Contracts – Commercial Lease Agreements

Overview of Issue

Commercial lease agreements specify the obligations of the landlord (lessor) and the obligations of the tenant (lessee). If a healthcare organization is leasing space to a tenant, they must be clear on their role as the landlord. If a healthcare organization is leasing space to provide patient care, they must be clear on what they are allowed/not allowed to do with that space.

HIROC recommends subscribers have their corporate counsel review all contracts.

Refer to related Risk Notes for details: Contracts – Important Provisions. Contracts – Insurance Clauses, Contracts – Indemnification Clause with Hold Harmless and Defense Provisions

Key Points

• Lease agreements should specify what the landlord is responsible for and what the tenant is responsible for.

Things to Consider

Common Provisions

• A commercial lease agreement typically has the following provisions:
  • The type of property being rented;
  • The address of the property being rented;
  • The term of the tenancy and provisions for renewal and termination;
  • The amount of rent payable and when it should be paid. This provision also includes rent increases and the method of rent calculation. For example rent calculation may be the percentage rent lease, gross rent lease, net lease, net-net lease, triple net lease;
  • Consequences for; breach of lease, arrears in rent and eviction procedures;
  • The type of business that may be conducted on the premises;
  • Ownership of any leasehold improvements;
  • The provisions of any security/damage deposits;
  • Responsibility for property improvements;
  • Insurance and indemnification provisions; and
  • Governing law provision.

Use of Property

• The agreement should specify:
  • What may or not be done on the property, e.g. addition of tenant improvements and introduction of special risks such as storage of pharmaceuticals;
  • Who is responsible for utilities (e.g. heating/ ventilation/electricity).
• If the tenant has access to common areas (where available such as cafeteria and gymnasium), the agreement should specify who is responsible for them (e.g. maintenance of the premises and equipment).

Maintenance

• The agreement should specify who (i.e. landlord, tenant or other) is responsible for:
  • Upkeep of the premises and the outside areas, including parking areas and access to the building;
  • Maintenance of the premises and keeping it safe for tenants and visitors. For example, it is important to make sure that drainage is unimpeded so that flooding is avoided, the sprinkler system is monitored, the premises are secure from unwanted access, heat and proper ventilation;
  • Garbage disposal;
  • Snow removal. Note: if contracted, the landlord should make sure the contractor(s) has appropriate and adequate insurance;
  • Special services (e.g. removal and disposal of biomedical waste and specific storage requirements such as those required by computer storage operations and blood and milk banks).

Safety and Security

• The agreement should specify who is responsible for the safety and security of:
  • The property, including items as fire, smoke and burglar alarms; sprinkler system; heating systems; storage of hazardous materials such as oxygen tanks, etc.;
  • Pharmaceuticals and/or high value equipment (where applicable).

Insurance

• The agreement’s insurance clauses:
  • Must clearly specify the types of insurance coverage, the limits of liability, the deductibles and other items pertinent to the contract and activity involved. At the very least, the insurance requirements for tenants must include general liability, tenant’s legal liability, products and completed operations, contractual liability, cross liability and severability of interest. If the tenant provides professional services, the lease should require professional liability insurance.
  • Must require that the tenant purchase property insurance for contents, business interruption, boiler and machinery for boiler equipment that the tenant himself has purchased or is legally responsible for. This may include special air conditioning, refrigeration or fire prevention equipment for such risks as computer rooms and pharmaceutical storage;
  • Include a thirty-day prior notice of material change to, cancellation and non-renewal of the policy. This is important so that all parties are aware of significant changes in coverage.
• Some leases may require a waiver of subrogation clause, which should be referred to legal counsel (or insurer) as this removes the tenant’s insurer’s right to recover money from the landlord, if its negligence caused damage to the tenant’s property.
• If the insured is the property owner, the insurance requirements should include at minimal general liability, products and completed operations, contractual liability, cross liability and severability of interest. The insured must also insure the building (unless the agreement stipulates that the tenant must carry building insurance), business interruption and boiler and machinery. The building owner often requires that the tenants add the owner as additional insured to the tenant’s policy but only in regard to the lease agreement.
• Mutual indemnification clause – see risk note: Contracts - Indemnification Clause with Hold Harmless and Defense Provisions • Insurance requirements may vary according to the type of lease and the tenant’s operations.

References

• Canada Business Network. (2018). Signing a commercial lease.
• Gharib C. (2015). Negotiating a commercial lease? Here’s what you need to know.
• Law Depot. (2016). Commercial lease agreement FAQ – Canada.