15 leasing tips

LEASING TIPS

by

Harvey M. Haber, Q.C., J.D., LSM,

DSA, C. MED., C. ARB., B.A.
Retail, Office & Industrial Leasing,
Lease Interpretation, Mediation and Arbitration

Linkedin: http://www.linkedin.com/in/harveyhaber

Covenant

The Alberta Court of Queen’s Bench in the case of Equitable Trust Co. v. Lougheed Block Inc, (2013), ABQB 2092013 Carswell Alta 457, 77 Alta. L.R. (5th) (276) Alta. Q.B.at paragraph 37, held that a covenant is  a positive covenant when the covenantor promises to do something.  “A covenant is a negative covenant” when a covenantor promises to not do something.

Time of Essence

The Ontario Superior Court of Justice in a decision dated August 21, 2003-2329131 Ontario Inc. v. Carlyle Development Corp., 2013 OREG// 59001 held that when an agreement has a “time of the essence” clause and one party fails to make a deadline for closing, the other party may sue for damages provided that the other party was “ready, desirous, prompt and eager” to carry out the agreement.

Not Ready to Close

In the case of 2329131 Ontario Inc. v. Caryle Development Corp. 2013 OREG, the Ontario Superior Court of Justice noted that, pursuant to Domicile Developments Inc. v. MacTavish (1999), 45 OR (3d) 302 (Ont. C.A.), a party who is not ready to close on the closing date may rely on the “time of the essence” provision only if it gives reasonable notice setting out a new closing date and reinstating the clause.

Assignment For Different Use

A Tenant operating a fruit and vegetable store in the landlord’s shopping centre, requests landlord’s consent to assign its lease to a luggage store.

Landlord refuses its consent to do so.

Tenant responds that its lease provides that the landlord’s consent will not be unreasonably withheld to a transfer of its lease.

Landlord responds that there is case law that a use clause governs the assignment.

In other words, if the tenant wanted to assign its lease to another fruit and vegetable store, that would be okay, but for a different user that would not be okay.

The landlord, in any event, would be very concerned if it already had a luggage store in its shopping centre (but had not given the luggage store a restrictive covenant).

But what if the lease expressly provided that the tenant could assign its lease to a different use that did not conflict with any restrictive covenant given by the landlord to any other tenant in the shopping centre.

Under those circumstances, the landlord would be obliged to give its consent to the transfer.

Landlord’s Termination Right

A Tenant operating a fruit and vegetable store in the landlord’s shopping centre, requests the right to transfer, its lease to a luggage store.

The landlord responds by terminating the lease.

The tenant responds that its lease provides that the landlord’s consent is not to be unreasonably withheld to an assignment of its lease.

The landlord,  however, points out that the lease contains a provision whereby in the event of a request for an assignment, the landlord has three options, the first being to approve it, the second being to refuse it and third being the right to terminate the lease instead of giving its consent, and that the landlord is exercising the third option.

But, there is recent case law that has held that where a lease provides for a tenant to withdraw its request to assign its lease in the event the landlord refuses the request, and terminates the lease, then the court will not uphold the landlord’s right to terminate the tenant’s lease.

However, if the lease did not provide for the tenant to have the right to “step back” and withdraw its request, then the case in question provides that the landlord can effect a termination of the tenant’s lease, upon the tenant’s request to assign its lease.

Exclusives

Ronald A Goldenberg in his chapter entitled “Distinctive Features of a Shopping Centre Lease ” in “Shopping Centre Leases – 2nd Edition” (Publisher – The Cartwright Group Ltd. 2008,-Editor- in-Chief, Harvey M. Haber Q.C.) sets out that exclusive clauses give a tenant the exclusive right to sell certain products or carry on a certain business in the shopping centre, but that exclusive clauses are not as common as in previous years and are harder to negotiate as major tenants have significantly broadened their “permitted uses”.  Landlords and tenants are experiencing continuing problems as a result of overlapping uses by tenants.

Specialty Contract No Longer Applicable

A landlord should be aware that under the new Ontario Limitations Act, the 20 year limitation period for a landlord to bring an action against the Tenant for outstanding rent arrears, under what is called a “specialty contract” (a lease under seal is a specialty contract) is no longer applicable and the landlord’s claim against the Tenant is limited under the Ontario Real Property Limitations Act to six years from the date the outstanding rent arrears were due.

For example, a clause in the lease requiring a tenant to repair its premises is caught under the new Ontario Limitations Act in which the limitation period is two years from the date on which the claim is discovered or should have been discovered, but a claim for outstanding rent arrears by a landlord has a limitation period of six years.

Landlord’s Remedies

The following question should be considered by a landlord before taking action:

  1. Does the lease require specific notice to the tenant upon rent default before action may be taken by the landlord?
  2. Is there anything belonging to the tenant of value on the premises that is worth seizing by the landlord?
  3. Does the definition of “rent” in the lease include all money payable by the tenant under the lease?
  4. Does the lease provide for “accelerated rent” upon default (for the purpose of distress or bankruptcy)?
  5. Does the landlord wish to preserve or terminate the lease?
  6. Does the landlord have any security for the rent?
  7. Is the tenant a borderline bankrupt?
  8. Is the tenant a chain store?
  9. Is it better to maintain the tenancy? Can a new arrangement be negotiated to meet the needs of both the landlord and the tenant?
  10. Is the tenant a major tenant and what would be the effect of losing such a tenant?
  11. Is the tenant a viable entity and can it continue to operate?
  12. Are there any guarantors or indemnitors of the lease?
  13. What is the likelihood of re-letting that premises and at what cost?
  14. If the landlord wishes to terminate the lease, what is the likelihood of the tenant resisting and creating expensive litigation? Can a surrender agreement be negotiated with the tenant to avoid any potential litigation?

Monetary Default

When a tenant defaults in the payment of rent under its lease, the landlord has the right to:

  • (i) Negotiate a solution (such as a surrender of the lease) – this does not terminate the lease, unless the parties agree to it;
  • (ii) Seize (e.,”distrain”) the goods of the tenant (or any person liable for the rent, such as an assignee, i.e., a third party to whom the lease has been assigned, or a guarantor or indemnitor) on the premises for the rent arrears. If the lease specifically permits the landlord (in the event of a default by the tenant) to claim accelerated rent for an additional three months, this accelerated rent, upon such default, may then be added to the tenant’s rent arrears for the purpose of seizing the tenant’s goods – this does not  terminate the lease, if done properly;
  • (iii) Take security for the rent arrears by way of a guarantee, indemnity, bond, letter of credit or a security interest pursuant to the Ontario Personal Property Security Act, R.S.O. 1990, c. P.10 (“PPSA”) – this does not terminate the lease;
  • (iv) Insist that the tenant perform the terms of the lease and sue the tenant (if need be, on a monthly basis) for the rent as it becomes due – this does not terminate the lease; or
  • (v) Terminate the lease with proper notice, sue the tenant for the rent arrears and also claim damages for losing the benefit of the lease for the unexpired balance of the term – this does terminate the lease.

 

Non-Monetary Default

Where the tenant has breached some covenant in its lease other than the covenant to pay rent, the landlord has different remedies.  The landlord may:

  • (i) Commence legal proceedings for a court order to require the tenant to comply with the terms of the lease (“specific performance”) and to compensate the landlord for any damages resulting from the breach – this does not terminate the lease;
  • (ii) Commence a court action for damages for breach of the particular covenant – this does not terminate the lease;
  • (iii) Commence a court action or application for an injunction to restrain the tenant from breaching the covenant – this does not terminate the lease;
  • (iv) If the original tenant has vacated the premises, the Landlord should give the tenant written notice that the landlord is re-entering the premises on the tenant’s behalf, as the tenant’s agent, without terminating the lease, for the purpose of re-letting the premises to a new tenant on the original tenant’s account. The landlord then may commence legal proceedings against the original tenant for any rent arrears plus any difference in the rent charged to the new tenant and the rent due under the original lease.  This does not terminate the lease, although, if the landlord, in re-letting the premises, changes certain fundamental terms of the lease (e.g., extending the term beyond the original term of the lease), a tenant may successfully argue that, by doing so, the landlord has terminated the lease and ended the tenant’s liability as of the date of termination;
  • (v) Commence a court action for declaratory relief that the lease has ended and for possession of the premises – this does terminate the lease; or
  • (vi) Terminate the lease with proper notice and claim damages for losing the benefit of the lease for the unexpired balance of the term – this does terminate the lease.

 

Terminating the lease

One of the most important initial determinations a landlord must make before choosing a remedy, is to decide whether or not to terminate or preserve the lease, as that will play a major role in the landlord’s choice of remedy.

If the landlord decides to terminate (“forfeit”) the lease and obtain possession of the premises, it may do so in any one of the following ways:

  • (i) Physically re-entry (e., by the landlord or its representative actually physically re-entering the premises and changing the locks);
  • (ii) Upon written notice to the tenant (given pursuant to the Supreme Court of Canada decision, Highway Properties Ltd., v. Kelly Douglas & Co. (1971), 17 D.L.R. (3d) 710, [1971] S.C.R. 562, [1972] 2 W.W.R. 28)), terminate the lease and claim the rent arrears plus damages for losing the benefit of the lease for the balance of its term – the landlord would then commence a court action for the arrears and damages.

 

Mitigation lost

A key issue to remember in deciding whether to terminate the lease is that, once the lease is terminated and notice given (pursuant to the Kelly Douglas case), the landlord has the obligation to mitigate the landlord’s losses if the landlord wishes to pursue a claim against the former tenant.  That’s important, as once the landlord terminates the lease, it can no longer distrain against the tenant’s goods for rent arrears.  In other words, once the landlord terminates the lease (having given the proper notice to the tenant), it must mitigate its damages by endeavouring to locate a new tenant, lease the space and offset against the amount owing by the tenant, the amount it receives from the new tenant:

  • (i) Commence a court action (by a statement of claim) for a declaration that the lease has ended and for possession of the premises by the landlord. In this court action, the landlord can combine a claim for possession of the premises with a claim for rent arrears or damages, or both;
  • (ii) Apply to the court for a writ of possession (an order of the court for possession of the premises) under Part III of the Ontario Commercial Tenancies Act (the “Act”), or its equivalent, and for termination of the lease. This is a summary procedure for evicting a tenant who wrongfully refuses or neglects to vacate the premises upon the termination or expiry of its lease.  Unfortunately, the landlord cannot combine an action for possession under Part III of the Act with a claim for rent arrears or damages; or
  • (iii) Terminate the tenancy by written agreement with the tenant, in which event rent is paid by the tenant to the date of termination, unless otherwise agreed between the parties.

Distress

The landlord’s remedy of distress is the landlord’s right, upon a tenant’s rent default, without notice (unless the lease provides for it), to seize and hold the tenant’s goods, chattels and inventory, as security for rent arrears and, if the rent remains unpaid, to sell the goods and apply the proceeds on account of the rent arrears.  This right is available only if the following conditions are met:

  • (i) There must be a landlord and tenant relationship (a lease or agreement to lease premises at a fixed rent). “Landlord” is defined in the Ontario Commercial Tenancies Act Revised Statutes of Ontario 1990 C.L. 7;
  • (ii) The tenant must be in possession of the premises;
  • (iii) There must be rent arrears due and payable by the tenant to the landlord; and
  • (iv) If the tenant is in arrears and continues to remain in possession of the premises after the lease has ended, the landlord (as long as the landlord continues to hold title to the land on which the leased premises are situated) has the right to seize the tenant’s goods, chattels and inventory, for a period of up to six months after the end of the term. But this six-month right of the landlord does not apply where the landlord has terminated the lease.

Who has Security?

Distress is a self-help summary remedy (i.e., it may be exercised by the landlord or its agent without the need for the landlord to first go to court), which arises on non-payment of rent by a tenant.  It has been affirmed by the Ontario Court of Appeal in Commercial Credit Corp. Ltd. v. Harry D. Shields Ltd. (1981), 122 D.L.R. (3d) 736, 32 O.R. (2d) 703, 14 B.L.R. 121, 1 P.P.S.A.C. 301 (C.A.), and also by the Ontario Court of Appeal in Leavere v. Port Colborne (City) (1995), 122 D.L.R. (4th) 200, 22 O.R. (3d) 44, 79 O.A.C. 16, 25 M.P.L.R. (2d), 9 P.P.S.A.C. (2d) 78, that while a right of distress is not itself a lien on the goods, a lien on them comes into existence when the person exercising a right of distress actually or constructively takes possession of the goods.  This lien arises not by statute but by operation of law as an incidence of the relationship of landlord and tenant.  Under s. 4(1)(a) of the Personal Property Security Act,  R.S.O. 1990, c. P. 10 (“PPSA”), liens created by statute or by operation of law are excluded from the provisions of the PPSA.

Therefore, in a dispute between a landlord under its right of distress and a secured creditor whose security interest has been registered and perfected under the PPSA, the landlord’s right of distress has priority, subject, however, to certain exceptions, such as those   set out in s. 31(2) of the Ontario Commercial Tenancies Act.

Who does distress apply to?

Distress is incorporated into, and governed by the Ontario Commercial Tenancies Act (the “Act”). The Act sets out the parties and the “goods” against which distress may be exercised, and provides for statutory remedies available to tenants and other parties affected by the distress.  It is important to note that in Ontario the right of distress does not apply to residential promises. It applies to commercial premises, such as shopping centres, offices, warehouses and industrial premises.

A landlord should be aware that it may contract out of the distress provisions of the Act.  But a landlord should be very reluctant to waive its right of distress.