With rising inflation rates, both landlords and business owners are feeling the strain of increased costs. With a new year on the horizon, you might wonder whether and how often your commercial rent can be increased in Ontario. A solid budget and business plan are critical for any business, and understanding upcoming costs is a vital part of that plan.
Ultimately, the devil is usually in the details. If you’ve signed a commercial tenancy agreement, it likely addresses whether the landlord can increase the rent, how often it can be increased, and the process for raising the rent. Below, we discuss commercial tenancy agreements, rental increases, and the options available to parties dissatisfied with a rental increase.
What Is a Commercial Tenancy?
Before diving into commercial tenancy agreements and rental increases, it’s important to distinguish between commercial and rental tenancies. In Ontario, commercial tenancies are governed by the Commercial Tenancies Act. On the other hand, residential tenancies are governed by the Residential Tenancies Act.
The Residential Tenancies Act applies to accommodations that are used (or intended for use) for a residential purpose, while the Commercial Tenancies Act applies to spaces that are used for a commercial purpose. So, if you’re renting space for commercial use, the Commercial Tenancies Act applies.
Sometimes, the issue of whether a tenancy is residential or commercial may require clarification. If you need direction, you can apply to the Landlord and Tenant Board to determine whether your tenancy falls under the Residential Tenancies Act or the Commercial Tenancies Act.
Entering a Commercial Tenancy
Chances are, you’ll enter into a commercial lease agreement with a landlord if you decide to rent a space for your business. A commercial lease agreement will vary depending on the unique needs of the parties involved but typically will cover the following topics:
- Whether a deposit is required and, if so, the deposit amount
- The rent amount, including rent increases and notice requirements
- The length of the tenancy
- When and how the lease ends
- Other obligations depending on the circumstances (for example, insurance requirements, renovations, maintenance, and repairs)
How Often Can a Landlord Increase Commercial Rent in Ontario?
The Commercial Tenancies Act does not guide rent increases. Therefore, it’s up to the parties to agree on the frequency and amount of commercial rent increases in Ontario (including when notice of a rental increase will be given to the tenant). This information should be included in the commercial lease agreement, primarily because a landlord is entitled to increase the rent by any amount at any time if the commercial tenancy agreement does not state otherwise.
Resolving Issues Relating to Rental Increases
Disputes can arise regardless of whether your commercial tenancy agreement covers rent increases. For example, a landlord might agree to increase rent by no more than a certain percentage per year but later determine that they are undercharging. Alternatively, a tenant might agree to annual rental increases and subsequently struggle to keep up with their payments. So, what happens when a party is dissatisfied with a rental increase?
Ultimately, the options available to the parties will depend on the terms of the commercial tenancy agreement. Here are a few options the parties might consider when a dispute arises regarding a rental increase.
The Parties Negotiate
Landlords and tenants should always remember the value of communication. If a dispute arises relating to a rent increase, nothing prevents the parties from attempting to negotiate a mutually acceptable alternative. After all, while a commercial tenancy agreement may give the landlord the power to increase rent (or provide a favourable rental increase process for the tenant), one or both parties may be motivated to continue their landlord-tenant relationship for other reasons. These could include the convenience of continuing the relationship versus finding another tenant or space, current economic circumstances, or the availability of commercial rental space in the area.
The Parties End the Commercial Tenancy Agreement
In some cases, one of the parties may elect to end the commercial tenancy agreement. The parties may even mutually agree to terminate the agreement.
The process for ending a tenancy depends on the terms of the commercial tenancy agreement. If, for example, the landlord is renting the space on a month-to-month basis, either party may end the tenancy by providing written notice at least one month in advance (unless a different notice period is specified in the commercial tenancy agreement). However, if the parties have entered a fixed-term lease, the tenant will likely need to pay the rent for the remaining term unless the commercial tenancy agreement states otherwise.
The Tenant Subleases the Commercial Property
Depending on the terms of the commercial tenancy agreement, the tenant may be able to sublease the commercial property for the remaining duration of their lease. This option can be useful for fixed-term leases. However, its success depends on the tenant finding another party to sublease the space to for the remainder of their term while ensuring they do not run afoul of the commercial tenancy agreement.
The Courts Resolve the Conflict
Sometimes, the parties may need the court’s assistance to resolve their conflict. For example, litigation may be required if one of the parties breaches the terms of their commercial tenancy agreement (for example, if the landlord increases rent improperly in breach of the commercial tenancy agreement).
Considerations for Commercial Rental Increases
While the points above illustrate what can happen when a dispute arises regarding a commercial rental increase, the options available to a party will ultimately depend on the terms of the commercial tenancy agreement. To avoid confusion, stress, or disputes down the line, it is critical for commercial landlords and tenants to clearly outline their expectations regarding how often the commercial rent can be increased from the outset. Taking these steps before a tenancy agreement begins is the best way to set expectations and ensure that no surprises arise the next time the rent is increased.
For further guidance on renting commercial property in Ontario, consult the Ontario government’s guide to renting commercial property in Ontario or contact an experienced commercial real estate lawyer.
Oakville Commercial Real Estate Lawyers Representing Buyers, Sellers, and Professionals
At Campbells LLP, our experienced commercial real estate lawyers regularly assist business owners and entrepreneurs with all real estate aspects of their venture. Our team advises commercial landlords and tenants and represents clients in litigation. We can provide ongoing advice as your business grows or be retained to address stand-alone issues as they arise. To speak with one of our experienced real estate lawyers, contact us online or call 905-828-2247.