Commercial Lease Agreements in Ontario: Key Terms to Watch

Signing a commercial lease is often the largest financial commitment a small business makes outside of hiring people. Yet most business owners sign commercial leases with far less scrutiny than they apply to major equipment purchases or supplier contracts — often because the landlord presents the lease as standard, or because the pressure to secure a location feels urgent.

Commercial leases in Ontario are governed primarily by the Commercial Tenancies Act (Ontario), but unlike residential leases, they are not heavily regulated by consumer protection provisions. The parties have wide freedom to contract. That means the lease you sign is largely what you will live with — often for five years or more. Understanding what you are agreeing to before you sign is essential.

Gross Lease vs. Net Lease: Know What You Are Paying

The most fundamental question in any commercial lease is: what does the monthly rent number actually include?

Gross Lease

In a gross lease, the tenant pays a single, all-inclusive rent. The landlord uses that rent to cover property taxes, building insurance, and maintenance (the operating costs of the building). What you see is (roughly) what you pay.

Gross leases are more common in older buildings and some office arrangements. They offer predictability but tend to have higher base rents because the landlord is absorbing operating cost fluctuations.

Net Lease

A net lease separates the base rent from the building's operating costs. In a net lease, the tenant pays:

• Base rent — rent for the physical space
• Additional rent — the tenant's proportionate share of operating costs

Operating costs in net leases are commonly called TMI — taxes, maintenance, and insurance — or CAM charges (common area maintenance). In a fully net lease, the tenant pays their share of property taxes, building insurance, and operating and maintenance costs for the building.

Net leases are extremely common in Ontario retail and commercial spaces. The important thing: the total cost of a net lease is not the base rent number alone. You need to understand what TMI currently runs and how it can change.

What TMI Can Include

TMI is not a fixed number — it is estimated at the start of the year and reconciled at the end. Depending on how the lease is drafted, TMI can include:

• Property taxes
• Building insurance premiums
• Common area cleaning, repairs, and maintenance
• Parking lot maintenance and snow removal
• Property management fees
• Utilities for common areas
• Reserve funds for capital repairs

Ask for the actual TMI figures for the past two to three years, not just the estimate, so you understand the real cost and its trajectory. Some leases cap annual increases in certain TMI categories; others do not.

Lease Term, Renewals, and What Silence Costs You

Initial Term

Commercial leases typically run three to ten years, with five years being common for retail and office space. A longer initial term may come with incentives (tenant improvement allowances, free rent periods) but also locks you in.

Renewal Options

A renewal option gives the tenant the right — but not the obligation — to extend the lease for another term. Critically, a renewal option does not mean the rent stays the same. Most renewal options are at "market rent to be negotiated" or "fair market rent as determined by arbitration." You may have the right to stay, but not the right to stay at today's rate.

Pay attention to:

• Notice deadlines — Most renewal options require the tenant to give written notice months in advance (often 6 months before lease end). Missing the deadline means losing the option. Landlords are not required to remind you.
• What "market rent" means and how disputes are resolved
• Whether the renewal is on the same terms or whether the landlord can introduce new conditions

Holdover

If you remain in the premises after the lease expires without exercising a renewal or negotiating a new lease, most commercial leases convert you to a month-to-month tenancy, often at a higher rent (sometimes 150% of the last monthly rent). This is the "holdover" provision. It is designed to pressure tenants to either commit early or leave on time.

Repair and Maintenance Obligations

Who fixes what is a recurring source of commercial landlord-tenant disputes. The allocation depends entirely on the lease.

Typical allocations:

• Landlord: structural repairs, roof, foundation, building systems (HVAC, plumbing, electrical) not caused by tenant
• Tenant: interior maintenance, fixtures installed by the tenant, any damage caused by the tenant

Watch out for:

• HVAC responsibility clauses — Some leases put full HVAC maintenance and replacement on the tenant. A failing rooftop unit can cost tens of thousands of dollars to replace.
• "As is" provisions — Some leases require the tenant to accept the premises as-is, which can be acceptable if you have inspected and understand the condition, but is dangerous if signed blindly.
• Tenant improvement obligations — If you make improvements to the space, the lease may require you to restore the premises to original condition at lease end (the "restoration clause"). Stripping out improvements you paid for is costly.

Personal Guarantees

When a business (typically a corporation) signs a commercial lease, the landlord often requires the business owner to sign a personal guarantee. A personal guarantee means that if the corporation fails to pay rent, the individual owner is personally liable for the amount owed.

Personal guarantees in commercial leases can be:

• Unlimited — the guarantor is liable for everything the tenant owes for the entire remaining lease term
• Limited in time — for example, the first 12 months of rent
• Limited in amount — a cap on total liability
• "Good guy" clause — the guarantor is released from liability once the tenant vacates and provides proper notice; this limits exposure on early exit

Before signing a personal guarantee, understand exactly what you are personally on the hook for. A five-year lease at $8,000/month with an unlimited personal guarantee means you could personally owe close to $500,000 if the business fails in year one.

Negotiating the scope of a personal guarantee is often possible — landlords do not always volunteer that the guarantee terms are negotiable.

Other Key Clauses to Review

Permitted use clause. This defines what you can use the premises for. A use clause that is too narrow can prevent you from pivoting your business; one that is too broad may conflict with exclusivity rights granted to other tenants.

Assignment and subletting. If you want to sell your business or sublet part of the space, you need the landlord's consent under most commercial leases. What happens to the original tenant's liability after assignment varies — sometimes the original tenant remains on the hook.

Exclusivity clause. In retail or mixed-use properties, you may be able to negotiate an exclusivity clause preventing the landlord from leasing other space in the building to a direct competitor.

Demolition and relocation clauses. Some commercial leases (particularly in older urban buildings) give the landlord the right to terminate early for redevelopment. These clauses deserve attention if the location is critical to your business model.

Frequently asked questions