Securing the right commercial space is a pivotal decision that can make or break the potential success of your business enterprise. For entrepreneurs and business owners in Ontario, finding the perfect location is just the beginning of a complex journey that involves commercial lease negotiation and review. Over the last few months, the backdrop against these negotiations has been further complicated by the challenge of high financing rates.
This blog post will discuss offers to lease and commercial lease agreements in the context of negotiating terms and financing considerations. It will also consider the importance of obtaining sound legal advice throughout commercial real estate transactions. Finally, this post will explore the impacts of the rising interest rates on the Canadian commercial real estate market with a particular focus on the Windsor region.
Is an Offer to Lease a Binding Agreement?
When a commercial tenant negotiates with a prospective landlord, an initial document known as an Offer to Lease (or an Agreement to Lease) containing specific terms will often precede the commercial lease itself. While the commercial lease is the focal point of the negotiation, the Offer to Lease is just as important as the lease itself for setting the relationship between the parties.
The Offer to Lease is a critical document, as once the Offer to Lease has been negotiated and finalized, the deal between the parties is often considered complete. In some cases, landlords and commercial tenants may treat an Offer to Lease as a final lease, while in other situations, the Offer to Lease is used to determine the substantive features of the lease agreement by identifying of the parties, describing the premises, outlining the term of the lease, and setting out particulars regarding rent. When an Offer to Lease sets out the relevant information relating to the commercial lease, it can be considered binding and enforceable. Therefore, if a party fails to meet their obligations under the lease, they may face legal consequences. For these reasons, it is helpful for parties to obtain legal advice from an experienced commercial real estate lawyer to ensure that their rights and interests are protected from the start of the potential landlord-tenant relationship.
Negotiating a Commercial Lease
Commercial lease agreements are more than just contracts. They are the foundation upon which a business will flourish. The terms and conditions outlined in these agreements can significantly impact your overhead costs, flexibility, and, ultimately, your profitability. As such, understanding the intricacies of lease negotiation and review is paramount for any business owner, both seasoned and novice alike.
The prevailing financial environment adds to the complexity of lease negotiations in Ontario, as the commercial lending market has seen substantial fluctuations in financing rates. This has impacted various aspects of commercial leases and commercial lending.
In Ontario, commercial leases are governed by the provincial Commercial Tenancies Act. Commercial leases may contain various elements that are different from other lease types, such as net leases, design-build leases, and purchase options. Since commercial leases can impact the long-term viability of a business, using “boilerplate” lease agreements or failing to conduct sufficient due diligence can expose a party to costly litigation.
The Impact of Rising Interest Rates on Commercial Real Estate
Over the last year, Canada has seen rising interest rates, which has led to the curtailment of floating and fixed-rate commercial real estate lending activity across the country. Although the current interest rate is comparatively favourable compared to historical rates, many borrowers with the ability to temporarily forgo transacting are choosing to do so in hopes that the rates will soon stabilize or decline.
With debt service payments increasing due to the higher interest rates, underwriters are facing new challenges, and borrowers are asking for increased flexibility with respect to repayment to take advantage of potential future opportunities to refinance if rates decrease. The rising interest rate has also negatively impacted commercial lending activity. Therefore, while many people have continued to work remotely due to the COVID-19 pandemic, those seeking to return to the office or change office locations may reconsider their financing options.
The State of Windsor’s Commercial Real Estate Market
In Windsor, the first six months of 2023 saw a decline in commercial real estate deals and their values compared to the first half of 2022. This trend has been largely attributed to high interest rates. However, the city is still on track for its second-best year.
The Associate President of Coldwell Banker Richard Ellis (CBRE) Windsor has indicated that “[o]ffice space is not a large part of our market at the best of times, but those assets are facing challenges in terms of finding liquidity”, while industrial property has not been substantially affected. Compared to the number and value of deals in 2022, CRBE Windsor anticipates an overall year-end decline of 33 percent.
With an eye toward Windsor’s commercial real estate market, CRBE Windsor Senior Vice President Brook Handysides expects the market to ride out higher interest rates comfortably and stated that the Windsor region has been “outperforming other markets across Canada.” While many recent commercial real estate transactions have included local retail and land purchases for future industrial and residential development, office space remains uncertain, particularly in the downtown core. The current vacancy rate is “43.4 percent of listed space, including sub-listed space in the active market.” This vacancy rate can also be considered in light of the ever-changing choices of work arrangements, including remote and hybrid offices.
Willis Business Law Provides Quality Commercial Real Estate Advice to Windsor-Essex County Businesses
The experienced business lawyers at Willis Business Law frequently advise corporate clients on commercial matters, including financing and commercial real estate matters, such as commercial leasing. Our lawyers understand the need for commercial tenants and landlords to minimize risk exposure and preserve their interests, particularly in today’s uncertain financial landscape and commercial real estate market.
Willis Business Law has offices located in Windsor’s financial district. We proudly represent private sector and public clients throughout Windsor-Essex County and the surrounding region. If you have questions about commercial leasing or want to learn more about debt financing solutions, contact us by phone at 519-945-5470 or reach out online to schedule a confidential consultation with a member of our business law team.
