Distribution Centre Leases ' Suited For You? (Podcast)

• Published date: 24 October 2022
• Subject Matter: Real Estate and Construction, Construction & Planning, Landlord & Tenant - Leases
• Law Firm: WeirFoulds LLP
• Author: Ms Lisa Borsook and David R. Thompson

selfWeirTalking Leasing | WeirFoulds LLP · S2E2. Distribution Centre Leases - Suited for You?

Lisa Borsook and David Thompson dig deep into two types of distribution centre leases - build to suit and existing industrial premises. They discuss why these types of leases are not like the others, the essential things to think about when negotiating these types of leases and other issues that are specific to this form of lease - such as Planning Act and Land Transfer Tax Act compliance construction financing, and other unusual challenges.

Transcript

Narrator: You're listening to season two of WeirTalking Leasing. A podcast series from WeirFoulds LLP's commercial leasing lawyers in Ontario, Canada. In these first few episodes of the season, our speakers cover topics including co-tenancies, distribution leases, and changes to construction legislation that impact leases and construction projects. Now, onto the episode.

David Thompson: Hi, everyone. It's Lisa Borsook, Co-Head of the Leasing Group, and David Thompson. Talking to you today about distribution centres. People with the growth in logistics and warehousing, it's sort of a hot topic. So Lisa, what is a distribution centre?

Lisa Borsook: A distribution centre is a location, usually of an industrial nature, where the tenant uses the premises for the purposes of distributing product. So, they can be distributing product because they're a logistics company, which means that they're a company, the sole purpose of which is to distribute product for other entities, or they can actually be leasing the premises for themselves. So, as you can imagine, with the advent of the internet, a number of companies that historically distributed their product through retail locations are now distributing them through distribution centres, directly to consumers.

David Thompson: So are there different types of distribution centre leases? Obviously, depending on if it's a third-party logistics company or it's their own product?

Lisa Borsook: I think that the difference between the leases for distribution centres that are for a logistics company or for a tenant themselves aren't so substantial. There are a variety of different types, depending on really whether or not it's a build-to-suit distribution centre or an existing industrial premises, but regardless whether it's a logistics company or a tenant, a tenant that's actually distributing its own product, but particularly in the latter case, it is likely that they are going to put a lot of money
into the leasehold improvements that they're putting into the distribution centre. What with an incredible array of new systems that mechanize the process of distributing product.

David Thompson: So build-to-suit, what does that mean? They're only building the inside or they could even build the entire shell?

Lisa Borsook: Well, build-to-suit is for sure the more complicated type of distribution centre lease that you can do. It involves the landlord usually, not always, but usually building the location for the specific tenant, and usually building it to suit their specific needs. So what happens is you enter into a lease, there's usually quite a long construction period at the beginning of the lease, and depending on who is doing construction, there's a package of risks that you need to deal with in the lease relating to that construction. So the build-to-suit, if it's being done by the landlord, creates certain risks on the tenant. On the other hand, if the build-to-suit involves the landlord handing over the land to the tenant and the tenant doing the construction, then the landlord has a package of risks that it wants to look at as well in the context of the construction process.

David Thompson: So for tenants, often it's a ground lease rather than a building lease. What does that mean?

Lisa Borsook: A ground lease is a lease of the land. And it's not a lease of the building. So, if you can imagine, if you go to lease a retail store in a shopping centre, what you're getting is a lease just of premises. The interior area of a location: not the walls, not the structure. If you're entering into a ground lease, then what you're doing is leasing the entire package of land and everything that's on it. At the beginning of the lease, if it's a build-to-suit, there may be nothing on it, except for maybe environmental hazards. And then when you build it, if you're one year in, or you're two years into the term of the lease, the ground lease is going to include the ground, plus the building and all the other improvements. The parking, the landscaping, everything else.

David Thompson: So then there'd be different costs in that kind of lease than a normal store lease, because you have to deal with the parking lot, you have to deal with structure, you have to deal with things that normal tenants wouldn't deal with, right?

Lisa Borsook: So within every genre there's a whole bunch of different options. And in a lot of build-to-suit leases, which...