposit required to be paid. Under the law, a tenant shall not:
Under state law, landlords are also forced to:
Under state law, tenants are responsible for keeping the unit clean, safe, undamaged, and repaired. Specifically, a tenant has the responsibility to:
The failure by you to adhere to Tenant Obligations may result in landlord evicting you for such a breach.
If a landlord fails to abide by the legal obligations mentioned above or any agreed upon provisions in the rental space agreement or lease, then tenants have a few remedies. Tenants have the right to withhold rent and deduct damage costs from the security deposit at the end of the tenancy. Tenants also have the right to sue the landlord for any damages sustained because of the landlord’s conduct. In the event a tenant makes a claim against the landlord in court, the tenant can recover possession of personal property and the unit, obtain monetary relief (damages), and possibly obtain a restraining order.
Negotiating a Rental Space Agreement
As with any type of lease, a rental space agreement is a contract, and a negotiation with a business person. In respect of a rental space agreement, one party is renting its space out and the other party is paying for the use of such space.
Negotiation Strategies. Depending on a number of factors, including your independent bargaining power with the other party, previous and current relationships, each party’s flexibility, and whether you are dealing with a "professional lease manager" or the owner or property manager, among other things, you may have to base your strategy on the individual circumstances.
One approach is to ensure that you capture the basic terms in relative simplicity. Then flesh the other terms out as needed and requested by the other party. In other words, ensure that the other party cannot in any way misunderstand the term, and then make sure that you each understand all of the other terms. This may sound counter-intuitive, but it may save you the trouble of having to go back and modify a term you thought could not be misunderstood.
If you are dealing with a professional manager or agent, it is very likely that there are forms in place for your type of rental space, and these will impose pre-determined limitations and restrictions.
In every case, it is critically important that you understand the terms of the proposed rental space agreement before signing . It is even better to fully discuss and agree to the material terms prior to signing in order to avoid flushes of anger and emotion over unnegotiated terms that may seem unconscionable and cause significant emotional and financial damage:
Annual Rent. The parties may want to include in the rental space agreement the escalation in rents annually, possibly with a prospect of having it tied to inflation or consumer price index indicators. It is most likely that the landlord will want to have an increase built into the first renewal term.
Rent/Rate. A retail rent is normally expressed in terms of a rate per square foot. The rent may or may not include property taxes, insurance, maintenance, and repairs. At the outset, the owner is obligated to provide an accounting for the prior year and make the tenant an offer as to the following year’s rate. Most often, each renewal has some sort of percentage rent formula built into the rental space agreement with the opportunity to escape the obligation of the percentage rent by simply paying flat rent.
Percentage Rent. Percentage rent frequently applies to restaurants and other businesses who perform services, where the value of the paper currency is lower than the value of the items sold and more of the profit is in the margin or mark-up which may have a fixed cost per unit and an ever-increasing profit margin. The lease will provide for the percentage to be based on gross sales or receipts, including food and beverage tax (if applicable) but excluding returns and allowances for the year.
Distinctions Between Commercial and Domestic Agreements
In Canada, renting or leasing a particular space for personal or professional use is governed by contract law. While the Residential Tenancies Act (RTA) governs residential leases, commercial leases are governed by the general principles of contract law and are subject to common law. When it comes to commercial leases, only the terms of the lease will be enforceable. For example, if the terms of the lease say that the tenant must take care of maintenance, the tenant will be required to do so. However, if the lease does not say anything about maintenance, then it is likely that the landlord will have the responsibility in similar fashion to an RTA lease for a residential unit. In contrast, residential leases covered by the RTA have different expectations. Both the tenant and landlord are obligated to uphold certain responsibilities that will remain binding regardless of whether the lease contains those provisions. For example, only the landlord will be responsible for maintenance, even if the lease says the tenant must do it. Because the RTA holds various statutory provisions, landlords and tenants are not able to modify the lease by removing some of the terms or imposing new terms. Rental space agreements are another term that may be used to refer to commercial leases, however, the RTA does not apply to these types of leases since they are for non-residential purposes. Commercial leases, or rental space agreements, enjoy far more latitude than RTA leases and therefore, parties may structure the lease according to their wishes with the appropriate safeguards.
How to Draft a Rental Agreement
To draft a rental space agreement, one must first gather the essential information regarding the parties involved, the property, and the terms of occupancy. One can begin by seeking a rental space agreement template designed for the type of property they wish to rent, be it an apartment, a house, or a commercial property.
Once a suitable template is located, a prospective tenant can fill in the contact information of the landlord, including their full name, address, phone number, and email address, and then proceed to provide their personal details, including their full name, Social Security number, phone number, and email address.
Next, the tenant will confirm their current employment information, including their employer’s contact information and their monthly income, and provide a co-tenancy clause regarding additional rental applicants. After that, the tenant and landlord will agree to the details of the apartment, including the start date of the lease, the rent amount, and the responsibility for utilities, any rules and regulations, and a list of furnishings.
The landlord may charge a security deposit amount of their choosing, and will outline the conditions under which it will be forfeited, including damages, unpaid rent, and breach of lease. The document will then contain a notice to isolate past, unpaid accounts from one another, such as those belonging to the prospective tenant and previous tenants. The prospective tenant and landlord will then have to sign the rental space agreement and include the execution date.
After the rental space agreement is signed, the landlord should be sure to photograph the rental unit so as to avoid liability in the event they need to collect damages. It is important to note that the prospective tenant is by no means legally required to sign the rental agreement once it has been presented to them by the landlord for review, and that they are entitled to seek review from a lawyer before signing.
Steps if There’s a Dispute
Disputes over Rental Space Agreement Contracts
Despite best efforts, there may be occasions in which disputes arise concerning rental space agreements. If this is the case, then both lessee and lessor have options for resolving the conflict.
Mediation
The first step in any dispute should be an attempt to reach resolution through mediation. This process involves a neutral third party helping the involved parties to come to a harmonious solution. If mediation is unsuccessful, sticking to the process outlined in the rental space agreement could save time and money in the long run .
Arbitration
The rental space agreement may already impart a method of conflict resolution outlined by the lessor. If so, this would be arbitration as described in the rental space agreement rules. Essentially, each party presents their case to a third-party arbitrator, who listens to both sides and makes a decision one way or another.
Legal Action
If the previous two options are unsuccessful, then a lawsuit may be necessary to resolve the dispute. Documentation and communications between involved parties will be necessary to help substantiate the legal argument in whatever jurisdiction the case is filed.