What kinds of insurance should I buy for my commercial building?

Property damage insurance will help protect your investment if your building is damaged or destroyed by fire or other causes. Public liability coverage will protect you if someone is hurt in the building or on your property and sues you.

If the property is occupied by tenants, also consider rent interruption (rental income) insurance to make sure you do not lose rental income while you are repairing damage caused by a fire or severe weather.

What are 'Fixtures'?

They are the parts of the building that are permanently in place and cannot be removed without damage to the building. The plumbing system is an example. Usually, fixtures are included when you buy a building.

Tests to determine whether an item is a fixture may include:

The intent of the parties (was the item intended to remain within the building

On the other hand, items that are not attached or are easily removed are considered to be personal property. Office equipment is an example. Usually, personal property is not included when you buy a building, unless specifically listed in the sales contract.

Some items (like a window air conditioner) might fall into either category. To avoid disputes, it is a good idea to specify in the sales contract how such items are to be dealt with.

If I am buying commercial real estate, what should go into my contract?

Since every real estate deal is different, you will need to get advice from lawyer on how best to protect your interests in the contract. Typically, however, your contract should address at least the following issues:

Your lawyer may advise you to include several other provisions such as representations and warranties of the Seller.

I am looking at a small shopping centre that I may want to buy.How do shopping centre leases work?

Quite commonly, the tenant pays a base also referred to as Net or Minimum rent – often tied to the amount of square feet the store occupies. In addition, the lease may require the tenant to pay a certain percentage of gross sales.

Shopping tenants often contribute a portion of the expenses of maintaining the common areas of the shopping centre and pay for part of the property taxes.

Who is a Landlord?

A landlord is the owner of rental property, who leases it to another person. The landlord is also referred to as the "lessor" of rental property. The landlord lets permits or surrenders the use of its property to permit a tenant use and occupy his/her rental property for a specific length of time in exchange for the monthly payment of or receipt of rent.

Who is a Tenant?

A tenant is a person who has the right to use and occupy rental property in accordance with a rental agreement or lease. The tenant is also referred to as the "lessee" of rental property. The tenant may use and occupy the rental property, for a specific length of time as long as s/he complies with the terms and conditions of the rental agreement, including, but not limited to, the payment of rent.

Who is a Subtenant?

A subtenant is a person who has the right to use and occupy rental property or a portion of rental property leased by a tenant from a landlord. A subtenant has responsibilities to both the landlord and the tenant, Head-Tenant/Lessee. A tenant can sublet rental property to a subtenant, but often must obtain the prior agreement of the landlord; the tenant still remains responsible for the payment of rent to the landlord and any damages to the property caused by the subtenant.The sub-tenant often must agree to abide by the terms and conditions of the Head-Lease before being permitted occupancy by the Landlord.

What is a lease or rental agreement?

A lease, sometimes also referred to as a rental agreement, is an agreement between a landlord and a tenant which gives the tenant the right to use and occupy rental property for a specific period of time. When a tenant turns over the right to use and occupy rental property to a subtenant, the agreement is sometimes referred to as a sublease or assignment of lease.

A lease can be an oral agreement, or it can be in writing. If the lease extends beyond one year, there is usually a requirement that it be in writing. An oral lease has the disadvantage of future misunderstandings over terms of the agreement, and potential problems for enforcement of terms between the landlord and the tenant. At the end of the lease, use and possession of rental property must be returned to the landlord. In addition to other responsibilities, a lease requires the tenant to pay the landlord a specified amount of money each month; this payment is called rent.

What should a lease or rental agreement include?

Although there are many preprinted lease forms, both the landlord and the tenant have the right to change the particular terms and conditions of the pre-printed lease before the lease is fully executed. Lease forms, like all contracts, may be subject to negotiation between a prospective tenant and a landlord.

Is there a difference between a residential and a commercial lease?

 When a person leases rental property from a landlord for use as a residence, the arrangement is called a residential lease. When a business leases rental property, the arrangement is called a commercial lease.

While there are many similarities between residential and commercial leases,provincial and local law often regulates the relationship between a tenant and a landlord under a residential lease. These laws are designed to provide basic requirements for the condition of rental property, and to protect tenants from unscrupulous "slumlords." Since commercial leases are viewed as being contracts between knowledgeable business people, less governmental protection is needed, as knowledgeable business people should be able to negotiate the terms of the lease to their respective satisfaction

What is Zoning?

Zoning is the way the governments control the physical development of land and the kinds of uses to which each individual property may be put.

Zoning laws typically specify the areas in which residential, industrial, recreational or commercial activities may take place. For example, an R-1 residential zone might allow only single-family detached homes as opposed to duplexes or apartment complexes. On the other hand, a C-1 commercial zone might be zoned to permit only certain commercial or industrial uses in one jurisdiction, but permit a mix of housing and businesses in another jurisdiction.

What else do zoning laws regulate?

Besides restricting the uses that can be made of land and buildings, zoning laws also may regulate the dimensional requirements for lots and for buildings on property located within the town, the density of development, and whether you can have pigeons, dogs, sheep or llamas. Some zoning ordinances also regulate the extraction of natural resources from land within the zoned area, others provide space for hospitals, parks, schools, and open space and still others protect places of historical significance within the community.

What is a Purchase Option?

It is a right a seller grants a buyer to buy real estate within a certain period of time. For example, suppose you are interested in buying an office building but want more time to investigate the cash flow and compare this building to others in your area. You might offer to pay the owner an option fee to tie up the property. In return, the owner might be willing to grant you the right to buy the building within a certain period (say, six months) at a stated price. The owner would not be able to sell to anyone else in meantime.

You could agree that all or part of the option fee would apply toward the purchase if you decided to actually purchase the property. If you did not exercise your option, you would forfeit your option fee.

A building I am considering is occupied by several commercial tenants.If I buy the building, can I evict them?

Generally not. If a tenant has a legally valid tenancy and is current on the rent and all other lease obligations, the law usually lets the tenant remain in possession until the end of the lease, regardless of who owns a 'leasehold interest'.

Your best bet is to ask the owner for the legal status of each tenant since your ownership of the building will be subject to those leases. You may need a lawyer's help in evaluating how to deal with the tenants.

I have heard the term 'build-out'. What does it mean?

Every business has its own jargon and the commercial real estate business is no exception. Many office and retail buildings start out with tenant spaces consisting of little more than four walls and a door. The idea is that the spaces will be finished to meet the specific needs of each tenant.

The process of finishing this raw space is known as the 'build-out'. There can be extensive negotiations between the building owner (landlord) and the tenant over:

What improvements will be made?

• Who will pay for these improvements?
• Who will be in charge of getting the work done?
• What will the tenant be permitted (or required) to remove at the end of the lease?

What is a 'nuisance'?
Legally speaking, it is some condition on your property or some use of your property that interferes with a neighbouring owner's ability to enjoy their property. For example, if dense smoke or loud noises are emitted from your property, a neighbouring owner can claim it is a nuisance.

A judge may require you to stop creating the nuisance and to compensate the other owner for any losses.