Commercial Leasing Basics

Leasing commercial space is a major step for any business in Ontario — whether you’re opening your first retail store, expanding an office, or renting a warehouse. Unlike residential tenancies, commercial leases are largely governed by contract law and offer much greater flexibility — and risk — for both landlords and tenants.

This article covers the key concepts you need to understand about commercial leasing in Ontario.

1. What Is a Commercial Lease?

A commercial lease is a legal agreement between a landlord (the property owner) and a tenant (the business occupant) that outlines the terms under which the tenant rents space for business purposes.

The types of commercial spaces which are subject to commercial leases include:

  • Retail space
  • Office
  • Industrial unit
  • Warehouse

Commercial leases in Ontario are governed by the Commercial Tenancies Act, not the Residential Tenancies Act (RTA), which means the parties have more freedom to negotiate — but also more responsibility to protect their interests.

2. Types of Commercial Leases

In Ontario, commercial leases come in different forms. The main types include:

✅ Gross Lease

  • The tenant pays a fixed rent, and the landlord covers most or all of the operating expenses associated with the property (e.g. property taxes, maintenance, utilities, repairs).
  • Easier for tenants to budget but often more expensive upfront.

✅ Net Lease

  • The tenant pays base rent plus a share of property expenses (sometimes referred to as Operating Costs, Additional Rent, TMI or CAM)
  • There are variations depending on the extent of expenses allocated to the tenant: single net, double net, and triple net (NNN) leases.

✅ Percentage Lease

  • The tenant pays base rent + a percentage of their gross revenue.
  • Mostly confined to retail leases

3. Key Clauses to Understand

🔹 Term & Renewal Options

Defines how long the lease lasts and whether the tenant can extend it. Options to renew should be clearly stated, with timelines and notice requirements.

🔹 Rent & Additional Rent (TMI)

There will be a section of the lease that outlines how much the tenant is paying to occupy the premises (“rent”), when rent is payable and any adjustments that will be made to the rent. In many leases, tenants must pay TMI (Taxes, Maintenance, Insurance) on top of base rent, which is sometimes referred to as Additional Rent, Operating Costs and/or Common Area Maintenance (CAM). Tenants should have a clear understanding of what’s included in their rent and how it’s calculated.

🔹 Use of Premises

Specifies what type of business can operate in the space. Tenants should ensure the clause is broad enough to include all of the activities that they plan to undertake in their business. The use clause will also address the need to meet the zoning requirements for the premises.

🔹 Repair, Maintenance, Alterations & Additions

Outlines who is responsible for upkeep, repairs, and replacements to the premises — including HVAC systems, plumbing, and structural elements. It will also control the process of making changes to the leased premises, in the event that the tenant wants to make alterations or additions. If the rented premises are part of a larger building or structure, it will also deal with common or shared areas.

🔹 Assignment & Subletting

Controls whether the tenant can transfer the lease to another party, with or without the landlord’s consent. If the tenant is a corporation, it can also place restrictions on any change in control of the corporate tenant. Usually requires the new tenant or sub-tenant to assume the terms and conditions of the lease.

🔹 Indemnity & Liability

Commercial leases often include indemnity clauses that place broad liability on the tenant for any damage to persons or property in the leased premises. Insurance coverage is usually mandatory and tenants are advised to review the lease’s insurance requirements with their insurer or insurance agent prior to entering the lease.

4. Personal Guarantees

Landlords often require personal guarantees from the business owner or a related party, especially if the tenant is a new corporation or lacks strong financials. This means the guarantor is personally liable if the tenant fails to pay rent or breaches the lease. Guarantors provide the landlord with the assurance that rent will be paid, on-time, throughout the balance of the term.

5. Negotiating a Lease

Unlike residential leases, most commercial lease terms are negotiable, including:

  • Rent and rent-free periods
  • Leasehold improvement allowances
  • Exclusivity clauses (e.g. being the only bakery in a plaza)
  • Early termination or “escape” clauses

It’s strongly advised to engage a commercial real estate lawyer in Ontario to review or draft lease terms before signing.

6. Dispute Resolution and Remedies

Because the Residential Tenancy Board (LTB) has no jurisdiction over commercial leases, disputes must go through Ontario courts or be resolved by negotiation or arbitration (if agreed in the lease). The terms of the commercial lease will generally dictate what constitutes breach of the lease and the various remedies that the landlord or tenant may avail themselves.

In the event of a breach of the lease by the tenant (i.e. Non-payment of rent, damage to the premises, etc.), the lease will provide the landlord with a number of remedies, which may include but are not limited to terminating the lease, re-taking possession, re-leasing the premises, charging accelerated rent, and distressing on the tenant’s chattels. Prior to enforcing its rights under the lease, the landlord must follow proper legal steps, which may include service of notice and (sometimes) obtaining a court order.

Final Thoughts

A commercial lease in Ontario is a legally binding, complex contract — not a one-size-fits-all agreement. Whether you’re a landlord or a tenant, understanding the basics is crucial to protecting your financial and legal interests.

 

Leasing space can be an exciting and profitable next step for a tenant’s business. Having experienced professionals you trust guide you during this process can increase the chances that your commercial lease will work for you and your business.

Whether you are a entering your first commercial lease or extending an existing commercial lease for your property, our experienced team of real estate lawyers at CARREL+Partners LLP is here to help guide you every step of the way. Get in touch today.

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