How an industrial bay lease is structured

Almost every industrial bay in Alberta is leased on a net basis. The tenant pays a base rent to the landlord and, on top of it, a proportionate share of the costs of running the building. Understanding which costs sit where is the difference between a budget that holds and one that does not.

This page explains the structure. It does not quote rates — no rent, operating cost or market figure appears anywhere on this site, because none is published in any source we rely on.

The two rents

• Net rent (also base rent or basic rent) — the rent for the space itself, quoted per square foot per year and paid monthly.
• Additional rent (also operating costs, op costs or TMI) — your proportionate share of taxes, insurance, maintenance and management. Covered in detail in additional rent explained.

Your monthly payment is normally one twelfth of the annual net rent plus one twelfth of the estimated annual additional rent, on the leased area, plus GST.

Rentable area

Rent is charged on the rentable area, which is not necessarily the area inside your walls. It may include a share of common areas, and how a mezzanine is treated is a matter for the lease. Two bays with identical usable space can carry different rentable areas. See how a bay is measured.

Term and escalations

Small-bay leases commonly run three to five years, with longer terms where the tenant is funding a significant fit-out. Net rent typically escalates — either in fixed steps written into the lease, or on a stated formula. Additional rent is not escalated; it is reconciled to actual cost each year.

A renewal option gives you the right to extend, usually at market rent with a mechanism for determining it. An option is worth having, and the mechanism matters — an option to renew at a rent the parties must agree on is not much of an option.

Free rent and allowances

• Fixturing period — a period before rent starts, to build out. Confirm whether additional rent is payable during it; often it is.
• Free rent — months of abated net rent. Check whether it is truly free or is recaptured if you default.
• Tenant improvement allowance — a landlord contribution to your fit-out, usually paid on completion against invoices and lien-free evidence.
• Landlord's work — work the landlord does at its own cost before you take possession. Get it defined in a schedule, with a date.

Security

Expect a deposit — commonly first and last month's gross rent, sometimes more where the covenant is new or the fit-out is heavy. A new business should expect a personal guarantee or an indemnity to be asked for. Both are negotiable in scope and duration, and a guarantee that burns off after a period of good payment history is a reasonable thing to ask for.

The clauses worth reading twice

• Use — narrow use clauses limit what you can do and who you can assign to. Push for the broadest use the landlord will accept.
• Assignment and subletting — this is your exit. A clause allowing the landlord to terminate rather than consent can strand you.
• Repair — who maintains and who replaces the roof, structure, slab and mechanical equipment. A tenant paying to replace a rooftop unit in year two of a five-year term is a common and avoidable outcome.
• Restoration — what you must remove and restore at the end of the term. Agree it now, in writing, or you will negotiate it later with no leverage.
• Relocation — a right for the landlord to move you. Resist it in an industrial bay; a fit-out does not relocate.
• Operating cost exclusions — see the additional rent page. This is where money is quietly lost.
• Estoppel and subordination — normal, but read what you are agreeing to confirm.

Get advice

A commercial lease is a long-dated financial commitment, frequently with a personal guarantee attached. Have a lawyer review it. The cost of the review is small next to the cost of a repair clause you did not understand.