THE SIX-MINUTE - LSUC Store SIX-MINUTE Commercial Leasing Lawyer 2017 CLE17-0020301-A-PUB...

chairs

William (Bill) Rowlands McMillan LLP

Alison Tortorice Senior Director, Legal

The Cadillac Fairview Corporation Limited

February 22, 2017

THE SIX-MINUTE Commercial Leasing Lawyer 2017

*CLE17-0020301-A-PUB*

DISCLAIMER: This work appears as part of The Law Society of Upper Canada’s initiatives in Continuing Professional Development (CPD). It provides information and various opinions to help legal professionals maintain and enhance their competence. It does not, however, represent or embody any official position of, or statement by, the Society, except where specifically indicated; nor does it attempt to set forth definitive practice standards or to provide legal advice. Precedents and other material contained herein should be used prudently, as nothing in the work relieves readers of their responsibility to assess the material in light of their own professional experience. No warranty is made with regards to this work. The Society can accept no responsibility for any errors or omissions, and expressly disclaims any such responsibility.

© 2017 All Rights Reserved

This compilation of collective works is copyrighted by The Law Society of Upper Canada. The individual documents remain the property of the original authors or their assignees.

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Library and Archives Canada Cataloguing in Publication

The Six-Minute Commercial Leasing Lawyer 2017

ISBN 978-1-77094-777-1 (Hardcopy)ISBN 978-1-77094-778-8 (PDF)

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Chairs: William (Bill) Rowlands, McMillan LLP

Alison Tortorice, Senior Director, Legal, The Cadillac Fairview Corporation Limited

February 22, 2017

9:00 a.m. to 12:30 p.m. Total CPD Hours = 3 h 30 m Substantive

The Law Society of Upper Canada

130 Queen St West Toronto, ON

SKU CLE17-00203

Agenda

9:00 a.m. – 9:05 a.m. Welcome and Opening Remarks

William (Bill) Rowlands, McMillan LLP


PRELIMINARY ITEMS 9:05 a.m. – 9:13 a.m. Conditions for Tenant Possession

Jordan Hill, Director, Legal, Ontario Portfolio Office, The Cadillac Fairview Corporation Limited

THE SIX-MINUTE COMMERCIAL LEASING

LAWYER 2017

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9:13 a.m. – 9:21 a.m. WELL Building Standard: Shifting the Focus to Wellness in the Built Environment

David Ross, McMillan LLP 9:21 a.m. – 9:29 a.m. New Reporting Requirements for Ownership Interests in Land

Sonja Homenuck, Dentons Canada LLP

SPECIFIC LEASE TERMS 9:29 a.m. – 9:37 a.m. Gross Revenue and Internet Sales

Julie Robbins, Director, Legal Services, Morguard Investments Limited

9:37 a.m. – 9:45 a.m. How Insurance and Indemnity Provisions Need to Work Together

Macdonald Allen, WeirFoulds LLP

9:45 a.m. – 9:53 a.m. Rent Abatement: When is it Appropriate to Include it in a Commercial Lease?

Dennis Tobin, Blaney McMurtry LLP 9:53 a.m. – 10:01 a.m. Drafting “Fair Market Rent” for Renewals

Christina Kobi, McLean & Kerr LLP

10:01 a.m. – 10:09 a.m. Relocation Provisions: How Much Certainty is Too Much? Laurie Sanderson, Gowling WLG (Canada) LLP

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10:09 a.m. – 10:17 a.m. For whom are you Responsible in Law?

Steven Cygelfarb, Fogler Rubinoff LLP

10:17 a.m. – 10:25 a.m. Consent to Transfer: Procedure; What is Reasonable?

Stephen Posen, Minden Gross LLP 10:25 a.m. – 10:33 a.m. Clauses that Smaller Tenants Should Focus On

Elizabeth Earon, Blake, Cassels & Graydon LLP 10:33 a.m. – 10:48 a.m. Coffee and Networking Break REMEDIES 10:48 a.m. – 10:56 a.m. Landlord Remedies

Sarah Turney, Fasken Martineau DuMoulin LLP 10:56 a.m. – 11:04 a.m. It’s Fundamental, No Really, Fundamental Breach as a Tenant’s Remedy David Thompson, WeirFoulds LLP SPECIFIC TYPES OF LEASES 11:04 a.m. – 11:12 a.m. Issues in Leases to and from Municipalities John (Jack) Payne, Legal Department, City of Toronto

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11:12 a.m. – 11:20 a.m. Issues in Leases to Health Clubs and Gyms: Make Sure Your Lease is in Good Shape!

Michael Horowitz, Minden Gross LLP 11:20 a.m. – 11:28 a.m. Sale Leasebacks

David Holmes, First Capital Asset Management ULC LENDERS AND OTHER THIRD PARTIES

11:28 a.m. – 11:36 a.m. Non-Disturbance Agreements

Mervyn Allen, McMillan LLP 11:36 a.m. – 11:44 a.m. Anticipating the Needs of Future Players and other Third Parties

Faruk Gafic, Aird & Berlis LLP SPECIAL TENANT RIGHTS 11:44 a.m. – 11:52 a.m. Are You Afraid of the Dark? Tenant Rights to “Go Dark”

Melissa McBain, Daoust Vukovich LLP

11:52 a.m. – 12:00 p.m. Lease Expansions

Yael Bogler, Owens Wright LLP

12:00 p.m. – 12:08 p.m. Do You See What I See? Visibility Protections Celia Hitch, Director, Retail Legal Services,

Oxford Properties Group Inc.

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12:08 p.m. – 12:16 p.m. Exclusive and Naming Rights in Office Buildings Abraham Costin, McCarthy Tétrault LLP 12:16 p.m. – 12:30 p.m. Question and Answer Session Abraham Costin, McCarthy Tétrault LLP Celia Hitch, Director, Retail Legal Services,

Oxford Properties Group Inc. William (Bill) Rowlands, McMillan LLP


12:30 p.m. Program Ends

February, 22, 2017 SKU CLE17-00203

Table of Contents

TAB 1 Conditions for Tenant Possession ………………………………… 1 - 1 to 1 - 8


TAB 2 WELL Building Standard: Shifting the Focus to

Wellness in the Built Environment ………………………………… 2 - 1 to 2 - 17

David Ross, McMillan LLP

Kailey Sutton, Student-at-Law, McMillan LLP TAB 3 Practical Advice for Complying with Ontario’s New

Corporate Record Keeping Requirements Does the term “Ownership Interest” apply to Leases? ……………………....... 3 - 1 to 3 - 5

Sonja Homenuck, Dentons Canada LLP

Arielle Kieran, Dentons Canada LLP TAB 4 Gross Revenue and Online Sales …………………………………… 4 - 1 to 4 - 8

Julie Robbins, Director, Legal Services, Morguard Investments Limited

THE SIX-MINUTE COMMERCIAL LEASING

LAWYER 2017

TAB 5 How Insurance and Indemnity Provisions

Need to Work Together ……………………………………………… 5 - 1 to 5 - 15

Macdonald Allen, WeirFoulds LLP

TAB 6 Rent Abatement in Commercial Leases ……………………….. 6 - 1 to 6 - 26

Dennis Tobin, Blaney McMurtry LLP

W. Colin Empke, Blaney McMurtry LLP

Horatiu Porime, Blaney McMurtry LLP

TAB 7 Drafting “Fair Market Rent” for Renewals ……………………. 7 - 1 to 7 - 9

Christina Kobi, McLean & Kerr LLP

Tab 08 Relocation Provisions: Getting it Right

How Much Certainty is Too Much? ………………………………. 8 - 1 to 8 - 15

Laurie Sanderson, Gowling WLG (Canada) LLP Tab 09 Those For Whom One is in Law Responsible …………………. 9 - 1 to 9 - 31

Steven Cygelfarb, Fogler Rubinoff LLP Max Reedijk, Student-at-Law, Fogler Rubinoff LLP

Tab 10 Consent to Transfer: Procedure; What is

Reasonable? ………………………………………………………………… 10 -1 to 10- 16

Stephen Posen, Minden Gross LLP Oladipo (Ladi) Onayemi, Student-at-Law, Minden Gross LLP

Tab 11 A ‘Smaller” Tenant’s “Top 10”: Lease Provisions to

Think About When You Don’t Have Clout ……………………. 11 - 1 to 11- 9

Elizabeth Earon, Blake, Cassels & Graydon LLP

Tab 12 Landlord Remedies ……………………………………………………. 12 - 1 to 12 - 8

Sarah Turney, Fasken Martineau DuMoulin LLP

Tab 13 Tenants Just Wanna Have Fun-damental Breach …………. 13 - 1 to 13 - 8

David Thompson, WeirFoulds LLP Robert Eisenberg, WeirFoulds LLP

Tab 14 Issues in Commercial Leases to and from

Municipalities ……………………………………………………………… 14 - 1 to 14 - 9

John (Jack) Payne, Legal Department, City of Toronto Tab 15 Issues in Leases to Health Clubs and Gyms: Make Sure Your Lease is in Good Shape! ………………………………………… 15 - 1 to 15 - 8

Michael Horowitz, Minden Gross LLP Tab 16 Sale-Leasebacks ……………………………………………………………. 16 - 1 to 16 - 7

David Holmes, First Capital Asset Management ULC

Tab 17 Non-Disturbance Agreements ………………………………………. 17 - 1 to 17 - 8

Mervyn Allen, McMillan LLP

Tab 18 Anticipating the Needs of Future Players and

other Third Parties ………………………………………………………… 18 -1 to 18- 12

Faruk Gafic, Aird & Berlis LLP Tab 19 Are You Afraid of the Dark? Tenant “Go Dark”

Rights ………………………………………………………………………….. 19 - 1 to 19 - 8

Melissa McBain, Daoust Vukovich LLP Jenna Morley, Daoust Vukovich LLP

Tab 20 Go Big or Go Home Expansion Rights –

An Overview ……………………………………………………………….. 20 -1 to 20- 13

Yael Bogler, Owens Wright LLP Tab 21 Do You See What I See? Vistas and No Builds ………………. 21 - 1 to 21 - 3 Celia Hitch, Director, Retail Legal Services,

Oxford Properties Group Inc. Tab 22 Exclusive and Naming Rights in Office Buildings ………….. 22 - 1 to 22 - 5 Abraham Costin, McCarthy Tétrault LLP

TAB 1

Conditions for Tenant Possession


February 22, 2017

THE SIX-MINUTE

Commercial Leasing Lawyer 2017

Conditions for Tenant Possession

By Jordan Hill The Cadillac Fairview Corporation Limited

Introduction

As retail leasing lawyers, we often notice certain themes emerging in lease negotiations over

time. Depending on economic conditions, retail trends, recent case law and other factors, from

time to time certain sections of the lease are negotiated more heavily than others. Recently,

we have noted that our retail tenants are spending significantly more time negotiating

conditions for tenant possession.

In many cases, a typical landlord’s retail lease will identify a fixed calendar date as the tenant’s

possession date, on which the landlord agrees to turn over possession of the premises to the

tenant. The tenant will then have a maximum number of days for its fixturing period, during

which the tenant will complete its tenant’s work as required in order to open for business in the

premises. During recent lease negotiations, we have seen more frequent requests from our

retail tenants for certain conditions which must be satisfied before the possession date is

triggered and the fixturing period begins. These conditions range from technical requirements

that the tenant needs to have in place before it can proceed with construction (such as the

issuance of the tenant’s building permit) to items that the tenant wants to have in place before

it is comfortable moving forward with its investment in the premises (such as the landlord

securing tenants for neighbouring premises). While it is reasonable to request certain

conditions for tenant possession, depending on the circumstances in a given lease, landlords

must be cautious when agreeing to these conditions. Unless carefully drafted, conditions to

possession could have unintended consequences. Most notably, they can lead to unanticipated

delays in the possession date, which in turn will delay the commencement date of the lease. A

delayed commencement date will have certain obvious consequences (such as the delay in

commencement of rent payments) but may also lead to other indirect consequences, including

those affecting other tenant’s leases in the shopping centre (such as co-tenancy provisions

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which may be triggered by the failure of a particular tenant to open for business as originally

scheduled).

This paper will outline some of the more commonly requested conditions to possession,

together with some drafting tips.

Defining the Possession Date

In cases where the tenant has negotiated for conditions to possession, the possession date can

no longer be defined as a fixed calendar date. Instead, the parties will typically identify an

anticipated possession date, being the target date upon which the parties expect all of the

conditions to possession to be fulfilled, followed by the list of conditions which must be fulfilled

in order to trigger the actual possession date. This framework is also used in most cases where

there is significant landlord’s work and the landlord is not in a position to identify a fixed

calendar date at the time the lease is signed. A sample clause is provided below:

The Tenant shall have a maximum period of [INSERT LENGTH OF FIXTURING PERIOD] days to complete the Tenant’s Work (the “Fixturing Period”) which shall commence on the later of: [INSERT CALENDAR DATE] (the “Anticipated Possession Date”), or (ii) the date next following the date on which all of the following requirements (the “Delivery of Possession Requirements”) have been satisfied, or waived by the Tenant:

A list of the negotiated conditions to possession will follow.

Examples – Most Frequently Requested Conditions to Possession

Substantial Completion of Landlord’s Work

This condition is typically requested when there is a substantial amount of landlord’s work to be

completed. It will almost always be provided in a development lease, where the shopping

centre is being newly constructed or redeveloped and the landlord has significant amounts of

landlord’s work. The tenant should not be required to take possession and have its fixturing

period commence if the landlord is still completing its landlord’s work and the landlord’s

presence will interfere with the tenant’s ability to commence and complete its tenant’s work.

We often see the tenant request that the possession date does not occur until the landlord’s

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work is “substantially complete.” Although commonly used, the term “substantially complete”

does not have a universally accepted definition in the context of commercial leasing, and may

be open to interpretation and dispute. To avoid any uncertainty, the parties should explain in

more detail what level of completeness is required. A basic clause is as follows:

The date the Landlord provides possession of the Premises to the Tenant with the Landlord’s Work sufficiently complete such that the Tenant may commence the Tenant’s Work.

The foregoing description will be adequate in most circumstances. However, if the tenant

expects any specific element of the landlord’s work to be complete prior to the possession date

this should be identified as a requirement for “sufficient completion” (for example, the tenant

of a multi-level premises may require that its elevator will be installed by the landlord and will

be in good working order prior to taking possession, if the tenant requires the use of the

elevator in order to conduct its tenant’s work). Similarly, if the landlord expects that any

specific element of the landlord’s work will not be complete prior to the possession date, and

the tenant is comfortable that this will not interfere with the tenant’s work, this should be

specifically carved out of the description of “sufficiently complete”, with the parties agreeing

that the landlord may continue such work during the tenant’s fixturing period (for example, the

landlord’s work in connection with a big box tenant or pad site may include exterior work such

as landscaping or façade work, which can in most cases be completed during the tenant’s

fixturing period without any interference to the tenant’s construction activities within its

premises).

It is recommended that the lease provides that in the event of a disagreement over whether or

not the landlord’s work is sufficiently complete such that the tenant may commence the

tenant’s work, the opinion of the architect (typically defined in the lease an accredited architect

selected by the landlord) should be binding on both parties, in order to ensure that any such

disputes are resolved in a timely manner without the need to resort to arbitration or other

more costly, time-consuming dispute resolution measures.

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Fully Executed Lease

Many landlords enforce a strict “no lease, no keys” policy. Keys to the premises will not be

provided to the tenant until the landlord has received a copy of the lease (in final form as

approved by the landlord) duly executed by the tenant. Tenants may make a similar request,

insisting that the possession date is not triggered until the landlord has provided the tenant

with a fully executed copy of the lease. This condition is not unreasonable, but should only be

granted if the tenant agrees to provide its executed copy to the landlord within a reasonable

time period prior to the anticipated possession date. Otherwise, the tenant would be able to

unilaterally delay the possession date simply by delaying its own execution of the lease. A

sample clause is provided below:

The date the Landlord has provided the Tenant with a fully executed copy of this Lease, provided that the Landlord receives a copy of this Lease, duly executed by the Tenant and in a form acceptable to the Landlord, at least five (5) business days prior to the Anticipated Possession Date, failing which this condition shall be deemed deleted.

Approval of Tenant’s Plans

The tenant may request that the possession date does not occur until the landlord has

approved the tenant’s plans and drawings in connection with its construction of the Premises.

Where a tenant has an established retail concept and has existing leases with the landlord, this

condition may not be necessary, as the landlord will be familiar with the tenant’s typical store

design, and the tenant will be familiar with the landlord’s design review process. However, this

condition may be appropriate in the context of a new landlord-tenant relationship, or for an

existing tenant that is introducing a new retail concept. This condition should be drafted

carefully, to avoid the possibility of the tenant unilaterally delaying the possession date by

failing to submit plans (or re-submit plans, once comments are received) in a timely manner:

The date the Landlord approves in writing the Tenant’s final construction plans and specifications for the Tenant’s Work, provided the Tenant has submitted construction plans and specifications in the manner required under this Lease for approval by the Landlord by [INSERT DATE] and, if required, promptly re-submits such plans and specifications within five (5) business days form receipt of the Landlord’s comments and

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requested revisions, and otherwise actively and diligently pursues obtaining such approval, failing which this condition shall be deemed deleted.

Tenant’s Building Permit

The tenant is unable to begin construction without a building permit, and will not want its

fixturing period to start running until the building permit has been obtained. For these reasons,

tenants will often request that as a condition to possession, the tenant has received its building

permit (and any other permits) required in order to commence its construction. Landlords

should be cautious before agreeing to such a condition. The timing for obtaining a building

permit can vary significantly from one municipality to the next and is entirely outside of the

landlord’s control. The tenant is aware of the anticipated possession date, and should be

responsible for taking whatever steps are necessary to obtain its building permit in a timely

manner (including taking into account the typical timing for the municipality in question, and

ensuring that its building permit application is complete, meeting all requirements for the

municipality in question). In most cases, the landlord will not want to accept the risk that the

tenant does not apply for and pursue its building permit in a timely manner.

While it will generally not be necessary for a typical CRU retailer, a building permit condition

may be warranted in certain cases, such as an anchor or large non-major tenant, a big box

retailer, or other tenant who will be performing extensive and significant tenant’s work. If

granted, the building permit condition should include specific criteria which must be fulfilled by

the tenant, including a deadline for submitting its application for the building permit, failing

which the condition should be deemed deleted. The landlord should also put a limit on the

length of time that the possession date may be delayed by this condition.

Possession Co-Tenancy

In an operating centre, a possession co-tenancy will generally not be necessary or appropriate.

However, in the case of a brand new development, or the redevelopment or expansion of a

significant part of an existing shopping centre, a tenant may request a possession co-tenancy

from the landlord. The tenant will want to avoid a scenario where it takes possession of its

space, completes its tenant’s work, and opens for business alone, while surrounding premises

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remain vacant for weeks (or worse, months) past the tenant’s commencement date. Prior to

taking possession and investing time and money on the construction of a store, the tenant may

want some assurance that the surrounding premises have in fact been leased to other retailers.

A possession co-tenancy is usually drafted so that the tenant is not required to take possession

of its premises until the landlord has certified that a certain percentage of other anticipated co-

tenants of surrounding permises (for example, at least 6 out of 10 anticipated co-tenants) have

signed a binding offer or lease with the landlord for the surrounding premises.

As with any co-tenancy, the landlord will want to ensure that if the co-tenants are named

retailers, the concept of a “suitable replacement tenant” is built into the condition. Otherwise,

in the event one or more of the named co-tenants does not proceed with a binding offer or

lease, the landlord may discover that its possession co-tenancy cannot be cured, even once the

named co-tenant is replaced with another retailer.

Deemed Acceptance

Of course, in most cases the tenant will be motivated to take possession in a timely manner and

begin construction of the tenant’s work. Depending on the circumstances, the tenant may elect

to take possession despite certain conditions to possession remaining unfulfilled on the

anticipated possession date. Landlords should insist that in the event the tenant elects to

accept possession of the Premises, then any and all conditions should be deemed waived. If

the tenant has decided that the unfulfilled conditions do not prevent it from taking possession

and beginning its tenant’s work, then the unfulfilled conditions should not prevent the

triggering of the possession date and the commencement of the fixturing period:

If the Tenant accepts possession of the Premises, then for the purposes of establishing the commencement of the Fixturing Period, the Delivery of Possession Requirements shall be deemed waived upon such acceptance.

Remedies

When the conditions to possession have not been met on the anticipated possession date,

what are the tenant’s remedies?

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In most cases, the lease will provide that all other lease dates (including the commencement

date) will be delayed by the same number of days as the actual possession date is delayed

beyond the anticipated possession date. This is generally sufficient to deal with most delays.

Certain tenants may insist on a “dead period” (or “blackout period”) during which the tenant

will not be required to take possession. There may be windows of time throughout the

calendar year when certain tenants are not prepared to open a new store for business (which

may be centered around certain seasons or holidays). The tenant will not want to take

possession during any time period where the commencement date will end up falling during

one of these “dead periods”. Instead, the tenant will request that in the event that the

possession date is delayed to a date within a predetermined “dead period”, the tenant may opt

to take possession on the day following the expiry of such “dead period”, with all other relevant

dates to be postponed accordingly.

In certain cases, the parties may agree that after an extended period of delay, a financial

penalty will also apply. This may be appropriate where there is extensive landlord’s work to be

done, such as the construction of a new shopping centre, and as a result the parties recognize

that there is greater potential for a significant delay to the actual possession date. As an

example, the parties may agree that if the actual possession date is delayed more than 90 days

beyond the anticipated possession date, the tenant will receive a financial penalty (it may be a

specific dollar amount, or it may be equivalent to one days’ rent) for every day the possession

date is delayed beyond such 90 day delay (the landlord should try to negotiate a maximum

amount on the financial penalty that may be triggered by this clause).

At some point (generally after 12 months’ delay or more), the delay will become so significant

that the tenant may want the option of walking away from the deal and looking for alternative

premises. The parties may agree that in the event the possession date is delayed more than 12

months beyond the anticipated possession date, the tenant may provide written notice to the

landlord to terminate the lease. This clause should provide that in the event of such

termination, the lease is terminated and neither party shall have any recourse to the other.

This clause should also be drafted so that the tenant is required to deliver its notice of

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termination within a specified period (for example, 30 days) after this right to terminate has

crystallized, to avoid a situation where the tenant has an ongoing right of termination that can

be exercised indefinitely into the future.

The landlord will want to ensure that any delays which can be attributed to force majeure or

the actions (or failure to act) of the tenant be excluded from the calculation of any delay, for

the purpose of any of the above remedies.

Conclusion

When it comes to meeting target dates in a timely manner, the interests of the landlord and the

tenant will usually be aligned. Both parties want the landlord’s work and tenant’s work to be

completed on schedule so that the premises can open for business on the anticipated

commencement date – after all, the tenant wants to start generating revenue, and the landlord

wants to start collecting rent. Tenants who are concerned about the risk of potential delay are

more frequently requesting conditions to possession. Where both parties take a practical

approach, it is possible to negotiate fair and reasonable conditions which are appropriate in the

context of a given lease.

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TAB 2

WELL Building Standard: Shifting the

Focus to Wellness in the Built Environment

David Ross McMillan LLP

Kailey Sutton, Student-at-Law,

McMillan LLP

February 22, 2017

THE SIX-MINUTE


WELL Building Standard: Shifting the Focus to Wellness in the Built Environment by David N. Ross and Kailey Sutton1

McMillan LLP

INTRODUCTION:

The commercial leasing industry may be reaching the point where the stakeholders (the

building owners and tenant occupants) are, in some markets, beginning to maximize their

returns and efficiencies through improvements to the physical environment by implementing

programs like LEED and others – that is, there is less opportunity to economize and create

additional value in this way. The focus may now turn to investing with a view to improving the

lot of the occupants of the buildings to achieve greater returns, as a growing body of literature

suggests that there are costs to be saved by making investments in the work environment, with

the goal of making tenants and employees happier and healthier. The WELL Building Standard

(the “WELL Standard”), developed by Delos Living LLC, a wellness real estate and technology

firm based in New York City, and administered by the International WELL Building Institute

(“IWBI”), is one way in which the industry is beginning to make these types of investments.

However, as the WELL Standard is only just starting to be integrated into new projects, its goals,

costs and benefits are not yet fully understood.

Although the WELL Standard is meant to apply across most built environments, from

low-income housing to mega commercial developments, what may yield the highest potential

for return is the standard work environment in which people spend most of their woken time.

Therefore, in the commercial leasing context it is important for stakeholders to take notice of

the potential gains to be made from investing in building improvements that create an

improved working environment for those they house.

This paper will attempt to draw together in a broad overview the current issues the

WELL Standard addresses, the stakeholders it impacts, what the WELL Standard entails, steps to

1 Kailey Sutton is currently completing her articles at McMillan LLP.

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certification, its interaction with existing standards such as LEED, and a brief cost-benefits

discussion.

CURRENT ISSUES ADDRESSED BY THE WELL BUILDING STANDARD:

There has been a growing focus on the impact the built environment has on the health

and wellbeing of building occupants, most particularly tenants and their employees. Commonly

discussed issues which are, at least in part, attributed to existing standard workplace designs

include physical effects such as chronic pain and fatigue, the epidemic of obesity, mental health

impacts such as burn-out and negative moods, decreased productivity and even workforce

attrition.

The most common clusters of these negative physical and psychological impacts have

been termed “Sick Building Syndrome” (“SBS”).2 Though there is no universal definition, SBS

generally involves acute health symptoms that seem to have no specific cause other than their

relation to spending time in a particular building, which disappear or improve on leaving the

building. These symptoms often include: headaches and dizziness, aches and pains, irritated,

blocked or runny nose, eye and throat irritation, nausea and fatigue. The causes of such

symptoms have been identified as: inadequate ventilation, low humidity, inadequate sound

insulation, a high level of noise created by piping or air-conditioning systems, fluctuations in

room temperature, airborne particles, airborne chemical pollutants, poor lighting, electrostatic

charges, poor standards of cleanliness and inadequate display screen equipment resulting in

glare or flicker. Further, symptoms have been linked to psychological factors such as stress or

low staff morale, which can have both mental and physical impacts.3

2 Designing Buildings Ltd., “Sick Building Syndrome” (November 10, 2016) online, Designing Buildings Wiki:

<https://www.designingbuildings.co.uk> [Designing Buildings Ltd., “Sick Building Syndrome”]; See also discussion in,

for example, W. J. Fisk et al., (2015) “Effects of ventilation rate per person and per floor area on perceived air quality, sick

building syndrome symptoms, and decision-making.” Indoor Air, 25:362-370; LeeAnn Jones and Nicole J. Wade, (1998)

“Sick Building Syndrome: Who Foots the Bill.” Prac Real Est Law, 14(3): 9-24.

3 Designing Buildings Ltd., “Sick Building Syndrome”, supra note 2.

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Such negative impacts on tenants can be remedied with early attention to the design of

the physical environment, whether at the initial build-out stage or later renovation stages. A

particular example is useful for illustration. It has been found that “mood, learning and

memory become impaired when the circadian system shifts due to light stimuli.”4 External

factors such as timing, length, intensity and wavelength of light exposure play a role in

physiological synchronization or “entrainment.” This means that higher lighting levels can

increase alertness because it lowers melatonin, while a disrupted rhythm can negatively impact

other biological systems, such as one’s metabolism. Therefore, inclusion of circadian lighting,

which emulates the natural environment,5 may mitigate such negative effects. That said,

lighting is not the only influencer of circadian rhythm: exercise, feeding, temperature,

pharmacology, locomotor stimuli, social interaction, stress and so on, must also be considered.6

It is for this reason that the WELL Standard involves many different areas of focus.

While at first it may appear that, on its face, the health issues of a tenant’s employees is

a remote worry for landlords, there has been some evidence that tenants will take these

matters to court, seeking damages caused by such building problems.7 This suggests that there

may be benefits for owners/landlords to provide, and employers/tenants to seek out, buildings

that will support the wellbeing of tenants.

4 Kathryn M. Stephenson, Carmen M. Schroder, Gilles Bertschy, Patrice Bourgin, “Complex interaction of circadian and non-circadian effects of light on mood: Shedding new light on an old story,” Sleep Medicine Reviews: 16:5: 445-454;G. Vandewalle, S. Gais , M. Schabus, et al., “Wavelength-Dependent Modulation of Brain Responses to a Working Memory Task by Daytime Light Exposure” Cerebral Cortex: 17:12:2788-2795; Although this mostly refers to jetlag / shift work, not just limited to those; see also Sumedha M. Joshi (2008) “The Sick Building Syndrome,” Indian J Occup Environ Med, 12(2): 61-64.

5 World Green Building Council, “Health, Wellbeing and Productivity in Offices: The next chapter for green building” (2015) online at: <http://www.worldgbc.org>

6 J.F. Duffy, Charles A. Czeisler, “Effect of Light on Human Circadian Physiology” (Sleep Medicine Clinics, 2009 4:2:165-177), J.F. Duffy, R.E. Kronauer, et al. (1996). “Phase-shifting human circadian rhythms: Influence of sleep timing, social contact and light exposure.” Journal of Physiology-London 495(1): 289–297.

7 See, for example, West American Ins. Co. v Band & Desenberg (1996), 925 F Supp 758 (US MD Fla); Stillman v Travellers Ins. Co. (1996), 88 F.3d 911 (US CA 11th Cir Fla); there appear to be no Canadian cases that report damages awarded on the basis of SBS, although there are instances of related illnesses such as “chemical sensitivity” in, for example, Mackenzie v Ward, 2007 CarswellOnt 3034 (Ont SCJ).

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The WELL Standard aims to address these issues and others in order to provide a

healthier and more productive work environment.

STAKEHOLDERS:

In a commercial leasing context, the major stakeholders are the owners/landlords and

the tenants and their employees. It is in the interest of the owners to attract high quality

tenants and it is in the interest of the tenants to maximize their employees’ health, satisfaction

and productivity. The WELL Standard markets itself as a way of improving all.

As noted in a recent article in The Globe & Mail by Ashley O’Neill, Vice-President of

Corporate Strategy at CBRE, “employee salaries are almost always a company’s largest cost,

representing typically 60 per cent to 70 per cent of overhead, whereas real estate accounts for

only 10 per cent.”8 Further, a recent publication in Bisnow Toronto titled “Nonprofits risk losing

talent because their workspaces aren’t cutting it” discusses how “nonprofits are failing to utilize

the workplace as a means of promoting their culture and attracting talent.”9 With these

considerations in mind, studies are finding that employers are willing to invest an increasing

amount into the health and wellness of their employees to retain talent, and that one way to

do that is through their work environment. The WELL Standard provides a means for both

appearing innovative and employee-focused, as well as a means for actually improving health

and comfort.

Indeed, “wellness” has been touted as “the next trillion dollar industry, as employers

invest in healthy living programs and as customers take more responsibility for optimizing their

own health.”10 This includes investing in an environment that will keep employees happy:

8 Ashley O’Neill, “The new frontier in health and wellness: the office,” (November 30, 2016), online on The Globe and Mail at: <http://www.theglobeandmail.com>

9 Ryan Starr, “Nonprofits risk losing talent because their workspaces aren’t cutting it” (November 29, 2016) online on

BisNow Toronto at: <https://www.bisnow.com>

10 International WELL Building Institute, “WELL Building Standard” PowerPoint Presentation (September 2015) online

at: <https://www.wellcertified.com > [IWBI “Well Building Standard” PowerPoint Presentation 2015]; Megan Reilly,

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“[t]alent trumps rent: employee engagement and wellness rank 2nd on the list of factors

influencing a tenant’s real estate decisions.”11 The IWBI website states that:

In the design and development industry, owners, designers and builders expect health

to have a higher influence on design and construction decisions...Employers spend 90

percent of their annual operating costs on people. This means that even a small impact

on productivity, engagement and satisfaction in the workplace can have huge returns on

investment.12

It is therefore expected that, “[w]ithin the next 3-5 years... 99% of employers [will] offer health

improvement and wellness programs.”13 In a commercial leasing context, it simply makes sense

for landlords to provide what tenants are looking for.

Proponents of the WELL Standard argue that its integration helps attract and retain top

talent; communicates and enhances culture, brand and corporate responsibility; establishes

differentiation from competitors; and demonstrates an investment in human capital.14 Thus,

for building owners, the WELL Standard can have a significant impact in terms of enticing high-

end tenants who believe in the necessity of having a healthy and comfortable work

environment for its existing and prospective employees.

“What’s this WELL Standard I Keep Hearing About?” (November 2, 2016) online on WestEdge Design Fair at:

<http://www.westedgedesignfair.com>.

11 CBRE Canada, “WELL Played: How to Position the WELL Building Standard” PowerPoint Presentation (received from

CBRE on November 21, 2016) [CBRE “Well Played” PowerPoint Presentation].

12 International WELL Building Institute, “WELL Development Process” (retrieved January 6, 2017) online at:

<www.wellcertified.com > [IWBI “WELL Development Process”].

13 IWBI “Well Building Standard” PowerPoint Presentation 2015, supra note 10, citing Aon Hewitt 2013 Health Care

Survey. Aon plc.

14 CBRE “Well Played” PowerPoint Presentation, supra note 11.

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WHAT IS IT? AN OVERVIEW OF THE WELL STANDARD:

As described in a recent Delos press release, the WELL Standard “helps create spaces

that actively contribute to human health, performance and well-being by marrying the best

innovations in technology, health, science, and real estate.”15 It was formally launched in 2014

and is administered by the IWBI, a public benefit corporation created by Delos, whose mission

is to improve human health and wellbeing through the built environment by harnessing the

power of private capital for public benefit.16 Its intention is to provide a path for designing

buildings that support wellness through a performance-based certification system that marries

best practices in design and construction with evidence-based medical and scientific research.

While CEO of Green Business Certification Inc. (“GBCI”), Rick Fedrizzi (now Chairman of

IWBI) was quoted as saying about the WELL Standard: “We always say green buildings are

healthier for their inhabitants, but until now, we didn’t have an aggressive system that looked

at wellness and the human condition from a completely separate lens.”17 The WELL Standard is

“the world’s first building standard focused exclusively on human health and wellness,”18 with

the goal of adapting the built environment to improve the overall health and wellbeing of the

occupants who spend 90% of their daily lives inside these buildings.19 It is comprised of seven

specific areas of focus: (1) light – to minimize disruption to circadian rhythm to improve energy,

mood and productivity; (2) comfort – to create an indoor environment that is distraction-free,

productive and soothing; (3) air – to optimize and achieve optimal indoor air quality; (4) mind –

15 Delos, Press Release, “Delos and Structure Tone partner to drive Wellness Real Estate through construction practices

and projects” (October 4, 2016) online at: <http://delos.com >

16 Real Estate Forums, Delos, “The WELL Building Standard” (retrieved November 30, 2016) online at:

<http://www.realestateforums.com >; Designing Buildings Ltd., “WELL Building Standard” (November 26, 2015) online

Designing Buildings Wiki: <https://www.designingbuildings.co.uk > [Designing Buildings Ltd., “WELL Building

Standard”].

17 CoreNet Global, Canadian Chapter, “The WELL Building Standard for Your Well Being” (retrieved January 6, 2017)

online at: <http://canada.corenetglobal.org >, quoting Rick Fedrizzi, CEO of GBCI (as he was then) [CoreNet Global].

18 Designing Buildings Ltd., “WELL Building Standard”, supra note 16.

19 International WELL Building Institute, “FAQ” (retrieved January 6, 2017) online at: < https://www.wellcertified.com>

[IWBI, “FAQ”].

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to support mental and emotional health; (5) nourishment – to encourage healthy eating habits;

(6) fitness – to encourage physical activity through design and corporate policy; and (7) water –

to optimize water quality while promoting easy access.20 Through these elements, the WELL

Standard hopes to mitigate or altogether prevent the negative impacts of unhealthy work

environments and provide a healthier, more comfortable environment for tenants.

It is important to note that the WELL Standard is not meant only for new building

projects – it applies to new construction, tenant improvements and core and shell

developments. Therefore, it can be implemented in stages, if need be. Also to be noted is that

the WELL Standard is not just for office buildings, but is also being introduced into higher-end

residential buildings, hotels, schools and lower-income housing21, thereby having the potential

to impact a range of people and industries.

Certification22

WELL Standard certification “allows building owners and employers to know that their

space is promoting health and well-being as it was designed and intended.”23 There are 102

metrics that are sorted into the seven categories listed above, some of which overlap with

LEED. There are between 27 and 41 preconditions for certification, depending on the building

type, and there are additional optimizations which will move a building up to silver, gold, or

platinum.24 Specifically, the steps to follow for a building to become WELL certified are: (1)


21 CoreNet Global, supra note 17.

22 IWBI, “FAQ”, supra note 19.

23 International WELL Building Institute, “WELL Building Standard” (retrieved January 6, 2017) online at:

<https://www.wellcertified.com> [IWBI “WELL Building Standard”].

24 Carl Seville, “Green Building Curmudgeon: A First Look at the Official WELL Building Standard,” (Nov 11, 2014)

online at Green Building Advisor: <http://www.greenbuildingadvisor.com >; Seville is a member of Green Building

Advisor and “a green builder, educator, and consultant on sustainability into the residential construction industry.”

[Seville].

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registration; (2) documentation requirements; (3) performance verification; (4) certification; (5)

recertification.

Certification goes beyond buildings – a person can become a WELL Accredited

Professional, which signifies that the person has knowledge in human health and wellness in

the built environment, with a specialization in the WELL Standard.25

Interaction with the LEED Standard

The WELL Standard is also designed to work with the more established LEED standard,

with which most building owners and tenants are familiar (even if they have not implemented

it). Running parallel to the WELL Standard, LEED’s primary objectives are “preserving the

environment and saving money.”26 In Canada, it was developed by the Canada Green Building

Council “to recognise sustainable site development, water savings, energy efficiency, materials

selection and indoor environment quality in buildings.”27 The WELL Standard is designed to

complement and work harmoniously with LEED, as well as other international “green building

systems.”28 Both WELL Standard and LEED certification is done by GBCI.29 However, whereas

LEED certification is important for achieving the best possible outcomes for environmental

sustainability, the goals of the Well Standard are to maximize the potential for supporting

human health and wellness.



27 Michelle Howie, The International Comparative Legal Guide to Real Estate, 2016, 11th ed., page 60, (Global Legal

Group Ltd., Feb 2016) online at: <https://www.iclg.co.uk>

28 Such as Three Star, Green Star and BREEAM (see IWBI, “FAQ”, supra note 19).

29 AnnMarie Martin, “Breaking Barriers” (October 3, 2016) online on Interiors+Sources at:

<http://www.interiorsandsources.com > [Martin].

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While LEED does address some issues of health and wellness, the WELL Standard has a

greater focus on these areas and more closely considers the experiences of the building

occupants:30

WELL respects biodiversity and species and climate issues and so forth while at the same

time worrying about people’s blood pressure, oxygen levels, their performance in the

proper lighting, air quality, nutrition, and more. It brings the entire system full circle.31

This complimentary design results in a 25-30 credit crossover between LEED and WELL Standard

certification. 32 Overlapping features between WELL and LEED are described in detail in the

appendices of the WELL Standard.33

COST – BENEFIT:

Due to its broad reach and integration of the whole built environment, it is not difficult

to see how implementation of the WELL Standard may come with significant costs. Further, as

a new concept, it appears that many who have heard about the WELL Standard may have initial

hesitations that need to be addressed if it is to become widely accepted as a legitimate

movement. However, proponents argue that potential benefits to be gained, backed by

scientific research into human psychology, biology and physiology, mean these investments will

have a long-term positive impact on all involved.

Hesitations:

Those who are reading about the WELL Standard for the first time may have particular

hesitations regarding its efficacy. The last decade, for example, has seen an increase in “green”

30 International WELL Building Institute, “WELL Building Standard” summary document (retrieved January 6, 2017)

online at: <https://www.wellcertified.com >.

31 Martin, supra note 29.

32 Martin, supra note 29.

33 Canada Green Building Council, “What is WELL?” (retrieved January 6, 2017) online at: <https://www.cagbc.org >.

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or environmentally friendly initiatives and some are becoming tired of the rhetoric. Moreover,

there is a concern that society is getting close to “green fatigue,” and that more green

programs may “...only serve to alienate the average building professional.”34 For example, a

branch at Toronto-Dominion Bank has been WELL certified, and although the Bank had positive

feedback and plans to expand on the program, they were wary that “there might be some

hesitancy with some of the features, because they’re a little different... [particularly] nutrition

and what’s going to be in vending machines.”35 What makes these hesitations difficult to

address is the fact that, even if the results of implementing the WELL Standard are real, they

are mostly invisible and intangible (e.g. benefits from using circadian rhythm lights).

However, the WELL Standard is based on scientific studies which, arguably, provide a

basis for the claims made by WELL Standard proponents, and it is the aim of the WELL Standard

to provide “measurable value.”36 The WELL Standard is still so new, though, that there have

not yet been opportunities to do studies on its effects, short- or long-term. But it may only be a

matter of time before studies can be done to demonstrate the impact achieving the WELL

Standard can have. The larger hurdle, therefore, will be the initial financial cost to early

investors.

Cost

As previously noted, projects range from retrofitting older buildings to designing new

projects with the WELL Standard in mind. Depending on the scope of the project, the age of

the building and other factors such as the price of particular equipment, the cost of

implementing projects can become expensive. Coming out of its WELL Standard renovation at

145 King Street West in Toronto, CBRE noted that any cost analysis intended to account for the

34 Seville, supra note 24.

35 Dixon, Guy, “A healthy office is a happy office” (August 24, 2016), online on The Globe and Mail at:

<http://www.theglobeandmail.com>, quoting the bank’s interior designer Martha MacInnis.


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use of the Well Standard should consider that, among other factors: (1) lighting and HVAC

requirements are the most capital intensive components (magnitude depends on base building

design); (2) furniture must be Greenguard Gold Certified; and (3) there is potential for increased

costs relating to the higher standards of compliance with respect to base building

maintenance/cleaning protocols and corporate HR policies. CBRE estimates that the premium

on project costs that include Well Standard certification is 1-5% for class AAA buildings and 15-

20% for A and B class buildings (depending on design and base building condition). 37

Furthermore, there are fees for the different stages of the project: registration will cost from

$1,500 - $10,000 depending on project typology and size; certification starts at $4,000, and

ranges from $0.08 to $0.23 per square foot; and performance verification starts at a minimum

of $9,000, and ranges from $0.15 to $0.35 per square foot.38 Unfortunately, the relative

newness of projects that seek to incorporate the Well Standard means that it is difficult to

estimate the return on investment.

With little evidence to date of either success or failure of implementing the WELL

Standard, and the sizeable financial investment that it can require, it is important to also

highlight the potential benefits, strengths and scientific foundation of the WELL Standard for

both building owners and tenants.

Benefits

Despite the inevitable costs of the required building upgrades and the lack of evidence

demonstrating WELL Standard impacts, WELL Standard projects seem to be growing in

popularity, indicating that there must be at least a perceived benefit to be gained. The IWBI

states on its website that the creation of the Well Standard “is the product of seven years of

research and development consulting, with a three-phase expert peer review process



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encompassing a scientific, practitioner, and medical review.”39 Therefore, while there may be

minimal research available on the actual results of implementing the WELL Standard, its

proponents argue that it is based on a strong research and development foundation.

A commercial building having been WELL Standard certified will likely have an edge in

attracting desirable tenants who are willing to pay increased rent to keep their employees

healthy and happy. As noted above, the WELL Standard “fills a void focused on health and well

being that sustainability standards do not fully address,”40 and research has shown that the

physical workspace plays a role in attracting and retaining talent – indeed, it “is one of the top

three factors affecting performance and job satisfaction.”41 The IWBI gives the following

numbers: better air quality can lead to productivity improvements of 8-11%; for those with

window views, focused work increases by 15%; and dehydration of “just 2% can impair

performance in tasks that require attention, psychomotor and immediate memory skills as well

as assessment of the subjective state.”42 Thus, implementation of the WELL Standard is said to

increase productivity and reduce the time employees are out of the office sick; it curbs rising

health care costs; it helps recruit talented employees; and it fits with today’s office space design

by incorporating more residential-style components (e.g. more casual seating areas).

Depending on the size of the workforce affected, this could very well mean that investment in

achieving the Well Standard could realistically result in higher returns, both tangible and

intangible.

Tenants are also becoming more environmentally and human-welfare focused, and so a

WELL certified building could add one more marketable characteristic to a building owner’s

39 IWBI “WELL Development Process”, supra note 12.



42 IWBI “Well Building Standard” PowerPoint Presentation 2015, supra note 10, citing “Cognitive Performance and

Dehydration” by Ana Adan, PhD, Journal of the American College of Nutrition, Vol 31, No 2., pp 71-78 (2012); and

citing “Health, Wellbeing and Productivity in Offices: The next chapter for green building” World Green Building

Council, 2015

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brand. If a tenant is already looking for a space that is LEED certified, WELL certification can

make use of some of those characteristics because of the noted 25-30 credit overlap, and can

help create a holistic built experience.

After the CBRE Group’s global headquarters in Los Angeles became the first commercial

office space to achieve WELL certification, the following results were noted in an employee

feedback survey: 83% of employees felt more productive, 100% said clients were interested in

their new way of working, 92% said that the new space created a positive effect on their health

and wellbeing, 94% said that the new space had a positive impact on their business

performance, and 93% said that they were more easily able to collaborate with others.43

Consequently, even in these early days of WELL Standard implementation and without

much in the way of concrete evidence of the impact of implementing the WELL Standard, there

are apparent benefits to be gained from making the investment in the built space. If and when

the evidence of these benefits grows, more and more tenants will be seeking premises in

buildings that can accommodate Well Standard implementation and landlords who are

prepared to cooperate.

CONCLUSION:

As the costs and related returns from LEED certification become more expected than

unique, as building owners look for new ways to attract high quality tenants, and as

tenants/employers look for different approaches to attract and retain employees, the focus

appears to be moving to investing not just in environmental friendly initiatives that also provide

cost savings, but also in the health and wellbeing of the tenants who occupy commercial

buildings. Although still potentially costly, it may be that the importance of demonstrating a

commitment to the health, happiness and productivity of a tenant’s workforce will start to

43 IWBI “WELL Building Standard”, supra note 23, citing CBRE Global Corporate Headquarters Los Angeles,

California, Workplace 360 Study (2014).

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drive tenants to insist that landlords take notice of the WELL Standard and, at a minimum,

create opportunities for features of the Well Standard to be implemented in their buildings, on

the basis that, in the long run, the brand and image of both the tenants and landlords will make

the investment worthwhile.

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BIBLIOGRAPHY: Case Law: West American Ins. Co. v Band & Desenberg (1996), 925 F Supp 758 (US MD Fla) Stillman v Travellers Ins. Co. (1996), 88 F.3d 911 (US CA 11th Cir Fla) Mackenzie v Ward, 2007 CarswellOnt 3034 (Ont SCJ). Journals Duffy, J.F., Charles A. Czeisler, (2009). “Effect of Light on Human Circadian Physiology” Sleep Medicine Clinics, 4:2:165-177. Duffy, J.F., R.E. Kronauer, et al. (1996). “Phase-shifting human circadian rhythms: Influence of sleep timing, social contact and light exposure.” Journal of Physiology-London 495(1): 289–297. Fisk, W. J., et al., (2015) “Effects of ventilation rate per person and per floor area on perceived air quality, sick building syndrome symptoms, and decision-making.” Indoor Air, 25:362-370. Jones, LeeAnn and Nicole J. Wade, (1998) “Sick Building Syndrome: Who Foots the Bill.” Prac Real Est Law, 14(3): 9-24. Joshi, Sumedha M. (2008) “The Sick Building Syndrome,” Indian J Occup Environ Med, 12(2): 61-64. Stephenson, Kathryn M., Carmen M. Schroder, Gilles Bertschy, Patrice Bourgin, (2012) “Complex interaction of circadian and non-circadian effects of light on mood: Shedding new light on an old story” Sleep Medicine Reviews, 16:5: 445-454. Vandewalle, G., S. Gais, M. Schabus, et al., (2007) “Wavelength-Dependent Modulation of Brain Responses to a Working Memory Task by Daytime Light Exposure,” Cerebral Cortex, 17:12:2788-2795. Articles: Dixon, Guy, “A healthy office is a happy office” (August 24, 2016), online on The Globe and Mail at: <http://www.theglobeandmail.com>

2 - 15

Martin, AnnMarie, “Breaking Barriers” (October 3, 2016) online, Interiors+Sources: <http://www.interiorsandsources.com> O’Neill, Ashley, “The new frontier in health and wellness: the office,” (November 30, 2016), online, The Globe and Mail: <http://www.theglobeandmail.com> Reilly, Megan “What’s this WELL Standard I Keep Hearing About?” (November 2, 2016) online, WestEdge Design Fair: <http://www.westedgedesignfair.com> Seville, Carl, “Green Building Curmudgeon: A First Look at the Official WELL Building Standard,” (November 11, 2014) online, Green Building Advisor: <http://www.greenbuildingadvisor.com> Starr, Ryan, “Nonprofits risk losing talent because their workspaces aren’t cutting it” (November 29, 2016) online, BisNow Toronto: <https://www.bisnow.com> Websites: Canada Green Building Council, “What is WELL?” (retrieved January 6, 2017) online: <https://www.cagbc.org> CBRE Canada, “CBRE’s New Toronto West Office is a ‘Workplace of the Future’” (June 8, 2016), online: <http://www.cbre.ca> Clinton Global Initiative, “2012 Annual Meeting Agenda” (retrieved January 5, 2017) online: <https://www.clintonfoundation.org> CoreNet Global, Canadian Chapter, “The WELL Building Standard for Your Well Being” (retrieved January 6, 2017) online: <http://canada.corenetglobal.org> Delos, “In the News: Paul Scialla on Human Friendly Building Standards” (August 25, 2016) online: <http://delos.com> Designing Buildings Ltd., “Sick Building Syndrome” (November 10, 2016) online, Designing Buildings Wiki: <https://www.designingbuildings.co.uk> Designing Buildings Ltd., “WELL Building Standard” (November 26, 2015) online, Designing Buildings Wiki: <https://www.designingbuildings.co.uk> International WELL Building Institute, “WELL Building Standard” (retrieved January 6, 2017) online: <https://www.wellcertified.com/well>

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International WELL Building Institute, “WELL Building Standard” summary document (retrieved January 6, 2017) online: <https://www.wellcertified.com> International WELL Building Institute, “WELL Development Process” (retrieved January 6, 2017) online: <www.wellcertified.com> International WELL Building Institute, “Learn about client strategies and the WELL Building Standard” webinar recorded April 22, 2016, online, US Green Building Council: <http://go.usgbc.org> International WELL Building Institute, “WELL Building Standard” PowerPoint Presentation (September 2015) online: <https://www.wellcertified.com> International WELL Building Institute, “FAQ” (retrieved January 6, 2017) online: <https://www.wellcertified.com> Real Estate Forums, Delos, “The WELL Building Standard” (retrieved November 30, 2016) online: <http://www.realestateforums.com> World Green Building Council, “Health, Wellbeing and Productivity in Offices: The next chapter for green building” (2015) online: <http://www.worldgbc.org> Miscellaneous: CBRE Canada, “WELL Played: How to Position the WELL Building Standard” slide presentation (received from CBRE on November 21, 2016). Delos, Press Release, “Delos and Structure Tone partner to drive Wellness Real Estate through construction practices and projects” (October 4, 2016) online: <http://delos.com> Howie, Michelle, The International Comparative Legal Guide to Real Estate, 2016, 11th ed., (Feb 2016) online, Global Legal Group Ltd.: <https://www.iclg.co.uk>

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TAB 3

Practical Advice for Complying with Ontario’s New

Corporate Record Keeping Requirements Does

the term “Ownership Interest” apply to Leases?

Sonja Homenuck Dentons Canada LLP

Arielle Kieran

Dentons Canada LLP

February 22, 2017

THE SIX-MINUTE


Practical Advice for Complying with Ontario’s New Corporate Record Keeping Requirements Does the term “Ownership Interest” apply to Leases?

Sonja Homenuck and Arielle Kieran, Dentons Canada LLP*

If your clients own, lease, or otherwise deal with real property in Ontario, you should consider the

effect of new reporting requirements that came into force on December 10, 2016. The recently enacted

Forfeited Corporate Property Act, 2015 (“FCPA”), which amends the Business Corporations Act (Ontario)

(“OBCA”) and the Corporations Act (Ontario), requires corporations to maintain a register of their

“ownership interests in land” in Ontario. The requirement is set out in an amendment to Section 140.1 of

the OBCA as follows:

Register of interests in land in Ontario 140.1 (1) A corporation shall prepare and maintain at its registered office a register of its ownership interests in land in Ontario. Same (2) The register shall,

(a) identify each property; and

(b) show the date the corporation acquired the property and, if applicable, the date the corporation disposed of it.

Supporting documents (3) The corporation shall cause to be kept with the register a copy of any deeds, transfers or similar documents that contain any of the following with respect to each property listed in the register:

1. The municipal address, if any.

2. The registry or land titles division and the property identifier number.

3. The legal description.

4. The assessment roll number, if any.

The Purpose of this Legislation is to Prevent and Manage Escheats

When a corporation that dissolves does not dispose of its property, that property is forfeited to

and vests in the Crown.1 This process is referred to as an “escheat”. Escheats can be problematic for the

Crown, particularly if the land is environmentally contaminated or subject to tax and utility arrears. In order

to manage the issues that tend to arise when corporate real property escheats, several statutes have

*with assistance from Lisa Hawker, articling student at Dentons Canada LLP 1 Business Corporations Act (Ontario), R.S.O. 1990, c. B.16 at s. 244(1).

3 - 1

been introduced and amended to place additional obligations on corporate owners. For example, the

FCPA introduces personal liability for directors and officers of dissolved corporations where the province

incurs costs associated with environmental remediation required to render forfeited property saleable.2

When the FCPA amendments were introduced as part of the Budget Measures Act, 2015, the

Minister of Finance stated that they would “improve the management of corporate land forfeited to the

province”.3 On the same day, the Ministry of Finance published a press release4 that identified the

following five objectives of the FCPA:

Mitigate risks to Ontario taxpayers that may arise when corporate property forfeits to and

becomes Crown property when a company is dissolved;

Reduce the number of corporate properties that forfeit to the Crown;

Increase corporate accountability for costs associated with forfeited corporate property;

Increase transparency and certainty in the management and disposition of forfeited corporate

property; and

Return forfeited property to productive use as quickly and efficiently as possible.

The Language Used to Create These Obligations is Ambiguous

Now that corporations are required to keep a register of their ownership interests in land, we need

to understand what qualifies as an “ownership interest in land”. The term is not defined in the FCPA or the

OBCA. As many practitioners have already noted, an “ownership interest” could ostensibly include a

leasehold interest, an easement, a mortgage interest, a beneficial interest, or a statutory right.

If we consider how courts have interpreted the word “ownership,” we find a mixed bag of

suggestions that don’t clearly favour the inclusion or exclusion of leasehold interests. Judges have held

2 Forfeited Corporate Property Act, 2015, SO 2015 C.38, Sched 7 at sections 30-31. For more information, see http://www.dentons.com/en/insights/articles/2016/december/5/corporate-dissolution-will-not-protect-former-directors-and-officers-from-environmental-liabilities

3 See http://www.ontla.on.ca/web/house-proceedings/house_detail.do?Date=2015-11-18&Parl=41&Sess=1&locale =en#para683 4 See https://news.ontario.ca/mof/en/2015/11/amendments-and-proposals-in-the-budget-measures-act-2015.html

3 - 2

that ownership involves “title to a thing”5, but have also noted that “a lessee for the term of years has

been held to be an owner.”6 Some legislation, including environmental legislation, explicitly expands the

scope of the term “owner” so that it can include tenants and even subtenants.7 Several courts have

focused on “the right to possess and use the thing”8 and “the right to deal with a thing to the exclusion of

all other persons, or of all except one or more specified persons”.9 On balance, we would suggest that the

word “ownership” probably includes ownership by leasehold interest.

The second section of the requirement should also be noted. As part of its ownership register,

each corporation must show the date that the property was “acquired”. And if we look at how courts have

interpreted the word “acquired”, we find that most focus on beneficial ownership interest. One court

looked to Black’s Law Dictionary, which states that “to acquire…does not necessarily mean that title has

passed”.10 Others have found that “the word “acquired” connotes an element of beneficial interest or

ownership”.11 In one case, the court held that “In considering when . . . property is acquired for the

purposes of the Act, our courts have held that property is acquired when title has passed or when the

purchaser has all the incidents of title, such as possession, use and risk”.12 It is very uncommon for the

registered and beneficial interests of a lease to be split, particularly on the tenant’s side of the lease.

Accordingly, we won’t venture into whether the legislation could apply to beneficial leasehold interests.

On the whole, judicial interpretation of these terms would suggest that leasehold interests are

captured by the new legislation. However, it is important to examine how the interpretation of these words

connects with the purpose of the new section. Remembering that the Crown’s main objective is to reduce

the incidence of corporate forfeiture, we must ask whether a leasehold interest could escheat to the

Crown and cause the same issues as a fee simple escheat.

5 Beaulieu v. Reliance Insurance Co., 1971 CarswellOnt 795 at para 12. 6 Morrison v. Urbaine Fire Insurance Co., [1944] 2 D.L.R. 402 at 412. 7 See, for example, the Environmental Protection Act (Ontario), R.S.O. 1990, c. E. 19, at section 25. 8 Merck Frosst Canada Inc. v. Canada (Minister of National Health & Welfare) (1994), 55 C.P.R. (3d) 502 9 Delgamuukw v. British Columbia, [1993] 5 W.W.R. 97. 10 Armstrong's Communication Ltd. v. Sure Safe Security Systems Inc., 2007 CarswellNS 493. 11 McKeown, Re (1984), 1984 CarswellSask 173, (Sask. Q.B.) at para. 10 Wright J. See also Re McKeown

(Horseman's Haven), [1984] 6 W.W.R. 274 (Sask. Q.B.). 12 Morin v. R., 2006 CarswellNat 2938, at para 10.

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https://nextcanada.westlaw.com/Link/Document/FullText?findType=Y&pubNum=5810&serNum=1971124242&originationContext=document&transitionType=Document&contextData=(sc.Search)




Escheated Leasehold Interests Aren’t the Target of this Legislation

If a corporation owned land subject to a lease, and that land escheated to the Crown, it is fair to

assume that (barring termination of the lease due to a change in control or anti-assignment clause), the

Crown would become the owner of the lands and possibly the landlord pursuant to that lease.

Accordingly, one might be tempted to construe the new legislation broadly and include leasehold

interests. To do so would be a mistake – after all, it is important to remember that this situation could only

come about following the initial escheat of the underlying fee simple interest. Even if the requirement is

interpreted narrowly to include only fee simple interests, when followed correctly, the Crown will receive

the benefit of the legislation in any case given the records kept by the registered fee simple owner.

The case to be made for tenants is even stronger. If a tenant corporation dissolves, it will

inevitably default on its obligations under the lease. Once this default occurs, lease remedies as modified

by the effects of insolvency or bankruptcy legislation take over. It would be absurd to suggest that the

Crown take responsibility for the tenant’s obligations pursuant to an ongoing lease, and therefore it makes

no sense for this legislation to capture a tenant’s ownership interests.

The Ministry Has Confirmed that this Legislation Does Not Apply to Leases and Other Interests

Given the apparent inconsistency between the plain meaning of the new legislation and its

purpose, we contacted various branches of the Ontario government to ask about their intended

enforcement practices. We received the following response from a manager at the Ministry of

Infrastructure:

“The new requirement in the Business Corporations Act to keep a register applies to registered

ownership interests in land, not all interests in land. This would include fee simple interests and

co-ownership interests, but would not include leasehold interests, easements, licences, or

mortgage interests. While the requirement is limited to registered ownership interests, it is a best

practice for active corporations to maintain a record of all interests in land.”

We note that the manager did not mention beneficial interests, but did use the term “registered interests”

which excludes beneficial interests by implication (and we hope that was his intention!). We wonder,

however, whether the Ministry’s intention for the legislation to apply to registered interests in land was lost

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in translation – after all, the legislation requires corporations to maintain a register of ownership interests,

not a record of registered ownership interests. We also enquired about whether a Notice of Lease

registered on title would qualify as a “registered ownership interest,” but we did not receive a response.

Nevertheless, this position is consistent with the purpose of the legislation, and accordingly it is likely to

reflect the government’s attitude going forward.

Practical Advice for Real Estate and Leasing Lawyers

Corporations that are incorporated on or after December 10, 2016 must comply with the

requirements in Section 140.1 immediately, and corporations incorporated before that date have until

December 18, 2018 to comply. Lawyers should reach out to all corporate clients and notify them of the

new corporate record keeping requirements as soon as possible. Many corporations are likely to require

assistance with creating their registers. Lawyers may need to complete Teraview name searches as well

as subsearches of adjacent and subject land, and may assist in obtaining roll numbers.

In certain instances, it may be best for some clients to maintain a list of all their registered

ownership interests (rather than only fee simple interests). Lawyers can advise their clients that at

present, it appears that this legislation is only intended to cover registered fee simple interests and those

interests are most likely to be targeted for compliance. However, as this legislation has not been tested,

lawyers should also explain that the legislation is ambiguous and could be judicially interpreted to include

leasehold and other interests. Until and unless the provision is litigated or amended to clarify its meaning,

we cannot be certain that leasehold interests are not captured.

Lawyers should also be mindful of the fact that this register must be kept at the corporation’s

registered address in Ontario. While many of our clients have traditionally preferred to use our law firm’s

address when first incorporating, we would now suggest that law firms avoid this practice so that they are

not obligated to maintain the ownership register at their offices. During the transition period, lawyers

should review all current and historical corporate client files to determine whether the law firm’s address

has been used as the corporation’s registered address, and contact clients to update this information

wherever possible.

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TAB 4

Gross Revenue and Online Sales

Julie Robbins, Director, Legal Services,

Morguard Investments Limited

February 22, 2017

THE SIX-MINUTE


Gross Revenue and Online Sales

Julie Robbins1

Like many lawyers, I went to law school because I always preferred words over numbers and it makes

sense then that I ended up in a practice area where agreements and documents are routinely over 50-60

pages. There is one section of a retail commercial lease where the words can have a significant impact

on the numbers and that is the percentage rent clause. This is becoming even more important as the

ratio between in-store and online shopping changes and retailers are evolving to create new shopping

experiences for customers built around multiple platforms.

The increase in online shopping will affect a number of areas of a commercial lease but I’m going to focus

on the percentage rent section and how gross revenue (also referred to as gross sales or gross receipts)

should be defined.

Unfortunately there are no clear guidelines about how percentage rent clauses should be drafted and

negotiated when taking into account (or electing to disregard) online sales. In addition, to my knowledge,

to date there has been no consideration by the Courts of gross revenue definitions and the calculation of

online sales for the purposes of determining a tenant’s percentage rent. While this issue has been

around for as long as online sales have been around, I’ve noticed over the past few years that landlords

and tenants are becoming much more attuned to this issue and the impact it can have on their bottom

line. The percentage rent clause is one of those sections of the lease that I think we will all be spending

much more time negotiating over the next few years as we gain a better understanding of the

practicalities of calculating the sales attributable to the premises in an increasing online world.

What is Percentage Rent – The Basics

Percentage rent is a rent that is paid based on a percentage of a tenant’s sales of merchandise and

services from the leased premises over a stated threshold (usually the minimum rent). It allows the

landlord and tenant to share in the benefits of a tenant’s success. The tenant may pay a lower

“minimum” rent but in turn agrees that if its sales reach a certain threshold (the ‘breakpoint’) then a

percentage of its gross revenue will be paid to the landlord. Part of the theory behind percentage rent is

that the landlord has created a shopping environment and experience that attracts customers to the

tenant’s store so it should share in the financial success of the store.

1 Director, Legal Services at Morguard Corporation The author wishes to thank Yan Besner (Partner, Osler, Hoskin & Harcourt LLP) and Sheldon Disenhouse (Partner, Dentons Canada LLP) for their comments on this paper.

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Once the business parties have agreed on the numbers to complete the percentage rent calculation (the

percentage rent rate and the breakpoint), the actual words used to define gross revenue can have a

significant impact on the amount a tenant will end up paying. A tenant will want to limit this definition as

much as possible while a landlord will want to broaden it as much as possible.

Defining Gross Revenue

A traditional landlord definition of gross revenue includes all sales of goods, merchandise or services

leased or sold at, in or from the leased premises regardless of how it is paid for or where it is delivered to

or picked up from by the customer. Generally a number of exclusions or deductions will be negotiated,

such as: refunds to the extent they relate to an item previously included in gross revenue, sales taxes, gift

certificates/cards (provided the sale price of goods paid for with gift certificates/cards are included in

gross revenue), discounts to employees, etc.

Over the last few years I have seen a number of landlord forms that do not clearly capture online sales.

Given that online sales are an area where many retailers are starting their business, growing their

business or looking to grow their business, the failure to capture these sales may result in lower rents for

a landlord than it had anticipated. Prudent landlords will want to ensure that they have reviewed their

standard leases to verify that they do capture online sales. For example, consider the following clause:

Gross revenue includes all sales of goods, merchandise or services

leased or sold at, in or from the Leased Premises (whether or not filled at

the Leased Premises) including any sales on computers, tablets,

electronic devices or other technology (whether existing today or not).

This type of definition is fairly broad and would capture a number of different kinds of online or electronic

sales.

Tenants may try to initially exclude all internet sales and will request broad language which excludes all

such sales. For example:

Notwithstanding anything to the contrary, Gross Revenue will exclude all

telephone orders and/or computer, internet or electronic orders of

merchandise regardless of where such orders are placed, delivered or

received (except orders placed through registers at the Leased Premises

which shall be included in Gross Revenue).2

2 See “Bricks Meet Clicks: How Omni Channel Retail is Impacting Leasing Fundamentals”, Joanne Goldhand and Nina Kampler, 2015 US Shopping Center Law Conference, October 28-31, 2015 for additional clauses.

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Clearly these clauses are at two separate ends of the spectrum. But what is fair? From a landlord

perspective, you will often hear that anything “which touches the store” should be caught by the gross

revenue definition.3 But even that is not clear as there is a wide continuum of what “touches” the store.

Here are a few examples:

- A customer is shopping for shoes in-store and checks the retailers’ website and learns that there

is an online sale for the same shoe. The customer tries the shoe on in the store and then orders

a pair online at home for the lower price. The shoes are delivered to the store from a distribution

centre for customer pick-up.

- A customer tries on a dress in-store but wants a different colour. The sales person helps the

customer order the desired colour from a store owned iPad and the dress is sent to the

customer’s home from a distribution centre.

- A customer orders a product online from her home computer and picks it up at the store closest

to her house. The store pulls the product from the inventory in the store. The customer ends up

buying three additional products from the retailer and some additional items from other retailers in

the mall when she picks-up the online purchase.

- A customer is shopping online while eating lunch in the mall food court using the mall Wi-Fi and

orders a smartwatch from his phone to pick-up same day in the electronic store in the mall. The

customer pays for the smartwatch on his phone.

- A customer cannot find a unique product in-store and the employee directs the customer to its

store website where there are some specialized products that are only available online. The

customer buys the online product from her phone while in the store.

As the above examples show, there are many ways a sale can ‘touch” a store, but should all of the above

examples should be treated the same for the purposes of calculating percentage rent? Some of these

sales clearly benefited more than others from the physical presence of the store.

How do we balance the landlord’s desire to not dilute sales while giving tenants sufficient flexibility to

grow their business and expand their sources of revenue? There is also a practical concern about

drafting a lease which is too administratively onerous for a tenant by requiring it to track and report sales

in a manner which is not consistent with its internal accounting practices (many tenants will argue that

they just cannot easily provide the information the landlord is requesting regarding online sales as they do

not allocate those sales to that store).

3 For further discussion see “Will Landlords Recalculate Percentage Rent to Include Internet Sales”, Steve McLinden, Shopping Centers Today, July 8, 2012 at https://oakstonecompany.wordpress.com/?s=internet+sale

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https://oakstonecompany.wordpress.com/?s=internet+sale

Considerations in Negotiating Online Sale Provisions

There are no right or wrong answers or positions when it comes to negotiating percentage rent clauses in

an online world, but there are some questions that the parties may want to ask themselves when trying to

determine what the percentage rent, the breakpoint and the inclusions, deductions and exclusions from

the definition of gross revenue should be.

1.) Where did payment occur?

If payment occurs at the leased premises, it creates a stronger nexus between the transaction

and the real estate. Payment could occur through the register but it could also occur through a

kiosk, tablet or terminal in the store owned by the retailer or by the customer directly on its

smartphone. Should each of these transactions be treated the same? Could the retailer track

and record each of these payments and easily allocate them to the store? These are all

questions that should be discussed.

2.) Where is the sale recorded by the retailer (online or a store)?

Retailers will have different practices regarding where they record an online sale. Is it credited to

the store, a particular sales person or to a distribution centre or separate business set up for

online transactions? If a customer buys the item from his or her home computer, but picks it up at

the store, does the retailer allocate that sale to the store? If yes, should the landlord also be

entitled to benefit from this transaction? Another issue is that the retailer may change its

practices for tax or accounting reasons and should the landlord’s rent be affected because of

these changes?

3.) Where was the order fulfilled?

If the order is fulfilled from product at the store, this will also increase the nexus between the sale

and the store. But what if the order is fulfilled from product sent to the store from a distribution

centre (because the customer decided that picking it up would be more convenient than delivery),

did the store really contribute to the sale? In this scenario, the tenant may be contributing to

customer count to the mall.

Understanding the answers to these questions can help guide the parties through negotiation of the rent

structure and gross revenue definition.

Discussion Points for Negotiation

Landlords and tenants are both going to have to be creative and open to new and different ways of

defining gross revenue and perhaps even how to calculate and structure rent in the first place. Some

commentators have suggested that there may no longer be a place for percentage rent in an online world,

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but I think that it is likely here for the near future, so here are some discussion points for negotiating

percentage rent provisions in an online world based on different scenarios:

1.) Ordered and paid online outside of the leased premises and then picked-up at the leased

premises. Order fulfilled from inventory not taken from the leased premises.

o In this case, the landlord potentially has the benefit of a new customer visiting the

shopping centre. Generally the research has shown that if a customer is going to a

shopping centre to pick-up an online purchase, he/she will usually buy other items as

well. In this instance, it may be reasonable and fair to exclude the sale from gross

revenue.

o Landlords will still be concerned about the store becoming a warehouse for online sales

so it may want to qualify any exclusion for this type of transaction by saying that it has to

be for the convenience of the customer only, or perhaps agreeing to a maximum volume

of merchandise that will be excluded.

2.) Ordered online and pick-up from leased premises but the product is taken from inventory in the

leased premises

o This is not as straight forward. Landlords will be concerned about excluding these sales

since the inventory would otherwise have been available for sale in the store and subject

to inclusion in gross revenue. However, there is also the argument, as in the example

above, that the customer is likely to buy other products during the visit to pick-up the

online sale.

o The landlord may have questions regarding where the sale was accounted for by the

tenant. If it is not accounted for at the store, then it may be more willing to exclude the

sale from gross revenue.

o If a landlord were to exclude this sale, it may want to qualify it as being for the

convenience of the customer only.

3.) Caps on the percentage of online sales excluded from gross revenue

o One option is to include caps on the percentage of online sales which can be excluded

from gross revenue. In order to determine what the appropriate cap should be, the

tenant will likely need to disclose information to the landlord regarding its online program

and how transactions are allocated. If there is a history of online sales and in-store sales,

determining the appropriate cap may be easier, but without this information, it may be

difficult to negotiate the cap.

o The practical problem with this is that it will require the parties to still negotiate which

types of online sales are included/excluded and the tenant will be required to report in a

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manner that identifies the applicable online sales so that the cap can be calculated. This

could be administratively difficult for the tenant.

4.) Sales from electronic devices not owned or operated by the tenant or any affiliate of the tenant for

product which is delivered from a distribution centre directly to a customer.

o Determining whether or not these sales occurred in the store may not be easily

determinable by a retailer and since the order is not fulfilled from the store inventory,

landlords may be willing to exclude these sales.

o From a landlord perspective, this is not that different than using a kiosk or tablet in the

store (the employee could just as easily direct a customer to its website from the

customer’s smartphone as it could direct it to the website using the store’s iPad), so if

these are being excluded, it may be advisable to get an understanding as to whether or

not the tenant could track this information and how the tenant is allocating these sales.

5.) The Halo Effect - Including all of the sales from a geographic region in the gross revenue for the

store.

o The research has shown that for some high profile stores, the online sales for the retailer

will increase in the area of that store because the store helps build brand recognition.4

Landlords may want to consider including the gross revenue for a particular geographic

region (such as by postal code) in the gross revenue for the store since the store

contributed to those sales.

o This would require tenants to report sales in a non-traditional manner which could create

an administrative burden for tenants.

o This probably only makes sense for a marquee or high profile store.

6.) Reducing percentage rent for online sales.

o The parties could negotiate two different percentage rent rates and breakpoints: one for

online sales and one for traditional in-store sales. This will still require the parties to

negotiate and define what constitutes an online sale, but could make sense where the

retailer has a significant online presence that benefits from the in-store experience.

7.) Eliminating percentage rent and increasing minimum rent

o If the parties are unable to resolve the percentage rent provisions, then it may be worth

considering what a fair minimum rent would be without percentage rent being payable.

4 “Exploring New Leasing Models in an Omni-Channel World”, ICSC Report, Section 3.3 and 6.4.4. Also see “The ‘Halo’ Effect” and “Online Shopping can Drive In-Store Sales (Joel Groover), Shopping Centers Today, ICSC, June 2016, pg. 6 and pg. 28.

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Refunds

It is not unusual to deduct from gross revenue the price of any refunds. However, refunds for product

purchased online may need to be treated differently than traditional refunds. Landlords should not be so

quick to agree to this deduction with respect to online sales. For some retailers, their customers may buy

multiple items online with the full intention of returning many of the pieces to a store (for example, if they

want to try multiple sizes or different colours and then only keep those which are the right size or

preferred colour). A retailer with a lot of refunds from online sales may be unfairly diluting their gross

revenue if they can deduct refunds from their gross revenue reports of transactions where the original

sale was not included in gross revenue. However, if it were clear that the refund is only deducted when

the original sale price for that item was included in gross revenue, then this deduction may be fair. The

problem is that tenants may not be able to easily track this level of detail. As technology continues to

evolve, it may become easier for retailers to track this level of detail and be able to report whether or not

the original sale was included in gross revenue.

Reporting/Auditing

Traditional reporting obligations and audit rights may no longer be sufficient for landlords when it comes

to being able to verify online transactions. Landlords may want to seek access to information regarding

where sales originated, the location of order fulfillment and details regarding how the retailer is allocating

online sales internally. Unfortunately, not all retailers will have (or be able to afford) technology and

reporting systems that are this advanced so it may be an administratively onerous burden to place on a

tenant.

The reporting and auditing provisions in a retail lease should be reviewed by landlords in order to ensure

that they allow for and accommodate electronic records (as traditional journal tapes are becoming more

and more extinct). The clauses may need to be broadened to include information related to sales from

kiosks and tablets in the store and perhaps, if the retailer has this information, information from the tablets

and electronic devices of customers.

Other Uses for the Definition of Gross Revenue

Landlords may be concerned about excluding or deducting online sales from the definition of gross

revenue where that definition will be used for other purposes such as triggering sales-based termination

rights or to trigger a conversion of rent to a pure percentage rent deal (for example, if this is a remedy for

a breach of an exclusive or co-tenancy clause or non-satisfaction of an opening covenant). The answer

to this may be that different definitions should be negotiated for different purposes in the lease. For

example, while a landlord may agree that sales made from a kiosk in the store regardless of where

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delivered may be excluded for the purposes of calculating percentage rent, it may not want those sales

excluded for an early kick-out where the tenant can terminate if its gross revenue has not reached a

certain threshold.

Conclusion

As retail and technology continue to evolve, landlords and tenants are going to have to discuss the issue

of online sales more thoroughly from the beginning of negotiations. For retailers with a strong online

presence, it would be prudent for both parties to understand how online sales are treated and accounted

for by the retailer from the beginning so that both parties can determine whether a percentage rent

structure makes sense, and if it does, what should be included and excluded in the definition of gross

revenue.

Negotiating power of the parties will obviously influence negotiations, but the issue of how online sales

impact percentage rent calculations deserves thoughtful consideration by both sides. Certainly, just

saying this is our standard position or this is the precedent may not be sufficient. There will need to be

ongoing discussion on this issue and a recognition by landlords and retailers that positions may evolve

over time

*All views expressed in this paper belong to the author. This paper should not be considered a detailed or comprehensive record

of all matters relating to the issues and subjects discussed above, but a general overview of the matters discussed. This is not a

legal opinion and should not be regarded or relied upon as such. This paper should not be treated as a substitute for specific legal

advice concerning individual situations or specific concerns regarding the issues and subjects discussed herein.

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TAB 5

How Insurance and Indemnity Provisions

Need to Work Together

Macdonald Allen

WeirFoulds LLP

February 22, 2017

THE SIX-MINUTE


HOW INSURANCE AND INDEMNITY PROVISIONS NEED TO WORK TOGETHER

Macdonald Allen WeirFoulds LLP

February 22, 2017

I. INTRODUCTION

When a commercial building is damaged by a fire: "who has to pay", and "am I covered"

are often the first two questions that lawyers receive from landlords and tenants. Like the

answer to most legal questions: “it depends”. Was the fire caused by negligence? Does your

lease explicitly allocate the risk of fire to one of the parties? Is the risk implicitly allocated? Do

the insurance, indemnity, subrogation, and release clauses contained in your lease reflect your

understanding of how that risk has been allocated? Are they ambiguous, inconsistent or are

there unintended consequences?

In order to mitigate risk, landlords and tenants need to understand the relationship

between an obligation to insure and a lease’s indemnity clause in order to allocate the risk as

the parties intended. Prior to entering the lease the insurance and indemnity clauses should be

read in conjunction with the other terms of the lease including, but not limited to, the

subrogation, and release clauses. Interpreting all of the terms in a lease which allocate risk

together ensures that there are no unintended consequences in the event of loss.

This brief paper focuses on the relationship between insurance and indemnity clauses

and the issues of lease interpretation. When parties don’t turn their minds to how these

provisions relate to each other prior to entering the lease parties often end up in court.1

Insurance and indemnity provisions need to work together, the slightest inconsistency or

ambiguity opens the door for parties to attempt to shift responsibility for the loss. Once in

court, it can be difficult to anticipate how the court will interpret each parties obligations.

1 Landlords and tenants should also pay particular attention to the subrogation and release provisions in a commercial lease as these provisions also impact the risk allocation analysis in a commercial lease.

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II. INSURANCE IN A COMMERCIAL LEASE

Insurance is a form of risk management. Insurance is intended to fund the obligation to

repair and/or replace property in the event of a loss. In the context of leased property,

insurance is used to address various types of risk: the risk of loss due to fire, faulty construction,

negligence or other property damage, and the risk of liability for damage to property, personal

injury or death. Depending on the specific circumstances of the property a lessor or lessee may

obtain, or require the other party to obtain, various forms of insurance including, but not

limited to: commercial property insurance, rental insurance, leasehold interest insurance,

business interruption insurance, and/or liability insurance.

A lessor may be primarily concerned with allocating risk for damage to its building, or a

disruption in rental income. A lessee may be concerned with allocating the risk to repair the

damage, the loss of use of the premises, and the liability to pay rent despite the damage and

loss of use.2 Each party may have a different view on the type of insurance required, who

should be responsible for obtaining that insurance, and the nuances of the policy including, but

not limited to, the exclusions, limitations, policy limits, and deductible. Insurance provisions

contained in a commercial lease outline the insurance requirements for each party and are

usually interpreted so as to not negate the protection afforded by the applicable insurance

policy.

Prudent lawyers, landlords, and tenants should ensure that the insurance provisions

contained in their lease are reviewed by their respective insurers. Insurance provides the

financial resources to rebuild in the event of loss. In order to determine which party’s insurer is

responsible, commercial leases often include additional terms such as indemnities.

2 Raymond S. Iwamoto, “Insurance and the Commercial Lease, Part I”, (2006)22:1 The Practical Real Estate Lawyer 1.

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III. INDEMNITY CLAUSE IN A COMMERCIAL LEASE

The principle of indemnity in a commercial lease is another form of risk

management. Generally, an indemnity clause provides that one party will agree to compensate

the other party for damage or loss for which that party (the indemnitor) would not otherwise

be legally liable, including third party claims. Another function of indemnity provisions are to

supplement rights of recovery on the happening of specific circumstances (breach of contract,

or breach of a duty of care). An indemnity results in the indemnitor being required to

involuntary pay money to a third person who has a legal claim against the indemnitee.3

Indemnities are intended to defend against liability, rather than to impose liability.4 A

party who is being sued by a third party can rely on an enforceable indemnity clause in order to

shift the liability to the other party. Unlike insurance clauses which will generally be interpreted

broadly in order to give effect to the underlying insurance policy, the courts will apply the

principles of interpretation to find broadly-worded indemnities unenforceable in certain

circumstances.5 If there are conflicting provisions in a commercial lease, for example, where

one party has a general covenant to repair and the other party has a broadly worded

indemnity, the courts may find the indemnity to be unenforceable.6

In one of the leading texts in this area, "Insurance and Risk Management in Commercial

Leasing", the author cautions that when drafting indemnities, unless specifically written into

the indemnity, an unsuspecting lawyer or party may be taken by surprise by the following

issues:

(i) the party that will benefit from the indemnity is under no obligation to mitigate its damages or to involve the party who has provided the indemnity in the settlement of the action;

3 In certain circumstances an indemnitor may also be directly liable (apart from the indemnity) to the third party. 4 Dawn Michaeloff, Insurance and Risk Management in Commercial Leasing, (Aurora: The Cartwright Group Ltd., 2009) at 86 [Michaeloff]. 5 Ibid at 87. 6 Agnew-Surpass Shoe Stores Ltd. v Cummer-Yonge Investments Ltd., [1976] 2 SCR 221, 55 DLR (3d) 676 [Agnew-Surpass]

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(ii) there is no control over legal costs;

(iii) in cases where the damage was caused by a third party, the party giving the indemnity (the “indemnitor”) has no rights to sue that other party;

(iv) the indemnitor could be required to indemnify for damages caused by the tortious acts of persons for which the indemnitor would not ordinarily by liable at law (this could include, in the case of an indemnity by the tenant, the tenant’s customers, for example); and

(v) the indemnitor could potentially be exposed to far greater damages than it might otherwise be exposed to at law.7

In addition to express insurance and indemnity provisions, a series of Supreme Court of

Canada cases in the 1970s established a common law principle in order to assist (or surprise)

landlords and tenants in allocating risk in the absence of express provisions: the principle of

immunity.

IV. THE PRINCIPLE OF IMMUNITY: THE TRILOGY AND BEYOND

The common law principle of immunity acts as an exception to the general rule that

negligence must be expressly released. This principle provides that where: (1) there is a

contractual agreement that one party buys insurance to cover a peril or; (2) one party

contributes to the cost of insurance for that peril, then the party who has agreed to buy

insurance or had the cost of their insurance partially paid by the other party, subject to express

language to the contrary, implicitly releases the other party, including for acts of negligence,

from liability for the loss. It is implied that the parties intended that the insurance fund the loss

regardless of the cause.8

Three Supreme Court of Canada cases in the 1970s developed the principle of immunity.

The courts and commercial leasing bar refer to these three cases as the “Trilogy”. The Trilogy

7 Michaeloff, supra note 4 at 88. 8 Michaeloff, supra note 4 at 62.

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involved covenants by the landlord to insure the premises, and subsequent damage to the

premises by fire. Each case involved slightly different contractual provisions/obligations.

In the case of Agnew-Surpass Shoe Stores Ltd. v Cummer-Yonge Investments Ltd.9, the

lease required the landlord to insure its shopping centre "against all risk of loss or damage

caused by or resulting from fire." The SCC judges were split four (4) (majority), three (3)

(dissenting in part), two (2) (dissenting) . The majority held that the landlord’s insurance policy

implicitly authorized the landlord to release the tenant from liability related to fire. However,

the landlord’s insurance policy did not extend to the tenant’s claim for loss of rental income

because it covered “damage to the building” only.10 The three partially dissenting judges, held

that the tenant’s claim for loss of rental income fell within the ambit of the landlord’s

covenants to provide coverage for the tenant “against all risk of loss or damage caused by or

resulting from fire”. The partially dissenting judges held that the landlord’s failure to obtain full

insurance protection against loss of rental income could not be shifted to the tenant.11 Finally,

the two dissenting judges held that where the tenant’s negligence was established the words of

the parties were not wide enough to exclude liability.12

The position of the three (3) partially dissenting judges written by then Chief Justice

Laskin, in Agnew-Surpass evolved into the majority position for the subsequent Trilogy cases. In

Ross Southward Tire Ltd. v Pyrotech Products Ltd.13, the lease required the tenant to pay all

"insurance rates". The landlord regularly charged the tenant for its share of the cost of fire

insurance, among other things. The building was destroyed by fire. The fire resulted from the

tenant’s negligence. After the building was destroyed by fire, the landlord’s insurer sought to

recover the cost of replacing the building from the tenant. The majority of the SCC held that the

risk of loss by fire passed to the landlord upon the presentation by the landlord to the tenant of

the insurance bill. The majority of the SCC determined that the payment of the insurance

9 Agnew-Surpass, supra note 6. 10 Ibid at 252. 11 Ibid at 236. 12 Ibid at 246. 13 Ross Southward Tire Ltd. v Pyrotech Products Ltd., [1976] SCR 35, 57 DLR (3d) 248 [Ross Southward].

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premium’s was an implicit agreement between the landlord and tenant that the insurance

proceeds would cover the risk of loss.

By the time the T. Eaton Co. v Smith14 case reached the SCC, the court preferred the

principle of immunity by a majority of six (6) judges to three (3). In Eaton, the landlord

covenanted to insure the leased premises against fire; the tenant on the other hand agreed to

repair on notice, but excluded damage by fire. The building was damaged by fire caused by

negligence attributed to the tenant. The majority considered the landlord's covenant to insure

the tenant's premises to be a "supervening covenant" that prevailed even where the tenant's

negligence had caused the loss. The majority held that the tenant was entitled to claim the

benefit of an insurance policy which the landlord covenanted to provide.15

The Trilogy established that in a landlord-tenant relationship, a contractual undertaking

by one party to secure property insurance operates in effect as an assumption by that party of

the risk of loss or damage caused by the peril to be insured against. A covenant to insure is a

contractual benefit conferred to the tenant, which, on its face, covers certain damage with or

without negligence by any person. The Courts arrived at the immunity principle in part, because

there would be no benefit of the covenant to the tenant if it did not apply to damage caused by

the tenant's negligence. Since the Trilogy, the Courts have expanded the application of the

immunity principle to circumstances where the tenant covenants to insure a specific peril.16

In 1997, the Ontario Court of Appeal explained the effect of the Trilogy in Madison

Developments Ltd. v Plan Electric Co. as follows:

The law is now clear that in a landlord-tenant relationship, where the landlord covenants to obtain insurance against the damage to the premises by fire, the landlord cannot sue the tenant for a loss by fire caused by the tenant’s negligence. A contractual undertaking by the one party to secure property insurance operates in effect as an assumption by that party of the risk of

14 T. Eaton Co. v Smith (1977), [1978] 2 SCR 749, 92 DLR (3d) 425 [Eaton]. 15 Ibid at 754-756. 16 Jarski v Schmidt (1987), 22 CCLI 94, 3 ACWS (3d) 400 (Ont Dist Ct).

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loss or damage caused by the peril to be insured against. This is so notwithstanding a covenant by the tenant to repair which, without the landlord’s covenant to insure, would obligate the tenant to indemnify for such loss. This is a matter of contractual law not insurance law, but, of course, the insurer can be in no better position than the landlord on a subrogated claim. The rationale for this conclusion is that the covenant to insure is a contractual benefit accorded to the tenant, which, on its face, covers fires with or without negligence by any person. There would be no benefit to the tenant from the covenant if it did not apply to a fire caused by the tenant’s negligence.17

Although the immunity principle was established by the SCC approximately forty (40)

years ago, and confirmed by the Ontario Court of Appeal approximately twenty (20) years ago

the courts continue to be faced with issues of interpretation regarding insurance and indemnity

clauses. Where cases involve the interpretation of clauses in a lease related to the allocation of

risk, there is often a lot at stake for both parties (and their insurers): as a result these cases

often end up in the Court of Appeal.

V. SHOULDN’T INSURANCE AND INDEMNITY CLAUSES WORK TOGETHER?

In 2014, the Ontario Superior Court of Justice, in Deslaurier Custom Cabinets Inc. v

1728106 Ontario Inc.18, seemingly ignored the principle of immunity created by the Trilogy. The

motion judge held that a tenant’s covenant to insure may be limited by express provisions in

the lease. In this case, the landlord / defendant entered into a lease with the tenant / plaintiff

to carry on the business of manufacturing and sale of custom cabinets. As a condition of the

lease, the landlord was required to have a third party perform structural repairs to the

premises. During this repair work, a fire occurred resulting in a total loss, and the building was

eventually demolished.

The tenant sought recovery of damages to its property, and its business interruption

losses. The Tenant was paid approximately $10.8 million by its insurer and sought to recover its

17Madison Developments Ltd. v Plan Electric Co. (1997), 152 DLR (4th) 653, leave to appeal refused, (1998), [1997] SCCA No 659 as reproduced in Deslaurier Custom Cabinets Inc. v 1728106 Ontario Inc., 2016 ONCA 246. 18 Deslaurier Custom Cabinets Inc. v 1728106 Ontario Inc., 2014 ONSC 5148, 2014 CarswellOnt 12201.

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remaining alleged losses, approximately $4.1 million, from the defendants, the landlord and the

third party contractor. The parties agreed on the facts and the matter proceeded by way of

summary judgment. The third party contractor did not participate in the summary judgment

motion.19

The issue was the interpretation of the lease, and the relationship between the tenant’s

obligation to insure, and the landlord’s indemnity. The relevant clauses in the lease include:

8.1.1. The Tenant must also obtain the following insurance for the Premises:

ii. insurance against all risks of loss or damage to the Tenant's property; The Tenant covenants to keep the Landlord indemnified against all claims and demands whatsoever by any person, whether in respect of damage to person or property, arising out of or occasioned by the maintenance, use or occupancy of the Premises or the sub-letting or assignment of same or any part thereof, and the Tenant further covenants to indemnify the Landlord with respect to any encumbrances on or damage to the Premises occasioned by or arising from the act, default or negligence of the Tenant, its officers, agents, employees, contractors, customers, invitees or licensees;

[…]

8.2.1. The Landlord covenants to keep the Tenant indemnified against all claims and demands whatsoever by any person, of or occasioned by the Landlord's maintenance, use or occupancy of the Premises, and the Landlord further covenants to indemnify the Tenant with respect to any encumbrances on or damage to the Premises occasioned by or arising from the act, default, negligence of the Landlord, its officers, agents, employees, contractors, customers, invitees or licensees;

[…]

8.3 The Tenant shall carry insurance in its own name to provide coverage with respect to the risk of business interruption to an extent sufficient to allow the Tenant to meet its ongoing

19 Ibid at paras 1-7.

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obligations to the Landlord and to protect the Tenant against loss of revenue.

8.4 To the extent not included in the insurance required by section 8(1.1)(ii), if any, the Tenant shall carry insurance in its own name insuring against the risk of damage to the Tenant's property within the Premises caused by fire or other perils and the policy shall provide for coverage on a replacement cost basis to protect the Tenant's stock in-trade, equipment, Trade Fixtures, decorations and improvements.

8.5 The Tenant's liability and property damage insurance policies required by this Lease shall include the Landlord as an additional insured;

[…]

9.1 If the Premises or the building in which the Premises are located, are damaged or destroyed, in whole or in part, by fire or other peril, then the following provisions shall apply […]

[…]

9.3 Apart from the provisions of Section 9(1) and as otherwise specifically provided for in this Lease, there shall be no abatement from the reduction of the Rent payable by the Tenant, nor shall the Tenant be entitled to claim against the Landlord for any damages, general or special, caused by fire, water, sprinkler systems, partial or temporary failure or stoppage of services or utilities which the Landlord is obligated to provide according to this Lease, from any cause whatsoever.

At the outset of the motion judge’s analysis the Trilogy was mentioned. However, it was

not explicitly applied. Instead, the motion judge stated that the Trilogy does not “purport to

override the basic principles of contractual interpretation” and that cases following the Trilogy

have repeatedly held that a covenant to insure may be limited by express provisions of the

lease.20

20 Ibid at paras 31-32.

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The motion judge’s analysis focused on what the parties meant by the term “Premises”.

The motion judge’s analysis began with the principles of contract interpretation applicable to a

commercial lease, as described by the Ontario Court of Appeal in Plan Group v Bell Canada:

[A] commercial contract is to be interpreted,

(a) as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective;

(b) by determining the intention of the parties in accordance with the language they have used in the written document and based upon the “cardinal presumption” that they have intended what they have said;

(c) with regard to objective evidence of the factual matrix underlying the negotiation of the contract, but without reference to the subjective intention of the parties; and (to the extent there is any ambiguity in the contract),

(d) in a fashion that accord with sound commercial principles and good business sense, and that avoid[s] a commercial absurdity.21

On its face, “Premises” (a defined term in the lease) referred to nothing more than the

rentable area leased by the Tenant. The motion judge acknowledged that references to

“Premises” seemed to indicate that the term was to be restricted to the rentable space and

excluded the tenant’s property. Notwithstanding the definition of “Premises” contained in the

lease, and its use in other provisions of the lease which were in line with the definition, the

motion judge found that if “Premises” meant nothing more than the rentable area, then the

landlord would be indemnifying the tenant for something in respect of which the tenant had no

interest.22

21 Ibid at para 26. 22 Ibid at para 28.

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Having expanded the meaning of “Premises” to include the tenant’s property, the

motion’s judge then determined that the tenant’s covenant to insure was limited by the

express provisions in the lease that required the landlord to indemnify the tenant for its (or its

agents) acts or negligence. The motion judge relied on the introductory wording in section 9.3

and extrinsic evidence regarding the landlord’s leases with other tenants in the building to find

that the parties must have specifically intended to give the tenant a contractual right which had

been withheld from the other tenants. The landlord’s leases with other tenants only contained

one-way indemnification clauses in favour of the landlord. Accordingly, the landlord was held

liable for the losses claimed by the tenant. The landlord appealed.

On April 4, 2016, the motion judge’s decision was overturned by the Ontario Court of

Appeal. The three judge panel unanimously held that the motion judge’s failure to apply

applicable jurisprudence (including the Trilogy) constituted an error of law, and the effect of the

tenant’s covenant to insure was to presumptively fix the tenant, rather than the landlord, with

responsibility for the tenant’s losses. The motion judge failed to give effect to the parties’

agreed allocation of risk. Once the tenant was presumed to assume the risk of loss, then the

analysis could shift to consider whether the presumption was rebutted by other provisions of

the lease.

The Court of Appeal correctly, in the author’s view, held that the starting point for the

motion judge’s analysis should have been sections 8(1.1)(ii) and 8(4) of the lease where the

tenant contractually undertook to obtain insurance against “All risks of loss or damage to the

Tenant’s property” and “against the risk of damage to the Tenant’s property with the Premises

caused by fire.” Applying the principles from the Trilogy, the tenant had assumed the risk of loss

or damage to its own property caused by fire. “By agreeing to insure, the Tenant relieved the

Landlord from the risk of liability for such loss or damage, even where caused by the Landlord’s

negligence, unless the Lease elsewhere provided to the contrary.”23

23 Deslaurier Custom Cabinets Inc. v 1728106 Ontario Inc., 2016 ONCA 246, 2016 CarswellOnt 4939, para 43.

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The Court of Appeal reasoned that if the motion judge started from the presumption

that the tenant was responsible then the interpretation of the meaning of “Premises” would

not have resulted in the same outcome. The Court of Appeal identified three issues with the

motion judge’s analysis:

(1) the motion judge discounted the fact that “Premises” was a defined term in the

lease;

(2) the motion judge ignored multiple provisions in the lease that drew a clear

distinction between the “Premises” and the tenant’s property; and

(3) the landlord’s indemnity covenant had meaning without having to interpret

“Premises” as meaning more than the rentable area.24

The Court of Appeal held that a proper interpretation of the landlord’s indemnity covenant

(where the meaning of “Premises” excluded the tenant’s property) still provided the tenant

with protection for: (a) its leasehold interest in the “Premises”; (b) any policy exclusions

contained in the tenant’s insurance coverage; and (c) damage caused by the landlord’s

negligence for a loss that the tenant was not required to insure against.25

The Court of Appeal relied on the reasoning in the case of Lincoln Canada Services LP v

First Gulf Design Build Inc.26 to read the tenant’s insurance covenant and the landlord’s

indemnity covenant in a manner that avoided inconsistency and reflected the intention of the

parties:

i) the tenant was obligated to obtain the specific insurance required by its insurance covenant;

ii) the tenant had to look to its own insurer for any damage that was the subject of the tenant’s insurance obligation, whether or not caused by negligence, and the tenant and its insurer were

24 Ibid at para 55-61. 25 Ibid at para 61-63. 26 Lincoln Canada Services LP v First Gulf Design Build Inc., 2007 CanLII 45712 (Ont. SCJ), aff’d 2008 ONCA 528.

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restricted from claiming against the landlord for recovery of such damage;

iii) if the landlord’s negligence caused any damage against which the tenant was not required to insure, the landlord was obliged to indemnify the tenant for such damage; and

iv) apart from negligence, the landlord had no liability to the tenant for any damage listed in the landlord’s indemnity covenant, whether or not the tenant had to insure for such damage.27

Based on the above analysis, the Court of Appeal held the tenant to its contractual

bargain: it assumed responsibility for the risk of loss or damage to its own property caused by

fire. The landlord only indemnified the tenant for risks against which the tenant was not

required to insure (i.e. for risks other than loss or damage caused by fire). This interpretation

also protected the landlord from negligence claims in circumstances where the tenant

specifically agreed to insure against an underlying risk, such as fire. The fact that the tenant was

underinsured could not become the landlord’s responsibility.28

VII. CONCLUSION

Lawyers, landlords, and tenants should pay particular attention to the insurance and

indemnity clauses in their leases. The principle of immunity (which may not be understood by

the tenant or landlord) stresses the importance for lawyers that the clauses intended to

allocate risk actually do what they are intended to. There is a presumption that where a party

has undertaken to obtain insurance for a specific peril or property, then that insurance will be

looked to in those circumstances, regardless of whether the peril was caused by the other

party’s negligence. This presumption can be rebutted by express language to the contrary.

However, where there are conflicting provisions in a lease, or the slightest ambiguity, it is

difficult to predict how the courts will resolve such inconsistencies. Lawyers are reminded to

27 Ibid at paras 65-66. 28 In addition to issues with respect to under insurance, parties to a commercial lease should be aware that the courts will likely apply the principle of immunity to enforce an implied release to a parties deductible portion of its claim: see Lincoln Canada, supra note 24.

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analyse all of the risk allocation provisions together in order to ensure that they mesh with each

other before the lease is finalized. If the insurance and indemnity provisions are reviewed in

isolation, it is possible that the client (or their insurer) may be left paying for damage that they

did not know they would be responsible for.

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10153505.1

APPENDIX A

Secondary Sources

Dawn Michaeloff, Insurance and Risk Management in Commercial Leasing, (Aurora: The

Cartwright Group Ltd., 2009).

Raymond S. Iwamoto, “Insurance and the Commercial Lease, Part I”, (2006)22:1 The Practical

Real Estate Lawyer 1.

Case Law

Agnew-Surpass Shoe Stores Ltd. v Cummer-Yonge Investments Ltd., [1976] 2 SCR 221, 55 DLR

(3d) 676.

Deslaurier Custom Cabinets Inc. v 1728106 Ontario Inc., 2016 ONCA 246, 2016 CarswellOnt

4939.

Deslaurier Custom Cabinets Inc. v 1728106 Ontario Inc., 2014 ONSC 5148, 2014 CarswellOnt

12201.

Jarski v Schmidt (1987), 22 CCLI 94, 3 ACWS (3d) 400 (Ont Dist Ct).

Lincoln Canada Services LP v First Gulf Design Build Inc., 2007 CanLII 45712 (Ont. SCJ), aff’d 2008

ONCA 528.

Madison Developments Ltd. v Plan Electric Co. (1997), 152 DLR (4th) 653.

Ross Southward Tire Ltd. v Pyrotech Products Ltd., [1976] SCR 35, 57 DLR (3d) 248.

T. Eaton Co. v Smith (1977), [1978] 2 SCR 749, 92 DLR (3d) 425.

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TAB 6

Rent Abatement in Commercial Leases

Dennis Tobin

Blaney McMurtry LLP

W. Colin Empke

Blaney McMurtry LLP

Horatiu Porime

Blaney McMurtry LLP

February 22, 2017

THE SIX-MINUTE


Rent Abatement in Commercial Leases

Dennis Tobin, W. Colin Empke and Horatiu Porime, Blaney McMurtry LLP1

EXECUTIVE SUMMARY

The word “abatement” when used in the context of “rent” ranks second among the seven

deadly words a landlord does not want to hear in a lease negotiation. The others are

“termination”, “set-off”, “allowance”, “reimbursement”, “self-help” and “the-landlord-shall”.

Accordingly, the negotiation of express rights of abatement for tenants in commercial,

industrial and retail leases can be a difficult task.2

This paper will canvas: five categories of circumstances in which rent abatement is relevant;

drafting considerations for abatement clauses; availability of insurance; and the impact of

insurance on the negotiation of abatement rights. We also review whether the circumstances

give rise to common law or statutory rights of abatement.

This paper is written for lawyers and people engaged in drafting offers to lease and leases for

retail, office, specialty and industrial premises in Ontario, Canada.3

INTRODUCTION

A recently negotiated lease of retail premises in a large regional shopping centre contained

more than 45,000 words. That is about the same number of words as Ray Bradbury’s famous

1 Dennis Tobin is a Partner at Blaney McMurtry LLP with more than 25 years’ experience as a lawyer in commercial, industrial and retail leasing. W. Colin Empke is a Partner at Blaney McMurtry LLP specializing in insurance litigation and insurance coverage advice and litigation. Horatiu Porime is an Articling Student at Blaney McMurtry LLP.

2 This is the second article in the “Seven Deadly Words” series. The first was “Tenant Termination Rights,” presented by Dennis Tobin and Michael Gilburt of Blaney McMurtry LLP at the Six-Minute Commercial Leasing Lawyer seminar in 2015. The article is available at http://www.blaney.com/files/16085_Tenant_Termination_Rights.pdf.

3 This article is not intended to provide legal or insurance advice and no legal or business decisions should be based upon it. If you have questions about the content of this article please call Dennis Tobin or your regular Blaney McMurtry lawyer.

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http://www.blaney.com/files/16085_Tenant_Termination_Rights.pdf

book Fahrenheit 451, a classic science fiction book obviously very different from a lease, if only

because most leases are something of a mystery.

The following are some simple statistics derived from the above noted sample lease that

illustrate the rarity of abatement rights. Leasing professionals will not be surprised to learn that

buried in those 45,000 words were only 20 references to variations of the word “abate.” Of

those 20 references, 18 appeared in the body of the lease and deal with 6 different scenarios.

Our conclusion is that the occurrences of abatement rights in commercial leases are rare even

in the case where the landlord and the tenant have relatively equal negotiating power.

WHAT IS RENT ABATEMENT AND WHEN IS IT APPROPRIATE?

Let’s put the discussion of abatement in context.

“Abatement” of rent in a lease negotiation means the right or process of reducing the rent in

certain circumstances. It is an agreed reduction not requiring the awarding and calculation of

damages.

Abatement can be confused with “set-off”. Where abatement is a reduction of the agreed

rental amount, set-off is where you seek to withhold specified amounts from an otherwise

agreed rental amount, for example where the tenant has suffered damages for breach of the

lease by the landlord.

Abatement is only one of many remedies. The fact that we discuss abatement as a remedy in

the particular circumstances listed below does not mean it is the best remedy or the only

remedy. From a tenant’s point of view, it is usually best to draft your remedies so that you can

claim other remedies as well.

Abatement of rent is a way to reduce rental expense for a period of time in certain

circumstances but often the better remedy is a claim for a loss of revenue or profit. Very often

the tenant is interested in recovering the lost profits and the right to abate rent is “nice to

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have”. Since the rent paid by the tenant is the landlord’s revenue, ensuring the rent continues

to be paid is very important from the landlord’s perspective.

If the tenant or the landlord has business interruption insurance then there are fewer

circumstances requiring abatement of rent. Business interruption insurance insures against the

possibility that a loss prevents the business from operating and earning income at its pre-loss

level. This can be purchased by the tenant and the landlord for their own interests. A tenant’s

policy may provide for the payment of rent during a period of interruption, thereby protecting

the landlord’s interest, however the landlord should still have contingent coverage in the event

the tenant’s policy does not respond. It may take a while to repair the damage and if that time

period is longer than the coverage period under the business interruption insurance then

perhaps abatement of rent can be triggered by the expiry of the insurance.

If the risk is insurable then the parties are trying to cover off the exclusions and those elements

of the risk which are not insurable. The best way to do that is to be informed as to what type of

insurance is available and what exclusions apply. Speak to an insurance broker about these

issues.

“Waiver of subrogation” is a common issue in commercial leases. Including a waiver of

subrogation or a mutual waiver of subrogation is good for a number of reasons: the recovery

from the insurance company is final; there is no delay in the payout by reason of the need to

determine fault; and it avoids a subrogated claim. This means that no claim is commenced in

the name of the landlord or the tenant, as the case may be, against the other which could

involve unpleasant examinations and discoveries involving employees of both parties. An

explicit contractual waiver or release included in the lease will bind the insurance companies in

many cases.

In some circumstances both the landlord and the tenant arrange insurance. This is because the

tenant may not be able to make the ultimate payment notwithstanding they received the

payout from the insurance company, or the tenant may go out of business or become

bankrupt.1 The tenant will usually argue for a right of abatement and ask the landlord to

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arrange business interruption insurance. If the tenant is required to arrange business

interruption insurance it may not want to contribute to the cost of the landlord’s business

interruption insurance.

Tenants often complain that regardless of which party carries the insurance the tenant pays for

it. The tenant pays directly for its own insurance and the tenant pays for the insurance arranged

by the landlord through its contributions to its proportionate share of operating costs. If

properly arranged, one policy can be excess coverage to the other policy with the goal that you

can overlap coverage but not have to overlap premiums. In some circumstances, both the

landlord and the tenant will carry insurance. This is prudent if you are concerned that

throughout the term of the lease one or both parties may not maintain the insurance as

required under the lease or if there is a chance the coverage limits are not sufficient.

Parties to a lease should assume that there is no natural “right of abatement” or right to reduce

the rent. The right to abatement arises from what you negotiate and include in writing in the

lease, from statute and possibly the common law (in the case of eviction and the breach of the

landlord’s covenant of quiet enjoyment).

DRAFTING ABATEMENT CLAUSES

Some of the considerations to keep in mind when drafting the abatement clause include the

following:

(a) The party who wants to enforce the right to abate the rent should draft the clause.

You are more motivated to get it right.

(b) Clearly define what triggers the abatement right.

(c) The period of the abatement needs to have a clearly defined beginning and end.

Specify when it is triggered and what constitutes the end of the abatement period.

(d) Specify how the abatement it is to be calculated. Proportionate abatement is

common and is based on the proportion of the leased premises rendered unusable

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by the tenant. Refer to the definition of the leased premises and consider if it is

appropriate. The use interrupted may relate to parking or common areas as well as

space within an office, store or industrial plant.

(e) Specify which elements of the rent abate and consider minimum rent, operating

costs, taxes, insurance, and percentage rent. All elements of the rent may not be

appropriately abated in the particular circumstance. For instance, if the tenant is still

operating in some of the premises you would not want to abate utilities.

(f) At some points of time during the lease term the tenant pays no rent or a reduced

rent. Fixturing periods and free rent periods are examples. If the abatement period

falls within one of these periods of time then abating a rent that is already reduced

may not be what you want. Consider including the right to apply the period of the

abatement to a later period of the term when the tenant would otherwise pay full

rent.

(g) Take into account the insurance that is available. The tenant may not want both an

abatement right and have business interruption insurance. If the tenant or the

landlord has business interruption insurance then there are fewer circumstances

requiring abatement of rent. If the tenant is entitled to abatement of rent then the

insurer will not want to reimburse the tenant for the rental expense, taking the

position that the tenant must exercise its abatement rights as mitigation of the

losses. It may take a while to repair the damage and if that time period is longer

than the coverage period under the business interruption insurance then perhaps

abatement of rent can be triggered by the expiry of the insurance. Also, abatement

may be appropriate to cover a deductible or waiting period under the coverage.

What are the circumstances where a tenant and landlord may negotiate or expect an

abatement of the rent?

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1. It’s only fair.

Here we are talking about circumstances where something has occurred and there is

agreement contained in the lease.

One thing that cannot be avoided is people have a moral sense of right and wrong. If one party

has caused damage to another party by their actions there is an expectation that the offending

party will pay for that damage. This sense of fairness extends to all parts of the negotiation

including how tenants feel about paying rent in circumstances where they are not getting the

full use of the premises.

(a) Changes to the site plan, the common areas, the parking or the loading dock.

Leases are often explicit about the landlord’s right to make whatever changes they like

to the project. The lease often defines the project, shopping center or building as the

buildings and facilities as they currently exist or might in the future be altered. As a

result, the lease is silent as to any remedy in the event the landlord decides to or is

required to make changes. The most obvious circumstance that comes to mind concerns

separate standalone sites in shopping centers where there are drive-through businesses

such as coffee shops and fast food restaurants. Visibility, access and driving patterns are

key to the success of such locations and permanent changes to the physical layout of

the site after the tenant has taken possession will often result in direct damages to the

tenant’s business. The appropriate remedy may be a general prohibition against making

such changes but abatement of rent may be appropriate in the circumstance where the

landlord must make the changes for some reason or is entitled to and elects to do so

over the tenant’s objection.

(b) Maintenance, repair, replacements made by the landlord which may include

the leased premises. This circumstance would include the erection by the landlord of

scaffolding and other obstructions which may negatively impact the visibility of the

premises or the signage as well as temporary restrictions on the use of parking and

loading facilities. Consideration should also be given to the time of year that these

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types of things might occur and the retail tenant will want to avoid not only the

obligation to pay rent but also the loss of revenue over the busy holiday season. An

example of where this may become an issue is where the Landlord reserves the right (or

the lease is silent) to restrict access to some or all of the parking lot for any number of

reasons including seasonal displays and garden centres operated in the common areas

and parking lots by other tenants.

The standard language found in many leases provides the landlord with the right to

make alterations to the “lands”, “shopping center”, “building” and the “project”, all of

which definitions usually include the leased premises.

In many cases, the Landlord has no choice but to do the work as a result of its obligation

to maintain, repair and replace the project. If the tenant does not include a restriction

on the landlord’s alteration rights and obligations to maintain, repair and replace, the

tenant could find itself with less than it bargained for and paying full rent in

circumstances where the business revenue is disrupted. The fact that the landlord must

do the work does not rule out the possibility of abatement. They are not mutually

exclusive. In these circumstances, other remedies that might be considered would be

the right to cease to carry on business and after a certain period of time to terminate

the lease.

(c) Other access issues. In buildings with multiple levels, the inability to access the

upper floors as a result of maintenance and repair, damage, destruction or the failure of

elevators and escalators could cause quite a problem for the tenant. This is another

circumstance where, if the tenant and their counsel think about it, their assumption

would be that there is elevator service to all of the floors in the building at all times save

and except on a temporary basis as a result of an emergency or regular maintenance. If

you don’t put it in the lease, you don’t get it.

(d) Failure of the landlord to maintain, repair and/or replace some or all of the

premises, the common areas and facilities. Abatement of rent could be negotiated in

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this circumstance depending on the level of interference with the tenant’s use of the

leased premises. This is a difficult circumstance because, if the tenant does not have a

self-help right, it has no effective remedy other than to sue the landlord. Even if the

tenant has the right to remedy a circumstance created by the landlord’s failure to

maintain, repair or replace, the self-help right is usually limited to fixing defects

exclusively in the leased premises.

(e) Acts of the landlord amounting to an eviction. Tenants are bound to pay rent

for the entire term of the lease, without abatement, set-off or suspension, unless there

is an agreement to the contrary, or acts of the landlord amounting to an eviction occur.2

Acts amounting to an eviction are acts of a “grave and permanent character done by the

landlord with the intention of depriving the tenant of the enjoyment of the demised

premises”.3

(f) Breach of the covenant of quiet enjoyment. Courts have previously awarded

rent abatement where the tenant has established that the landlord has breached the

covenant of quiet enjoyment. In order to establish a breach of the covenant of quiet

enjoyment, the tenant must show that the ordinary and lawful enjoyment of the

demised premises is substantially interfered with by the acts of the landlord. The

interference must be of a grave and permanent nature, and must constitute a serious

interference with the tenant’s exercise of its right of possession.4

DMX Plastics Ltd v Misco Holdings Inc illustrates the factors taken into account by the

Courts in such a situation.5 DMX leased a commercial property from Misco for a 10 year

term to use for processing polyethylene products, producing drainage products and

recycling plastics. The roof of the premises had recurring leaking problems, which the

landlord had chosen to fix by patching, contrary to expert advice indicating that the roof

had to be replaced in its entirety.6

At one point the roof started leaking so severely that it looked as if it was raining

indoors. The tenant felt that it was not safe for his staff to continue work on the

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premises and decided to shut down operations. The Ministry of Labour issued a stop

work order.7

The Court found that the landlord breached the covenant of quiet enjoyment. The

ongoing leaks in the roof caused a serious and substantial interference with the tenant’s

use and enjoyment of the premises, and had a significant impact on the tenant’s ability

to carry on its business. The landlord failed to remedy its breach, causing the tenant to

move from one part of the building to another at great expense. The tenant was entitled

to an abatement of rent of 50% for the relevant time period.8

In determining the actual abatement amount, the Court noted that “there is no magic

formula.” Relevant factors include the amount of rent, the age and general condition of

the premises, the nature and degree of non-repair and its duration, efforts of the

landlord to inspect, the co-operation or otherwise of the tenant in that regard, and the

efforts made by the landlord to rectify the defect.9

Other decisions suggest that the landlord’s covenant of quiet enjoyment may also be

breached when a tenant’s right to quiet enjoyment of the premises is substantially

interfered with by another tenant. In MNT Holdings Ltd v Bellano Ceramic Tile Co,10 the

tenant was entitled to rent abatement for two months because they were not able to

enjoy the benefit they were entitled to expect in return for the payment of rent as a

result of a neighbouring subletting tenant.11 The neighbouring tenant used the premises

as a construction site for movie sets and caused constant noise, dust and odour.12 The

Court held that the landlord was obliged to consider whether the proposed new tenants

would represent a substantial interference with the tenant’s right of quiet enjoyment of

the premises. The landlord gave little or no consideration to the issue when they agreed

to sublease the premises.13

2. If we had thought about it, it would have been part of the deal.

It is always a challenge to limit the detail in a commercial lease. The parties rarely have the

patience or the money to negotiate every possible situation. We have to consider how parties

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to a lease think about the negotiation. After they have dealt with location, the next thing they

direct their minds to is the rent. As you work your way through the lease everything relates

back to the rent. After all, the amount of rent that is paid is based upon the suitability of the

location for the particular purpose. Abatement is a bit of a misnomer. It is not really a

reduction in rent so much as a determination as to what the appropriate rent is in the

circumstances. This is an important distinction when you are negotiating or interpreting the

lease. Landlords will often resort to the claim that an abatement of rent is in fact a penalty and

should not be enforced as a matter of law. However, if it is expressly stated not to be a penalty

or is stated as an alternative rent then the interpretation of the lease should give rise to the

true intent of the parties which is to have the tenant pay different rental amounts in different

circumstances.14

(a) Co-tenancy requirements. Co-tenancy provisions in a lease provide that if the

occupancy levels in the project fall below certain levels, then there should be a

reduction in rent. This is a situation which calls for the determination of the appropriate

amount of rent payable by the tenant when the co-tenancy requirement is not met. This

is usually drafted as a form of abatement of rent during the period of the co-tenancy

requirements failure. In truth, it is alternative rental rates for different occupancy levels

in the project.

(b) Landlord does not complete its work. If asked, the tenant would probably

conclude that it should not pay rent until all of the covenants of the landlord respecting

renovation and the landlord’s work in the premises and the project are completed.

Often there is a discussion about whether to use “substantial completion” rather than

“complete in all respects” before the abatement right is triggered. However, there are

probably certain absolutely necessary elements of the landlord’s work which, if they are

not completed, will have a substantial negative impact on the tenant’s ability to

commence its own work or use the leased premises to its full advantage. Examples

could include where the landlord is installing an elevator but the elevator installation is

not complete when the tenant is supposed to begin its work. In that circumstance, the

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tenant’s contractors may not be able to access the premises. Sometimes negotiations

for landlord’s work extend beyond the leased premises and include renovations of

common areas such as the building lobby, the parking, the elevators and the hallways in

accordance with agreed plans. If this additional work to the common area is not also

completed by an agreed date then an abatement may be appropriate and later a claim

for damages can be added.

(c) Damage and destruction. Absent an agreement to the contrary, damage or

destruction of the premises does not give rise to the right to an abatement of rent

unless the lease is created under the Short Form of Leases Act (discussed below). Leases

often contain a clause that stipulates that in the event of destruction or significant

damage to the premises, rent will abate for the time period for which the premises are

not usable by the tenant.

Damage and destruction is the one circumstance where the parties would expect to

have insurance. The insurance considerations elsewhere in this article impact whether

or not you also negotiate abatement of rent.

(d) Environmental contamination. Abatement of rent may not be a sufficient

remedy in circumstances where there is environmental contamination. Very often

leases will be drafted to provide that there shall be no remedy in the case of

contamination so long as the contaminant is contained in accordance with

environmental laws and does not exceed limits allowable for the particular use.

However, it may be that by virtue of the nature of the tenant’s business, the tenant

would not continue to carry on business from some or all of the premises in the

particular circumstances. Abatement of rent may be appropriate for the duration of any

temporary remediation work. In some cases, it may be that abatement is not the

appropriate or sole remedy and that after certain period of time the tenant should be

permitted to terminate.

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It is not possible to purchase insurance to respond to a loss due to known, pre-existing,

environmental conditions. Pollution and contamination exclusions are common in

commercial general liability insurance policies and commercial property policies. If

pollution or contamination are potential risks on the property, it is prudent to

investigate purchasing extensions of coverage for pollution related losses, although it is

noted such coverage is often subject to lower limits and significant premiums.

3. Circumstances created by third parties.

Certain circumstances in which abatement of rent may be considered are created by third

parties. These circumstances include:

(a) Access restrictions to the project. If the city adjusts the street access to a retail

shopping center or if the loading access from an alley is closed off, the traffic flow and

cost of making deliveries for the tenant may be affected rather dramatically. In that

context, the value of the premises to the tenant is less. If you anticipate this possibility

in the lease, you can negotiate the right to a proportionate abatement.

(b) Ability to carry on the proposed use or some part of the proposed use. This is

one that comes up more often than you think, especially in industrial commercial

settings where the tenant determines that the premises is ideal for all sorts of reasons

but it turns out that the premises cannot be used for the proposed use due to by-law

and zoning restrictions. In most negotiations, it is buyer beware. However, if the

premises are being marketed for the use, it is not unusual or unreasonable for the

tenant to ask the landlord to represent that the proposed uses are permitted. It is also

prudent for the tenant to make inquiries or instruct their legal counsel to review the

permitted uses under the local bylaws. Anticipating future changes, the tenant may

negotiate an abatement of rent in the event that some aspect of its use may at a future

date be prohibited or restricted.15

(c) Expropriation: This is a clause that most parties do not pay much attention to.

However, it is possible that some or all of the shopping center or building is

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expropriated. Depending upon the extent of the expropriation and whether or not the

leased premises are included, it could have a significant direct or indirect impact on the

use of the leased premises.16 Most expropriation clauses will provide for a

proportionate reduction in rent to the extent that the leased premises or a portion of it

is included in the expropriation. Consider the case where a tenant was leasing an entire

building consisting of approximately 15,000 square feet of office space as well as a

rather large parking lot which surrounded the building. The tenant was a trucking

company and needed the parking lot for their trucks. How do you determine the

proportionate reduction in the circumstance where part of the parking lot is

expropriated but the building is left untouched? The tenant may be of the view that the

parking lot was just as important, or more important, than the offices because it needed

a place to park its trucks. The lease in that case referred only to the impact on area of

the office premises for the purposes of determining the proportionate share reduction

in rent and it had to be renegotiated.

(d) The President moves in next door. Some things are unacceptable, uninsurable,

unbelievable and not negotiable. Consider the case of the tenants occupying prime

street front locations on Fifth Avenue in New York City in 2016 and 2017 when the

candidate for President of the United States decided to set up shop next door. The

combination of crowds and security exclusion zones seriously damaged their businesses.

If they had thought about it ahead of time, they would have negotiated abatements.

This is the type of scenario that takes into account all of the different types of

considerations that we are discussing in this paper but is so rare it would not come up.17

In some cases where there are actions of civil authorities that interfere with the

business of the tenant, the tenant can obtain insurance coverage as an extension of its

property insurance. However, it usually requires that the order barring access to the

property be a direct result of damage to the insured property or neighbouring

properties. This coverage usually has a waiting period (3 days is typical) and lasts only

for short periods (2 weeks is typical).

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4. Acts of God.

As they say, we may plan but God has plans of his own. Again, one thing that cannot be avoided

is people having a moral sense of right and wrong so that if one party has caused damage to

another party by their actions there is an expectation that the offending party will pay for that

damage. However, a truly benevolent God treats everybody the same and Acts of God impact

the landlord as much as they do the tenant. That is why God-fearing people invented insurance.

Therefore, perhaps neither the landlord nor the tenant should be responsible to the other for

acts of God and abatement of rent without insurance coverage is not going to be acceptable.

(a) Fire and other casualties. This is the most obvious risk and is usually

contemplated in all leases. The lease terms will address circumstances where the leased

premises or the project are damaged by fire, water, and the weather. In more extreme

cases, it may go on to deal with earthquake and other more extreme circumstances

which are often excluded in standard commercial property insurance policies and must

be purchased separately.

(b) The failure of utilities. Do you wonder what would happen to our technological

world if the electricity goes out? Without electricity, gas or water many businesses could

not carry on. Modern-day definitions of utilities often include fiber-optic cable and

access to the Internet. However, very few leases require the landlord to provide utilities

as a service as opposed to making utilities supplied by third parties available at the

premises. Also, in our experience few leases provide for an abatement of rent in these

circumstances. Part of the solution is to arrange property and business interruption

insurance against these risks.

(c) Riots, emergency and civil unrest. In Toronto we remember the G20 Summit in

2010 and the impact it had on downtown businesses. Not only was a large portion of

the downtown fenced off but large crowds did some damage to a number of businesses.

For several days retailers’ customers were unable to easily access the stores. At a

certain point, stores had to be closed for fear of damage being done. SARS had an

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impact on tourism in 2004 and coffee shops and other businesses contained within

hospitals were closed to everyone except staff and patients. These are all circumstances

where the tenant would not want to pay full rent unless insurance covered the expense.

5. Statutory rights of abatement under the Short Form of Leases Act18

Some leases are stated to be pursuant to the Short Form of Leases Act. If that is the case and

the appropriate proviso is included in the lease, then pursuant to Schedule B of the legislation,

the following provisions are incorporated into the lease:

Provided, and it is hereby expressly agreed, that in case the premises hereby

demised or any part thereof shall, at any time during the said term, be burned

down or damaged by fire, lightning or tempest so as to render the same unfit

for the purposes of the said lessee, then and so often as the same shall

happen, the rent hereby reserved, or a proportionate part thereof, according

to the nature and extent of the injuries sustained shall abate, and all or any

remedies for recovery of said rent or such proportionate part thereof shall be

suspended until the said premises shall have been rebuilt or made fit for the

purposes of the said lessee.19

This provision was addressed in an old Ontario case, Noble Scott Ltd v Murray.20 The case is

interesting from a couple of perspectives including the reference to the Short Forms of Leases

Act. The plaintiffs (landlord) demised the third storey of a building, “together with the

reasonable use in common with others entitled thereto of the elevator leading to said premises

for the purpose of carrying freight only”.

A fire destroyed the elevator and damaged part of the premises and the building generally. The

plaintiffs promptly restored the building, but the replacement of the elevator took some time.

The plaintiffs entered a contract to replace the elevator without delay, and the work started

shortly after and was carried out diligently. The plaintiffs sued for rent arrears, as the

defendants had stopped paying rent.

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The Court addressed the issue of abatement with reference to the provisions of the Short

Forms of Leases Act noted above. The lease contained the ordinary short form proviso that in

case of fire, rent shall cease until the premises are rebuilt. The Court held that the elevator was

not part of the premises demised by the lease. There was no right to abatement of rent on

account of the interruption of the service. The defendants were liable for the rent for which the

plaintiffs sued.

THE THINGS THAT CAN BE INSURED

Obtaining proper insurance will offset or mitigate many of the losses that might be sustained by

landlord or tenant after unanticipated damages to the premises or interruptions to business

activities. It may also render unnecessary the need for abatement of rent. The most significant

types of insurance:

(a) Property Insurance - typically you expect a landlord to insure the building and its

improvements; while the tenant insures its own personal property and tenant’s

improvements. This is a “first party” policy, meaning the insurance company pays

the loss directly to the named insured, or to those designated as loss payees. Even

where a lease provides that the tenant is to secure whole building insurance the

landlord is well-advised to purchase contingent or excess insurance. If a tenant goes

bankrupt or fails to pay the premiums, the landlord could be left uninsured. A

contingent policy protects against that risk.

(b) Boiler and Machinery Insurance – this is a specialized form of property

insurance, to address issues like mechanical breakdown in heating or electrical

systems. The coverage can be purchased by either tenant or landlord, depending on

the circumstances.

(c) Liability Insurance - modern terminology is “commercial general liability” or

“CGL” insurance, but older precedents still use the terms public liability insurance or

comprehensive general liability insurance. The terminology of the CGL is nearly

universal in the insurance industry and is the preferred term in lease agreements.

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This insurance covers the risk of harm to other people caused by the policyholder’s

negligence.

(d) Business Interruption Insurance - this insures against the possibility that a loss

prevents the business from operating and earning income at its pre-loss level. This

can (and probably should) be purchased by the tenant and the landlord for their

own interests. A tenant’s policy may provide for the payment of rent during a period

of interruption, thereby protecting the landlord’s interest, but the landlord should

still have contingent coverage in the event the tenant’s policy does not respond.

FEATURES OF BUSINESS INTERRUPTION INSURANCE

Business interruption insurance should form a part of the insurance package for both landlord

and tenant. A proper combination of insurance and lease provisions can help ensure the

continuation of rent payments in the event of an unexpected loss causing the suspension of the

business operations or causing additional expenses to be incurred.

Like first party property insurance, business interruption policies require a connection to a

direct physical loss to the described premises. For a tenant, this means some care has to be

taken in defining the described premises, in order to avoid arguments that damage to the

remainder of the building does not trigger this coverage. A landlord’s insurance will typically be

net of any recoveries from other sources, such as the tenant actually paying the rent.

The requirement of physical and direct loss to property limits the business interruption

coverage. Some things cannot be insured against. For example, neighbouring construction

blocking access to the building is not an insurable risk. However, if that construction damages

the building, any interruption may be covered.

The importance of both the landlord and tenant having business interruption insurance is

demonstrated in a recent Ontario Court of Appeal decision: 2224981 Ontario Inc v Intact

Insurance Company.21 In that case a fire largely destroyed the premises. The lease did not

provide for an abatement of rent in the circumstances and the tenant simply stopped paying

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the rent. The landlord’s business interruption insurer was ultimately required to cover the claim

for lost rent, rather than the tenant’s insurance or the tenant itself, even though the tenant

remained under a legal obligation to pay (and actually had some business interruption

insurance of its own). The landlord’s insurer was required to bear the risk of seeking recovery of

the rent from the tenant in a subsequent action. The landlord may not have been made whole

had it not purchased its own business interruption insurance.

Common features of business interruption insurance include:

(a) As noted, there is a requirement for “direct physical loss” at the premises. If the

premises cannot be accessed because of a direct, physical loss to a neighbouring property,

this coverage may not be triggered (there are optional coverages available to offset this

risk).

(b) The losses can be calculated using various methods: loss of profits; loss of gross

revenue; or extra expenses of continuing operations (e.g. payment of standing charges).

Loss of profits is typically the most expensive and inclusive coverage.

(c) Payment is usually subject to a monetary limit as well as a period of indemnity.

There may be a waiting period (72 hours is common) and the loss period is usually capped

(12 months is common). If the business is of a nature that more than 12 months may be

required to restore it after a catastrophic loss, other periods of indemnity can be purchased.

It is possible to purchase contingent business interruption insurance, which protects against the

risks of physical damage to neighbouring properties causing harm to the business, even if your

own property is not damaged. If a supplier’s premises are damaged and this interrupts the

flow of critical parts to your manufacturing facility, that risk can be insured. Hurricane Katrina

provided many examples of the benefits of this type of insurance.

It is possible to purchase coverage for interruptions caused by civil authorities, arising from

physical damage to a neighbouring property. After 9/11, for example, some companies were

able to seek insurance recovery for losses sustained when bridges and tunnels were closed and

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access to the business was blocked. Since 9/11 this type of coverage has become rarer in the

United States. There does not appear to be the same market-driven reduction in this coverage

in Canada. Note, however, the requirement for physical damage blocking an access route would

not qualify however long the disruption.

SUBROGATION - AN UGLY WORD THAT IS HARD TO SPELL

Put simply, subrogation is the right of an insurance company to sue someone else in your name,

seeking to recover the damages the insurance company has had to pay to you. It is the attempt

by the insurance company to recover its payments from the at-fault party. In the leasing

context, subrogation rights add complexity and confusion. Ideally, the lease should contain

contractual indemnities and insurance requirements that extinguish subrogation rights and

thereby maximize the efficiency of the insurance policies and reduce premiums for both

parties.

The purpose of insurance is to compensate parties for unexpected loss. The purpose of

subrogation is to transfer loss from an insurer to another party. That loss transfer component is

of no real interest to a landlord or a tenant. The most efficient outcome after a large loss is for

each party’s insurer to pay their respective losses as quickly as possible, without the need to

determine fault. Allocating fault will lead to delays in recovery and future litigation that will

harm the landlord and tenant relationship. The provisions of the lease should complement the

existence of the insurance coverage, to avoid future claims that will benefit only the insurance

companies.

Mutual releases to the extent of insurance proceeds, combined with an explicit waiver of

subrogation, will ensure that the insurers are on notice that they are expected to pay the claims

promptly and not to devote inappropriate time and attention on seeking to blame the other

party to the lease. Obviously, it is important to evaluate the potential size of the risks to make

sure adequate limits of insurance are purchased, because any loss that is not covered by

insurance would properly be the subject of an action between the parties, unless those are also

released.

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It is critical to ensure that the lease contains an explicit waiver of subrogation clause. It may not

be sufficient to include only a request that the insurance policy contain a waiver of subrogation

clause since many insurers will not issue a policy containing such a clause. An explicit

contractual waiver will, however, bind the insurance companies.

BUYING THE INSURANCE

Negotiating the insurance provisions in leases is often acrimonious, as each side seeks to rely

on its own well-established precedents. Making sure all the parties know who is in the best

position to minimize risk, who is expected to bear the risk of loss and what activities are being

carried on will smooth the process. The lawyers need to understand and discuss the nature of

the businesses involved.

The most economically efficient lease from an insurance perspective is one that designates the

insurance responsibility to the party most at risk or most in control of a risk. A stand-alone

building may be more appropriately insured by the tenant. In a mall property it is much more

important for the landlord to control the property insurance as its interest in the whole is much

greater.

As a general rule, it is prudent to keep insurance clauses to what is capable of being achieved in

the market. It is better practice to include provisions requiring the parties to demonstrate the

existence, and renewal, of the various policies. It is even more important that the parties

obtain proof of that insurance every single year.

The acquisition of the insurance is the obligation of the client. In this regard, the client’s use of

a knowledgeable broker is critical. A broker is in the best position to discuss the risks unique to

the company and to find insurance options to best mitigate against those risks. The broker

should be made to earn its commission. The lease provisions should be provided to the broker

with instructions to acquire coverage that matches or exceeds the requirements.

The common practice is to obtain a Certificate of Insurance as the required proof of insurance

under the lease. These are typically prepared by the broker. It is very common for these

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certificates to contain errors. Often they will reference only one of the policies. There are

different types of certificates for property policies and liability policies. Most importantly, there

is case law demonstrating that a Certificate of Insurance is not necessarily evidence the policy

has been issued. Most standard form Certificates contain warnings that the certificate is issued

for information purposes only and only the actual policy wordings will bind the insurer. An error

or omission in a Certificate can result in loss of coverage. It is strongly recommended that

copies of actual Declarations pages and policy wordings be acquired prior to the lease effective

date.

OTHER CONSIDERATIONS: MORTGAGEES AND PURCHASERS

You must always consider the impact of what is negotiated in the lease from the perspective of

mortgagees and future purchasers of the project. Mortgagees are very concerned with any

provisions of a lease which could result in the amount of rent being reduced. The revenue

generated from the lease will have an impact on the amount of a mortgage. If there is a chance

(like the circumstance where you may negotiate an abatement clause) the rent will be reduced

at some time in the future, the mortgagee may discount the value of the rent which can be

collected. Similarly, a proposed purchaser of the project will seek a discount to market price if

there are terms permitting an abatement or reduction of the rent.

The risk of abatement clauses impacting the mortgage or the sale price of the project can be

mitigated with the appropriate insurance coverage and the requirement in the lease that any

abatement or reduction in rent is subject to the landlord receiving the insurance proceeds.

WHAT IS A COMMERCIAL LEASING LAWYER’S RESPONSIBILITY REGARDING INSURANCE?

Commercial leasing lawyers should ask their clients to have the lease provisions that have been

negotiated between the landlord and tenant reviewed by the client’s insurance broker.

Particular emphasis should be placed on (but not limited to) provisions dealing with insurance,

damage and destruction, abatement, and mutual releases and indemnities. The insurance

broker is going to be familiar with the business of the landlord or tenant, as the case may be,

where the risk to their business is and which of the risks can be reasonably insured for. The

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landlord or tenant can then be offered the range of insurance options that meet both their

business needs and their obligations under the lease.

6 - 22

BIBLIOGRAPHY

Legislation

Expropriations Act, RSO 1990, c E.26.

Short Form of Leases Act, RSO 1990, c S.11.

Jurisprudence

0707448 BC Ltd v Cascades Recovery Inc, 2011 BCSC 1065.

2224981 Ontario Inc v Intact Insurance Company, 2016 ONCA 870.

A Woessner Construction Co v Pacific Group Displays Ltd, 2014 ABPC 13, 239 ACWS (3d) 759.

Albamor Construction & Engineering Inc v Simone (1995), 56 ACWS (3d) 759 (Ont Ct J (Gen Div)).

Calloway REIT (Westgate) Inc v Michaels of Canada ULC (2009), 175 ACWS (3d) 553 (Ont Sup Ct

J).

Canadian Medical Laboratories Ltd v Stabile (1997), 69 ACWS (3d) 367 (Ont CA).

Cross v Piggott (1922), 69 DLR 107 (Man KB).

DMX Plastics Ltd v Misco Holdings Inc (2008), 172 ACWS (3d) 212, 76 RPR (4th) 300 (Ont Sup Ct

J).

Firth v B.D. Management Ltd (1990), 73 DLR (4th) 375, 23 ACWS (3d) 208 (BCCA).

Marvin Investments Ltd v Manitoba, 2001 MBCA 133.

Milne v Delta Foods (1996), 1 RPR (3d) 150, 61 ACWS (3d) 587 (PEI Sup Ct).

MNT Holdings Ltd v Bellano Ceramic Tile Co, 2002 BCPC 81.

Noble Scott Ltd v Murray, 1925 OLR 595 aff’d ONCA.

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Winfield Developments Ltd v JER Associates Inc, 36 Man R (2d) 301, 36 ACWS (2d) 310 (QB).

Secondary Sources

Haber, Harvey M., Q.C., LSM. Tenant’s Rights and Remedies in a Commercial Lease – a Practical

Guide, 2d ed (Toronto: Canada Law Book, 2014).

McConnell, Rose H. Ontario Real Estate Law Guide, vol 3 (Toronto: LexisNexis Canada, 2015).

Michaeloff, Dawn. Insurance and Risk Management in Commercial Leasing (Aurora: Canada Law

Book, 2009).

Olson, Richard. A Commercial Tenancy Handbook, Vol 1 (Toronto: Carswell, 2004).

Roberts, Harry. Riley on Business Interruption Insurance, 9th ed (London: Sweet & Maxwell,

2011).

News Articles

Schneier, Matthew, “How Fifth Avenue Is Coping”, The New York Times (23 Nov 2016) online:

The New York Times <http://www.nytimes.com>.

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Appendix - Endnotes

1 This is what happened in 2224981 Ontario Inc v Intact Insurance Company, 2016 ONCA 870. 2 Rose H McConnell, Ontario Real Estate Law Guide, vol 3 (Toronto: LexisNexis Canada, 2015) at 53,735. 3 See Winfield Developments Ltd v JER Associates Inc, 36 Man R (2d) 301, 36 ACWS (2d) 310 (QB) (where the landlord’s failure to provide adequate air conditioning did not justify unilateral withholding of rent, paras 25, 28); Cross v Piggott (1922), 69 DLR 107 (Man KB) (where, in the context of a residential tenancy, heating issues did not constitute an eviction, as on each occasion when complaint was made of insufficient heat the default was promptly remedied, paras 11 and 13); Marvin Investments Ltd v Manitoba, 2001 MBCA 133. 4 Firth v B.D. Management Ltd (1990), 73 DLR (4th) 375, 23 ACWS (3d) 208 (BCCA) at para 16. 5 DMX Plastics Ltd v Misco Holdings Inc, (2008) 172 ACWS (3d) 212, 76 RPR (4th) 300 (Ont Sup Ct J) [DMX Plastics]. For a similar fact scenario also resulting in rent abatement, see A Woessner Construction Co v Pacific Group Displays Ltd, 2014 ABPC 13, 239 ACWS (3d) 759. 6 DMX Plastics, supra note 5 at paras 13-18, 73. 7 Ibid at para 18. 8 Ibid at paras 75, 82. 9 Ibid at para 82. 10 2002 BCPC 81 [MNT Holdings]; See also Albamor Construction & Engineering Inc v Simone (1995), 56 ACWS (3d) 759 (Ont Ct J (Gen Div)). 11 MNT Holdings, supra note 10 at para 21. 12 Ibid at para 6. 13 Ibid at para 17. 14 See, for example, Calloway REIT (Westgate) Inc v Michaels of Canada ULC (2009), 175 ACWS (3d) 553 (Ont Sup Ct J). One of the issues in the case was the enforceability of two articles in the lease. One of the articles provided for liquidated damages in case the actual completion date of buildings in the shopping centre was after the contemplated completion date. The other article provided for liquidated damages in the form of an abatement of rent. At paras 84-89, the Court outlined the common law and equitable principles on whether a provision in an agreement constitutes a penalty. At common law, if the stipulated remedy represents a genuine attempt to estimate the damages that the innocent party would suffer in the event of a breach, it will be enforced. If it is extravagant and unconscionable in amount in comparison with the greatest loss that could be proved to have followed from the breach, it is a penalty. Equity also requires that the sum forfeited be out of all proportion to the damage. However, equity focuses on the time of the breach rather than the time the contract was entered into and considers whether it is unconscionable for the innocent party to retain the money forfeited. The Court held that the two articles were not penalties. 15 Although not abatement cases, a number of decisions illustrate the importance of considering the ability to carry out the proposed use. Canadian Medical Laboratories Ltd v Stabile (1997), 69 ACWS (3d) 367 (Ont CA) is one such case. The tenant brought an action for rescission of the 10-year lease it had entered. The use clause in the lease provided for use of the premises as a laboratory. The action failed. The lease did not make any stipulations concerning zoning. Although specific uses were referred to in the lease, no representations were made regarding the zoning required to support those uses. There was a specific clause stipulating against collateral warranties or representations. See also Milne v Delta Foods (1996), 1 RPR (3d) 150, 61 ACWS (3d) 587 (PEI Sup Ct) for the proposition that the duty to ensure the fitness of the premises for the intended purpose lies with the tenant (para 23). See also 0707448 BC Ltd v Cascades Recovery Inc, 2011 BCSC 1065, where the British Columbia Supreme Court affirmed the principle that there is no implied warranty in a lease that the premises are fit for the lessee’s purpose, even where known to the landlord (para 93). 16 Section 34 (1) of the Expropriations Act, RSO 1990, c E.26 provides that subject to s 34(2), where only part of the interest of a lessee is expropriated, the lessee’s obligation to pay rent under the lease shall be abated proportionately, as determined by the Ontario Municipal Board. Subsection 34(2) provides that where all the interest of a lessee in land is expropriated or where part of the lessee’s interest is expropriated and the expropriation renders the remaining part of the lessee’s interest unfit for the purposes of the lease, as determined by the Board, the lease shall be deemed to be frustrated from the date of the expropriation.

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17 Matthew Schneier, “How Fifth Avenue Is Coping”, The New York Times (23 Nov 2016) online: The New York Times <http://www.nytimes.com>. 18 RSO 1990, c S.11. 19 Short Form of Leases Act, RSO 1990, c S.11, Schedule B, s 11. 20 Noble Scott Ltd v Murray, 1925 OLR 595 aff’d ONCA. 21 2016 ONCA 870.

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TAB 7

Drafting “Fair Market Rent” for Renewals

Christina Kobi McLean & Kerr LLP

February 22, 2017

THE SIX-MINUTE


_______________________ *Special acknowledgement and thanks to Samuel Sutherland, Student at Law, for his assistance.


DRAFTING “FAIR MARKET RENT” FOR RENEWALS*

Christina Kobi, Partner McLean & Kerr

LLP

t: 416-369-6626 e: [email protected]

Introduction

Although a landlord and tenant will typically agree to extend the term or renew a lease on the same terms and conditions as contained in the original lease, the base RENT to be paid during the extension/renewal term is usually a specific exception. The key challenge involves drafting a renewal or extension clause which allows the parties to determine rent in the future, while also ensuring enforceability. Enforceability

Often the parties do not pay adequate attention to what rent is to be paid during the renewal/extension term and case law is replete with rental provisions that are deficient. This deficiency often arises from ambiguity around terms like “fair market rent” or “fair rent” and is compounded by trying to uncover if there any improvements to the property would refer to the “as is” or “as was” state of the premises when trying to determine “fair rent” or “fair market rent”. Generally speaking, a contract is enforceable when there is agreement between the parties on the essential terms or enough of the essential terms are able to be ascertained. In the context of a lease, sufficient certainty is found when the following five (5) essential terms are clear:

1. the parties; 2. the beginning and end of the term; 3. the premises; 4. the rent; and 5. any other essential terms.

Consistent with contract law principles, if a renewal or extension clause is merely an “agreement to

agree” in the future, then it will be void for uncertainty. Lord Wright clarifies that:

"If, however, what is meant is that the parties agree to negotiate in the hope of effecting a valid contract, the position is different. There is then no bargain except to negotiate, and negotiations may be fruitless and end without any contract ensuing …”: Hillas & Co. Ltd. v. Arcos Ltd. (1932), 38 Com. Cas. 23 (H.L.).

With respect to the DETERMINATION OF RENT in renewal or extension clauses, there is ample case law showing that a court will enforce a renewal clause if it is sufficiently clear.

The requirement for certainty of rents on renewal is satisfied if the amount is ascertainable with

reasonable certainty: Mustard Seed (Calgary) Street Ministry Society v. Century Services Inc. (2009), 79 R.P.R. (4th) 252 (Alta. Q.B.).

In Brown v. Gould, [1972] 1 Ch. 53 (Eng. Ch. Div.) the Court distilled the following three (3) principles for renewal clauses:

1. NO FORMULA + NO MACHINERY (being the mechanism for applying that formula) = NOT

ENFORCEABLE Where the rent is simply “to be

agreed”, without a formula or machinery, is void for uncertainty or merely an “agreement to agree”: Also see P.

Burns & Company v. Godson, 1919 CanLII 539 (SCC); Young v. Van Beneen, 1953 CanLII 275 (BC CA); and Town

& Country Marketing Ltd. v. Koutsouflakis, 1990 Carswell Sask 107 (SK QB);

2. FORMULA + NO MACHINERY = MAY BE

ENFORCEABLE Where the rent is to be established by a formula (e.g. “fair rent” or “cost of living index”) but without machinery to apply the formula, the courts may enforce the clause and provide the missing machinery by setting the rent based on the formula.

Courts have often supplied important terms that the parties have omitted. In Hillas & Co. Ltd. v. Arcos Ltd., Lord Wright stated that the court’s duty was to strain in favour of enforceability without being too astute or subtle in finding defects.

Here are some cases where the clause provided a formula, but no machinery, but they were found to be enforceable:

the court found that the term “current market rate” was certain enough to permit calculation of rent and held the renewal clause to be valid: Pigeon et al. and

Titley, Pigeon, Lavoie Ltd., 1972 Can LII 455 (ON SC);

the court found that the phrase “fair market value”, as opposed to a phrase such as “a price to be mutually agreed”, suggested a firm agreement at a price to be objectively determined: Nishi Industries

Ltd., Re, 1978 CarswellBC 297 (BC CA); rent was to be determined by the landlord “on the

basis of a fair return on the fair market value of the land”. The court held that “fair market value and fair rental in this case have definitive meanings which must be determined…The lease does not set out any mechanism for determining [the rental] rate, and the court must therefor supply it”: Dagny Development

Corporation v. Ocean Fisheries Ltd., 1991 CarswellBC 675 (BC SC);

where rent adjustments during the renewal/extension term were based on increases in the “cost of living index”, the lower court found those words were too imprecise to and found the clause to be

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unenforceable, but the case was reversed on appeal as the Ontario Court of Appeal held that the provision was enforceable on the basis that the words “cost of living index” could be given a reasonable interpretation as being synonymous with the Consumer Price Index used by Statistics Canada: Collins Cartage & Storage Co. Ltd. et al. and

McDonald, Re, 1980 CarswellOnt 3604 (ON CA); rent was to be set “at the then prevailing rate for

space of comparable area, repair and location…:. The court held that the renewal agreement was more than an “agreement to agree”. While the parties did not provide for arbitration fo the new rental, this did not mean that a court acting upon appropriate evidence could not fix the rental for the renewal term. The lease contained criteria to be applied in arriving at the new rent and this distinguished a number or precedent cases held to involve “agreements to agree”. The “prevailing rate” was an issue upon which evidence as to comparable market values could be led and upon which a court could rule: Morgan Earl Sounds Incorporated v. Eleven

Yorkville Ltd., 1979 CarswellOnt 655 (ON SC); the court found that the wording “market rental rate

prevailing at the commencement of the renewal term as mutually agreed between the Landlord and Tenant…” was sufficiently certain to permit market rental to be determined on the basis of valuations, and if necessary, this determination could be made by the court: Empress Towers Ltd. v. Bank of Nova

Scotia, 1990 CarswellBC 226 (BC CA).

Here are some cases where the clause provided a formula, but no machinery, but they were found to be unenforceable:

in Brown v. Gould the court stated “if the option is exercisable at a price to be determined according to some stated formula, but without any effective machinery for making the formula work, it too is uncertain”;

the court held that an option to renew “at a rental to be agreed upon by the lessor and the lessee, as being the fair market rental for the demised premises when compared to other buildings of comparable design, age, location and conditions…” was void for uncertainty: Hirex Holdings Limited v. Chrysler

Canada Ltd., 1991 CarswellBC 432 (BC SC)

How does one reconcile the cases of Hirex and Express? The more important lesson is that a renewal or extension clause which contains language such as “mutually agreed upon” or “to be agreed upon”, and which does not also contain a machinery

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should a rental rate not be agreed upon, may result in the renewal/extension clause being found to be void for uncertainty.

3. FORMULA + MACHINERY = ENFORCEABLE Where the formula and the machinery for its application are provided, the clause will be enforceable: Also see 1323677

Alberta Ltd. v. 334154 Alberta Ltd., 2014 CarswellAlta 1443 (AB QB), and Ramona Morrison Hospitality Services Ltd. v.

Stonebridge Hotel Ltd., 2008 ABCA 222 (AB CA). As well, in Tadman’s Limited v. Avenue Hotel Prince Albert Limited (1956) 21 W.W.R. 381 (Sask. Q.B.), the lease renewal clause provided that the parties would negotiate and fix renewal rent at a “fair and reasonable amount” and the clause provided for arbitration should it be required. The court enforced the renewal clause and concluded that should negotiations not succeed, a board of arbitration would perform the task of decision what would be a fair and reasonable amount.

Based on more recent cases, there appears to be a 4th category:

4. MACHINERY + NO FORMULA = MAY BE ENFORCEABLE Where the parties provided for the machinery (arbitration), but did not include a formula to be applied. See Calvan Consolidated Oil & Gas

Company Limited v. Manning, 1959 CanLII 56 (SCC), which involved establishing the terms of an operating agreement, rather than the amount of rent to be paid under a renewal/extension clause, but the underlying principle can be applied to a renewal/extension clause. In this case, the clause read:

“The terms of the operating agreement will be mutually agreed upon; and if agreement cannot be reached…, then the clause in question will be arbitrated by a single arbitrator, pursuant to the Arbitration Act of Alberta”.

The court referred to the learned author of Russell on Arbitration, 17th ed. p. 10, when he said “To a court such a provision is ineffective as being at most a mere “agreement to agree”; but a provision that the new or modified terms shall be settled by an arbitrator can without difficulty be made enforceable.” The court concluded that the contract was not void for uncertainty.

Given the case law – which illustrates that both a formula and machinery are required to ensure enforceability -- let us turn our attention to both aspects.

Formula

Objective vs. Subjective Formula

There are two approaches to determining an appropriate rent for an extension or renewal term. The parties can agree to an objective formula or a subjective formula.

Generally speaking, an OBJECTIVE formula will be easily calculated or ascertainable. Based in the case law, it would appear that wherever the renewal/extension clause refers to “market value” or “market rent” or “appraised value”, an objective approach is to be taken: see Re Revenue Properties Co. v. Victoria

University (1993), 101 D.L.R. (4th) 172, Yonge-Eglinton Building Limited v. Toronto Transit Commission,

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1997 CarswellOnt 120 (Ont. Div. Ct.) and NRI Manufacturing Inc. v. Gross, 1998 CarswellOnt 2741 (Ont. Gen. Div.).

Blacks Law Dictionary 8th ed. (West Publishing Co.: St. Paul Minn., 2004) defines “fair market value”

as:

“The price that a seller is willing to accept and a buyer is willing to pay on the open market and in an arm’s length transaction; the point at which supply and demand intersect”

In contrast to an objective formula, a SUBJECTIVE formula is meant to catch the unique circumstances of a particular landlord and/or tenant (i.e., the value to the parties). A subjective approach will usually be applied where the renewal rent wording refers to “fair”, “equitable” or “proper”, and where the words merely refer to “rent” or “worth” but objective terms like “market” or “prevailing” are absent: See Thomas Bates & Son Ltd. v. Wyndham’s (Lingerie) Ltd., [1981] 1 All E.R. 1077 (C.A.) and Yonge-

Eglinton Building Ltd. v. Toronto Transit Commission, 1997 CarswellOnt 120 (Ont. Gen. Div.) (“Yonge-

Eg v. TTC”). By way of example, the courts applied a subjective approach where the following wording was used:

“fair and proper sum”, which means what these particular parties would have reasonably considered to be fair and proper between themselves: Yonge-Eg v. TTC;

“in the opinion of the lessor is fair and equitable”: Canadian National Railway Co. v. Inglis Ltd., 93 D.L.R (4th) 461;

“rent was to be arbitrated”: Re Attorney-General of Canada and Lynwood Industrial Estates Ltd. (1982), 132 D.L.R. (3d) 496;

rent was “to be agreed upon” and in default to be determined by arbitration: Thomas Bates Ltd. v.

Wyndham’s Ltd., [1981] W.L.R. 505, and Lear v. Blizzard, [1983] 3 All E.R. 662.

Tenant Leasehold Improvements

Another important consideration is whether a Tenant’s leasehold improvements will be included or excluded from the calculation of renewal/extension rent. In Ontario, the cases on this point have gone both ways and will turn on the specific provisions of the lease.

In Desouza v. Sherwood Heights Plaza Ltd., [1996] O.J. No. 318, the court considered a lease renewal for a dentist who had installed significant leasehold improvements. The renewal clause provided that the renewal rent would be “the fair market rental then prevailing for premises of a similar character in a similar location”. The court held that “premises of a similar character in a similar location” should be interpreted as an “unimproved rental unit”.

Whereas in Fire Productions Ltd. v. Lauro, 2006 BCCA 497, the Court of Appeal overturned the trial judge’s assessment that by taking into account the tenant’s improvements in the property’s valuation would make the tenant pay for its investment twice. The Appeal Court found that because the tenant’s improvements became the landlord’s property by affixation:

“The tenant has not been disadvantaged if on exercising his right of renewal he is required to pay the rent the landlord would be able to obtain if the lease was not renewed. The tenant may in one sense be paying interest on the improvements he made, but he has the continued use of the improvements, which have become the property of the landlord, to the end of the renewal period” (Fire Productions at para. 14).

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Based on Fire Productions, it would be prudent for a tenant to bargain for an express exclusion of such improvements from the renewal/extension clause (or alternatively, “as was” wording). As well, given the fact-based and language-specific nature of these cases, landlords should not assume that the value of leasehold improvements will always be included in the calculation of renewal rent (I refer you to the paper by Darrell Jarvis, “Drafting the Fair Market Rent Definition” (paper delivered at The Six-Minute

Commercial Leasing Lawyer 2013, Toronto: LSUC, 26 February 2013).

Use / Use Restrictions

It is also recommended that the lease state whether the formula is for the tenant’s limited use, a broader use (e.g., retail or office), or the use permitted by law that will yield the highest rent (i.e., the “highest and best use”).

This issue arose in Pacific West Systems Supply Ltd. v. B.C. Rail Partnership, 2004 BCCA 247, where the lease restricted the use of the land to the construction and operation of a building supply business. The landlord argued that that such use restriction should not enter into the determination of fair market rent. The Court wrote:

“In the absence of express provisions to the contrary, I see no sound basis on which it can be said that the parties to this lease can have intended that the tenant be put in the position of paying rent based on the unrestricted use of the land when it is precluded from enjoying what may be the highest and best use” (Pacific West at para. 13).

Accordingly, landlords and tenants should state how any restrictions on use might be used to determine a fair market rent.

Other Considerations

Since the meaning of “market rent” and “fair market value” can be interpreted various ways, it would be prudent for the parties to clearly define these terms while considering the following:

1. Valuation date; 2. Location, quality and age of the Development…and maybe even LEED certification – these

factors will affect rent. Accordingly, only the rent for space that is located in comparable projects should be considered;

3. Use – should the rent be based on the specific use permitted under the lease, comparable uses, a broader use (e.g., retail), or the use permitted by law that will yield the highest rent (i.e., the “highest and best use”)?

4. Tenant’s financial strength -- weak tenants will generally be requested to pay higher rent, whereas stronger tenants are usually able to negotiate lower rents. Accordingly, a strong tenant should bargain for wording such as “comparable tenants with financial standing comparable to the Tenant”;

5. Size of premises – smaller premises will typically attract a higher psf rent than larger premises; 6. Term or length of the lease – usually the longer the term, the higher the rent; 7. Inducements/allowances granted – tenant inducements such as rent-free periods, allowances,

etc. will typically result in a higher rental rate. 8. Leasehold Improvements – Are the landlord’s improvements and/or tenant’s improvements to

be included or excluded? Tenants take the position that if it does major improvements at its cost, those improvements should be excluded in determining the rental rate for the renewal/extension term, otherwise the tenant is paying twice for the same work. Landlords take the position that those improvements become its property immediately upon affixation and any prospective tenant will be expected to pay a higher rental rate for the finished space;

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9. Special rights – the value of special tenant rights such as a right of first refusal, exclusive over use, option to purchase, etc. will often result in a higher rental rate.

10. “NO LESS THAN” wording (i.e., floor on rental rate) -- most landlords will try to ensure that the rent for the extension term will not be less than the rent payable during the last twelve month period preceding the extension term.

It should be noted that the more limiting the drafting language is, the more difficult it will be for an appraiser to find a comparable premise to determine rent. There is a delicate balance between being too restrictive for the assessor to make a proper valuation and the need for the certainty of particular terms.

Sample Clauses Here are some “landlord friendly” and “tenant friendly” definitions of market rent: Landlord Friendly

1. “the fair market annual Basic Rent for the Premises as agreed upon by the parties having regard to the finished condition of

the Premises at the time of extension and having regard to then applicable basic rental levels for similar premises for a similar term in the Building”

2. the Basic Rent payable during each year of the Extended Term shall be equal to the fair market base rent for the Premises on a highest and best use basis, to be agreed upon between the Landlord and the Tenant not later than three (3) months after the Tenant gives the Notice of Extension, provided that such Basic

Rent during each year of the Extended Term shall be not less

than the Basic Rent during the year immediately preceding

the first year of the Extended Term; if the Landlord and the Tenant are unable to agree on such fair market base rent within such three (3) month period, it shall be determined by arbitration pursuant to the Arbitration Act, 1991 (Ontario);”

3. "Market Rent" means the annual rental which could reasonably be obtained by the Landlord for the Premises from a willing renewing tenant or willing renewing tenants dealing at arms' length with the Landlord in the market prevailing for a term commencing on the commencement date of the Extension Term, having regard to all relevant circumstances including the size and location of the Premises, the facilities afforded, the terms of the lease thereof (including its provisions for Additional Rent), the condition of the Premises and the extent and quality of the improvements therein (disregarding any deficiencies in the

condition and state of repair of the Premises as a result of the

Tenant's failure to comply with its obligations hereunder in

respect of the maintenance and repair of the Premises) and the use of the Premises and having regard to rentals currently being obtained for space in the Building and for comparable space in other buildings comparably located.

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Tenant Friendly

1. “current fair market rental value of the Premises, as established by the mutual agreement of the Landlord and the Tenant, but

without taking into account the value of any leasehold

improvements placed in the Premises by the Landlord or by

the Tenant or any tenant allowance paid by the Landlord, all

of which shall be disregarded”

2. “Fair Market Rent” means an amount equal to the then prevailing rate for tenants taking similar space (without

receiving a tenant improvement allowance and without broker

representation for either party) in a comparable building located within the vicinity of the Premises during the previous six (6) month period.”

3. For the purposes hereof, “Fair Market Rent” shall be the rate charged for space of comparable size and condition in comparable buildings similarly located, reduced to account for

inducements and other expenses being paid or incurred by

landlord(s) to achieve such rates, such as free rent, tenant

improvement allowances, brokerage commissions, and all

other lease concessions, which are being paid or incurred in

connection with non-renewing, non-equity tenants.

4. “Market Rental” means, at any given time, the then current market net rental rate as indicated by market comparables, being leases with comparable terms (including without limitation, the length of the term and the frequency of adjustments in rent, if any) entered into at arm’s length with comparable tenants with financial standing comparable to

the Tenant, for unimproved office premises of comparable

size, effective age, quality and use in comparable buildings in the vicinity in which the Building is located, taking into

account the incidence of tenant inducements and allowances

or initial rent-free or reduced rent periods then prevailing in

the relevant market areas, and making necessary

adjustments for any differences.

Machinery

The other required element of an enforceable renewal or extension clause is the mechanism by which the formula will be applied. This is referred to as the machinery.

Arbitration is the most common machinery for determining the quantum of rent, although most issues settle before a hearing. The common types of arbitration used in renewal/extension clauses to determine rent are: (i) a single arbitrator; (ii) a panel of arbitrators (usually three, with each party appointing one arbitrator, and those two appointees choosing a third arbitrator); and (iii) “baseball” arbitration (in which the arbitrator must select one proposal over the other). An arbitration process will be governed by statute, except to the extent the statutory provisions are superseded by the process set out in the lease or in an arbitration agreement entered into between the parties.

Here are some considerations when drafting arbitration wording in a renewal/extension clause:

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1. Do you want to impose a “floor” on the rent (e.g., “not less than” the rent payable during the last year of the prior term)?

2. Choice of arbitrator – how many and qualifications (e.g., appraiser, retired judge, commercial leasing lawyer with a minimum number of years of experience)

3. Do you want to impose a time limit for the decision from the arbitrator(s)?

4. Do you want an administered arbitration (e.g., ADR Institute of Canada, Inc.) which will solve the appointment problems?

5. Do you want a two or three step ADR process (such as negotiate, mediate, arbitrate)?

6. Do you want to specify in advance the place and time for the arbitration hearing and the rules to be used?

7. Do you want to specify an alternative process? e.g., expert reports.

For a detailed discussion of arbitration, I refer you to the paper by Barbara Grossman, “Arbitrating Renewal Rent: Drafting the appropriate renewal arbitration provision” (paper delivered at The Six-Minute

Commercial Leasing Lawyer 2011, Toronto: LSUC, 16 February 2011) and for a general discussion of arbitration and other alternatives to litigation in the context of lease disputes, see the paper by Sheldon Disenhouse and Jordan Hill, “Settling Lease Disputes through Arbitration” (paper delivered at Practicing

Commercial Real Estate in a Changing Environment, Toronto: Osgoode Professional Development Centre, 22 September 2009).

There are other forms of machinery that are used to determine rent. This can be because of the costs associated with arbitration. The other commonly used processes are: valuation and mediation.

Valuation is, “the determination of a point in dispute by a third party (a ‘valuer’) who will rely on his or her own skill and judgment. The most common application is the determination of the rent on a renewal, but the process could be applied to almost any dispute” (Richard J. Olson, Catherine Gibson & Anthony J. Pappajohn, “Commercial Leases – Options to Renew” (Paper presented at the BC Practice Made Perfect CLE on Commercial Leasing: Essential Issues, May 2008) [unpublished] at 7.1.8). If the parties elect on valuation, there must be a high level of confidence in the valuer, as the decision is binding and there is no appeal.

Mediation is a kind of aided negotiation, in that there is a neutral observer that helps the parties hash out a workable solution. Mediation may help an existing and persisting relationship, but if it fails, there could be added costs.

Conclusion

A tenant who bargained for an option to renew the lease or an option to extend the term will be extremely upset if, when it attempts to exercise its option, the landlord argues that the option is unenforceable or void for uncertainty. To avoid this scenario, a prudent tenant should carefully draft its option clause. In addition to two key elements -- a formula and machinery (for applying the formula) -- which are required to ensure enforceability, there are important details which should be addressed in the definition of “market rent”, depending on whether you are acting for the landlord or the tenant. As well, consideration should be paid to procedures (including costs and timing) should renewal/extension rent negotiations breakdown.

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TAB 8

Relocation Provisions: Getting it Right How Much Certainty is Too Much?

Laurie Sanderson

Gowling WLG (Canada) LLP

February 22, 2017

THE SIX-MINUTE



RELOCATION PROVISIONS: GETTING IT RIGHT.

HOW MUCH CERTAINTY IS TOO MUCH?

Prepared By:

Laurie J. Sanderson of Gowling WLG (Canada) LLP

With sincere thanks to our then articling student, Hoi Ki Cheung, for her research.

January 31, 2017

© Gowling WLG (Canada) LLP

Contents Introduction ........................................................................................................................................ 3

Part 1: The Landlord’s Perspective .................................................................................................. 3

a. The Implications of Bhasin v. Hrynew ............................................................................... 5

b. Early Termination for Demolition and Redevelopment ..................................................... 6

c. Unilateral Non-Contractual Early Termination by Landlords ............................................ 6

Part 2: The Tenant’s Perspective ...................................................................................................... 6

1. Considerations Shared by Both Retail and Office Tenants .................................................. 7

a. Consent ................................................................................................................................ 7

b. Size ....................................................................................................................................... 7

c. Advance Notice .................................................................................................................... 8

d. Leasehold Improvements and Trade Fixtures ................................................................... 9

e. Tenant Compensation ......................................................................................................... 9

f. Tenant Right to Unilaterally Terminate the Lease ........................................................... 10

g. Constraints on the Timing of the Relocation ................................................................... 10

h. Adjusted Rent for the Relocated Premises ...................................................................... 10

2. Retail Tenants’ Additional Considerations .......................................................................... 10

a. Parameters of the Relocated Premises ............................................................................ 10

i. Configuration .................................................................................................................. 11

ii. Visibility .......................................................................................................................... 11

iii. Frontage .......................................................................................................................... 12

iv. No-Build Zones ............................................................................................................... 13

v. Access and Proximity Issues ........................................................................................ 13

b. Parking Ratios ................................................................................................................... 13

3. Office Tenants’ Additional Considerations ......................................................................... 14

a. Parameters of the Relocated Premises ............................................................................ 14

i. Configuration .................................................................................................................. 14

ii. Vista and Other Attributes of the Existing Premises ................................................... 15

vi. Access ............................................................................................................................. 15

b. Parking ............................................................................................................................... 15

Conclusion ....................................................................................................................................... 15

Introduction

The landlord’s right to relocate its tenants is arguably a necessary part of the landlord’s arsenal to properly manage, develop, operate and renovate its property – a necessary evil, so to speak. That said, unless the lease specifically grants the landlord the right to relocate a tenant’s premises, the landlord is not permitted to do so. There is no common law right in favour of a landlord permitting it to compel a tenant to surrender its premises and relocate to other premises. As such, the precise wording of the relocation clause in the lease will define the landlords’ relocation rights, including the manner in which the relocation will take place, the location of the relocated premises, and the features that the relocated premises must possess.1 Understandably, the landlord’s proposed right to relocate is a source of much discussion and dialogue

– unless there is no discussion at all and the tenant either does not care, or does not realize the

ramifications of signing the landlord’s standard provision or does not enjoy the leverage to address it.

On the other hand, some tenants seek to so constrain the location to which the premises can be

relocated and the required features of the relocated premises as to negate the landlord’s right.

This paper tries to canvas the concerns that should be addressed, or at least considered, in discussing

the scope and terms of a relocation provision. That said, the specific concerns of a particular tenant

are as unquantifiable as the possible attributes of any particular space and the wants and needs of

the occupier, but hopefully this paper gets the thought processes started, keeping in mind the

bargaining power of the parties will also vary and this in itself will dictate the extent to which these

rights are negotiated.

Part 1: The Landlord’s Perspective

Why is a relocation provision necessary? Without it, a landlord would not have the right to require a

tenant to relocate its premises at the landlord’s behest. When a landlord enters into a lease, it grants

the tenant exclusive possession of the premises. Landlords want/need relocation rights in order to

provide them with the freedom to reconfigure and redevelop their properties, to accommodate new

tenants and the growth of existing tenants, to change the tenant mix and to remerchandise the

centre. Landlords are looking to ensure that they have the flexibility to operate the property to

maximize value. To this end, landlords should ideally aim for the absolute right and discretion to

move tenants to any location at a moment’s notice for any reason.2

1 Annette Lambert & Shanlee von Vegesack, “Protecting Your Tenants: Tips for Negotiating Demolition and Relocation Clauses”, The Retail Newsletter (2014) 3 at 3. 2 Diana Sanders, “Move it lose it: relocation provisions in commercial lease agreements” (August 20 2015), online: Mondaq <http://www.mondaq.com/unitedstates/x/421854/landlord+tenant+leases/Move+It+Or+Lose+It+Relocation+Provisions+In+Commercial+Lease+Agreements> [Sanders].

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To achieve this objective, landlords will want to:

avoid making representations about or agreeing in advance to required characteristics of the

relocated premises (e.g. do not specify the location, the size, the configuration, visibility,

access of the relocated premises)

o If the tenant insists on describing the characteristics of the relocated premises, limit

them to objective criteria such as the size, the frontage, and the configuration of the

relocated premises.3

o Subjective criteria like visibility, exposure, and traffic, should be avoided4 as what is

reasonable will depend on the party’s perspective.

avoid having to provide significant advance notice periods to the tenant

o If the tenant insists on a long notice period, this must be balanced against the

possibility/probability the landlord will forfeit the business opportunity it is pursuing.5

state that the landlord has the right to relocate the tenant - do not elaborate on the

circumstances when this right may be exercised by the landlord

limit the compensation to be paid to the tenant

o ideally, no compensation

o if the landlord agrees to provide compensation to the tenant, carefully describe the

amount to be paid (e.g. consider limit the amount to the then unamortized cost of the

tenant’s leasehold improvements )

o if the landlord agrees to reimburse the tenant its costs, limit these costs to direct costs,

specifically exclude all indirect costs and require the tenant to substantiate its costs

through receipts or paid invoices

include a right, in favour of the landlord, to terminate the lease if there are no suitable

alternative premises to which to relocate the tenant.6

3Deborah Watkins & Joseph Grignano, “A few operating issues: relocation and go dark rights” in The Law Society of Upper Canada, Casting the Net Commercial Lease (2001), online: Daoust Vukovich Baker-Sigal Banka <http://www.dv-law.com/docs/default-source/Articles/pdf-3-6.pdf?sfvrsn=2> 1 at 2 [Watkins]. 4 Watkins, Ibid. at 4 5 Ibid. 6 Ibid at 5.

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a. The Implications of Bhasin v. Hrynew 7

There has been much discussion and conjecture about the implications of this important decision on

all commercial contracting. In Bhasin v. Hrynew, the Supreme Court of Canada confirmed that the

common law in relation to good faith performance of contracts is piecemeal, unsettled and unclear.

The Court found that two incremental steps are in order to make the common law more coherent and

just. The first step is to acknowledge that good faith contractual performance is a general organizing

principle of the common law of contract and the second is that, as a manifestation of this organizing

principle of good faith, there is a common law duty which applies to all contracts to act honestly in

the performance of contractual obligations. While the parties are permitted to vary the “precise

content of honest performance”, they are not permitted to contract out of the, as yet undefined,

“minimum core elements”. So what does this mean in the context of a relocation right in a

commercial lease?

Firstly, there is no standalone duty of good faith. An allegation of bad faith must relate to a particular

term or obligation in the lease. In this case, a relocation right will presumably be included in the lease

and thus the duty of good faith will apply. That said, a landlord will not be able to use Bhasin to argue

that a relocation right should be read into the lease.

The Supreme Court is clearly requiring parties to perform their respective contractual obligations

honestly and reasonably. In the case of the exercise of discretion, this discretion must be exercised

honestly and in good faith, even if the lease says it may be exercised in the party’s “sole” discretion.

The landlord is permitted to act in self-interest but not capriciously or arbitrarily or in a way that

eviscerates or defeats the objects of the lease.

What it means to “be honest” and “reasonable” will depend on the context – including not only the

kind of contract in question, but also the nature of the relationship between the parties. As such,

while the landlord has the right to pursue its own interests, it must not lie or knowingly mislead the

tenant about matters directly related to the performance of the contract.

“Capricious” or “arbitrary” behaviour is contrary to the duty to act honestly. One writer has

suggested that the parties document their decision-making processes.8 I completely agree and

suggest that landlords ensure that minutes be kept of meetings discussing the need to exercise the

right to relocate including the reasons behind the choice of which tenants are to be moved and why.

7 Bhasin v. Hrynew, 2014 SCC 71 8 Hayley Peglar, WeirFoulds LLP “A Leap of Good Faith” Practical Implications of the Supreme Court of Canada’s Decision in Bhasisn v. Hrynew for Contracting Parties” on-line www.weiffoulds.com/a-leap-of-good-faith-practical-implications-of-1

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http://www.weiffoulds.com/a-leap-of-good-faith-practical-implications-of-1

http://www.weiffoulds.com/a-leap-of-good-faith-practical-implications-of-1

A lease is not a one-off contract. It represents a long-term relationship that is quite co-dependant. As

such, I suggest that it is very likely that a court will require a high level of honesty and reasonableness.

b. Early Termination for Demolition and Redevelopment

No discussion about relocation rights can be complete without mention of the often present

demolition and redevelopment clause in the lease. This provision typically gives the landlord the right

to unilaterally terminate the lease, without recourse, if it intends to demolish or substantially

renovate the property. While advance notice is generally provided for, there is typically no

compensation provided to the tenant as a consequence of the landlord’s exercise of this right. As

such, this right must be examined in the context of relocation rights. While this right would not assist

the landlord where it wants to relocate a tenant in order to accommodate another tenant, it is very

useful in the context of the redevelopment of the property.

c. Unilateral Non-Contractual Early Termination by Landlords

Alternatively, a landlord may choose to terminate the lease and compensate the tenant in full based on the common law doctrine of “efficient breach of contract”. Under this doctrine, a landlord may elect to voluntarily breach the contract and compensate the tenant for the breach since doing so is less costly than fulfilling the contract.

However, tenants can protect their interest in the leased premises by seeking an injunction from the court to prevent the landlord from terminating the lease. In deciding whether the injunction should be granted, the court will consider the following three questions:

(i) Is there a “serious issue to be tried?” (ii) Will the party seeking the injunction suffer irreparable harm (harm which cannot be

adequately compensated by damages? For example, the leased premises has unique features that cannot be found in the relocated premises);

(iii) Is the balance of convenience in the favour of the party seeking the injunction (i.e. the inconvenience of not granting the injunction outweighs the inconvenience to the other party of granting the injunction)?

The court will consider all of the equities between the parties, and is unlikely to grant an injunction that has the effect of permanently barring the landlords from developing their lands.9 In addition, the court will more likely award damages to the tenant rather than an injunction.10

Part 2: The Tenant’s Perspective

Generally, a tenant’s aim is to exclude from the lease any right by the landlord to relocate the

premises, and if this is not possible, to agree to a relocation clause that:

9 Paquin, supra note 12. 10 Ibid.

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ensures a seamless transition from the leased premises to the relocated premises with as little

disruption to their businesses as possible

clearly specifies the required characteristics of the relocated premises

fully compensates the tenant for the relocation, including being reimbursed by the landlord

for all direct costs incurred by the tenant to relocate to the new premises (including removing,

re-installing, and replacing its leasehold improvements and trade fixtures), and for the

anticipated interruption to their business.

Not only will a tenant’s concerns vary from tenant to tenant, office tenants will have different

concerns than retail tenants. Section 1 of this Part 2 considers the concerns shared by both retail and

office tenants. The following sections 2 and 3 canvas the matters to be considered when discussing a

relocation right for retail space and office space, respectively.

1. Considerations Shared by Both Retail and Office Tenants

The following are a list of considerations that both retail and office tenants share.

a. Consent

Some writers have suggested that the tenant insist that the landlord’s right to relocate be made

subject to the tenant’s consent. In my experience, this is almost never acceptable to the landlord as it

essentially negates the benefit of the relocation clause from the landlord’s perspective. In addition, it

leaves open what is a “reasonable” in the circumstances. As such, I suggest that if this approach is

adopted, that the parties still discuss and stipulate the grounds on which it would be reasonable (and

perhaps unreasonable) to withhold consent to a requested relocation.

b. Size

Like Goldilocks, all tenants will want to be sure that the new space is neither too big, nor too small.

There are two considerations in relation to size – the usable area and the rentable area.

The tenant will want to ensure that the new premises are not too small. To address this, the tenant

will want to stipulate that the relocated premises have a usable area that is not less than *% of the

usable area of the existing premises.

From both a budgetary and functionality perspective, the tenant will also want to ensure that the new

premises are not significantly larger than the existing premises. That is, that the “rentable area” of the

new premises will not be more than 1**% more than the rentable area of the existing premises.

Ideally, the tenant will also want the landlord to agree that if the rentable area of the new premises is

greater than that of the existing premises, neither the tenant’s basic rent nor its proportionate share

of operating costs or realty taxes will be increased i.e. they will be determined as if the rentable area

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of the leased premises had not increased. By way of example, the relocation clause should include the

following:

“The relocated premises shall have a usable area (measured in accordance with ***) of not

less than 95% of the then usable area of the Leased Premises and a rentable area of not more

than 105% of the then rentable area of the Leased Premises.”

The relocation clause will need to specify the method for measuring the floor area. Generally

speaking, the same measurement standard as applies to the existing premises should be adopted for

this purpose.

For added clarity, the tenant should include a statement in the relocation clause that if the rentable

area of the relocated premises is less than that of the existing premises, the tenant’s basic rent and

proportionate share shall be likewise reduced.

c. Advance Notice

All tenants need sufficient advance notice to make a seamless transition from their existing premises

to the new space. What is sufficient will vary from tenant to tenant depending upon a myriad of

personal circumstances.

The following should be considered when determining the notice requirement:

the form of the advance notice (e.g. the notice should be in writing)

the length of the notice period – 60 to 90 days is quite common if the landlord is doing the

build out of the new premises

the information that the notice must contain. For example:

o the location and suite number of the relocated premises

o the proposed date of the relocation

o the floor plan of the relocated premises

o a measurement certificate disclosing both the usable and rentable areas of the

relocated premises.

In determining the length of the notice period, tenants should consider the time required to:

advise its clients, customers and suppliers of its impending move

prepare construction plans for the relocated premises and complete the build-out the new

premises (if not done by the landlord)

physically move from the existing location to the new location11

11 Watkins, supra note 2.

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whether the tenant should stipulate any dark periods during which it cannot be required to

relocate

d. Leasehold Improvements and Trade Fixtures

The cost to fit-up the new premises may be costly. It will involve replicating the tenant’s existing

leasehold improvements in the new premises and relocating or replacing its trade fixtures. The parties

will need to consider who will be responsible for the cost of doing this work and whether and to what

extent trade fixtures are to be relocated and re-used. The landlord will want to avoid any obligation to

replicate the tenant’s leasehold improvements in the new premises and many landlord standard form

leases limit the tenant’s rights in this regard to being reimbursed the then unamortized cost of the

tenant’s initial leasehold improvements. Clearly, this will result in a significant shift of the burden of

the cost of the relocation to the tenant. Tenants will likewise want to ensure that, while cooperating

with a relocation right, there is no cost to the tenant to do so and that all of these costs will be borne

by the landlord.

In any event, the parties will want to consider and address the following:

o stipulate who is to be responsible for (i.e. who will do the actual construction) and who

will pay to the cost for the improvements and the trade fixtures

o the scope of the work

o the quality of the trade fixtures and the quality of the materials used to complete the

leasehold improvements (e.g. “improved to a standard and using materials of the same

or better quality as the leasehold improvements which exist in the leased premises at

the time of the landlord’s relocation notice”)

o the time in which the improvements need to be made (e.g. before the tenant is

required to surrender its existing premises and relocate to the new premises)

e. Tenant Compensation

Tenants should be cognizant of the other costs it will likely incur as a consequence of being relocated

and should try to have the landlord pay for them. These costs include:

direct costs – e.g. the cost of physically transporting the tenants’ equipment and merchandise,

space design, replacement of stationary and business cards, temporary signage

telecommunication setup, computer, telephone and IT disconnection and re-connection costs

business interruption - depending on a tenant’s bargaining power, a stipulated rent-free

period may be negotiated in compensation to the tenant for this interruption

costs for damages suffered in connection with the relocation12

12 Randy Shapiro & Arthur Opalinski, “Demolition & Substantial Renovations – The 90 Day Demo Memo!” (2015) ICSC – Canadian Law Conference 2015 at 1-2 [Shapiro].

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f. Tenant Right to Unilaterally Terminate the Lease

Tenants may also want to consider negotiating for the right to terminate the lease in lieu of relocating

if they are unsatisfied with the proposed relocated premises. In that case, the tenant will also want to

ensure that they are reimbursed for the undepreciated capital cost of their leasehold

improvements.13

g. Constraints on the Timing of the Relocation

Tenants who are concerned about the disruption that the relocation may have on their business may

consider seeking the following terms:

the relocation cannot occur during the first or last year of the term of the lease14

the tenant will not be required to vacate its existing premises and relocate to the new

premises until the construction of the leasehold improvements and installation of the trade

fixtures are complete and the relocated premises are ready to be opened for business

the relocation will be scheduled outside of the tenant’s normal business hours and key

business periods (e.g. Christmas or an office tenant’s year-end)

the landlord is restricted from relocating the tenant more than once during the term of the

lease, or not more than once in a specified number of years.

h. Adjusted Rent for the Relocated Premises

There are various reasons why, after being relocated, a tenant may be unwilling to pay the same base

rent as was payable for their original premises.

For example:

the tenant is relocated from a new building (with a higher base rent) into an older building

with higher per square foot operating costs

the tenant is relocated to a new building where the realty taxes are higher

the tenant is relocated to less desirable space

2. Retail Tenants’ Additional Considerations

a. Parameters of the Relocated Premises

A retail tenant will want to ensure that the relocated premises are substantially similar to the existing

premises in terms of size, configuration, visibility, and frontage. In addition, it may be important to

13 Watkins, supra note 2 at 6. 14 David N Ross, “So you want to redevelop your property? Don’t forget about those (pesky_ tenants” (July 2013) McMillan Real Estate Bulletin, online: McMillan <http://www.mcmillan.ca/Files/156954_so%20you%20want%20to%20redevelop%20your%20property.pdf> [McMillan].

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the retail tenant that the new premises have the same level of accessibility as their current premises

(e.g. the relocated premises have similar proximity to major tenants, entrances, and escalators). Such

tenants will need to seek as much specificity as possible regarding the features of the relocated

premises when negotiating the relocation right.

i. Configuration

Retail tenants will want to maintain the functional configuration (e.g. the shape of the premises, the

ceiling height and visibility) of their existing premises to be sure that the new space will meet their

needs.

Consider the following examples of the concerns a retail tenant may have:

the tenant paid a higher base rent for leased premises with a rectangular configuration that

have a lot of frontage and windows that face a busy street and exterior door permitting direct

access from the street

the length of frontage is highly valued for maximizing visibility of the retail space and for

providing window display space

the rectangular shape is effective for providing a large centralized area for the tenant to

display their goods that are readily visible from all angles of the retail space

To maintain the preferred configuration, tenants can:

identify the street(s) that the relocated premises must front

limit where in the mall/centre the new premises must be located and those areas that they

cannot be relocated

specify the minimum linear feet of frontage that the relocated premises must possess and to

what extent this frontage must be open (versus enclosed)

specify whether the premises must continue to have direct street access.

ii. Visibility

Retail tenants will want to stipulate that the relocated premises must enjoy the same level of visibility

or traffic flow or pedestrian traffic as the original premises. You will want to be clear, however, what

visibility means to this specific tenant in order to avoid ambiguity.

For example, visibility can merely refer to an unobstructed view of the tenant’s storefront, or

it can refer to an unobstructed view of the entire premises (e.g. storefront and any exposed

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side of the exterior), as well as any exterior signage on the premises from adjoining sidewalks,

parking facilities, and streets.15

To alleviate any possible ambiguity, the parties will want to:

specify the degree of interference required for the tenant to rely on the visibility covenant.

For example, the landlord will want the obligation to be limited to specify that “landlord will

not permanently, materially, adversely affect visibility…”

clearly define the part of the premises which is the subject of the visibility covenant (e.g.

“landlord will not permanently, materially, adversely affect visibility of the storefront of the

premises…”)

clearly define the vantage point from which visibility will be protected (e.g. “landlord will not

permanently, materially, adversely obstruct the visibility of the storefront of the premises

from the parking facilities located within fifty (50) feet directly in front of the storefront of the

premises”)

identify the street(s) that the relocated premises must front

address whether to stipulate a liquidated damage claim or other specific remedy for a breach

of the obligation.

iii. Frontage

Frontage refers to the length of a property line on the front side of the property. Retail spaces with

the benefit of a large frontage enjoy improved visibility and exposure of the premises and serve as

advertising space. Naturally, tenants will want to ensure that the frontage of the relocated premises is

not less than that of their existing premises. To achieve this objective, tenants should consider:

specifying the minimum frontage length that the relocated premises should possess, including

the length of the window frontage

stipulating a rent reduction if the frontage of the relocated premises is smaller than the

desired minimum length.

For example, the tenants may opt for the following in the relocation clause:

“The new premises shall (i) front ABC Street or XYZ Street, (ii) have either street window

frontage or mall window frontage of not less than ■ (■) linear feet, (iii) if either the street

window frontage of the new premises or the mall (i.e. interior) frontage is less than ■ percent

(■%) of the then street window frontage or mall window frontage of the then Leased

Premises, the annual rate of Basic Rent per square foot of the Rentable Area of the new

15 Jamie Paquin, “Do You See What I see? Most Likely Not! Visibility Covenants in Commercial Leases” (July 30, 2014), online: Daoust Vukovich LLP <http://www.dv-law.com/docs/default-source/Articles/visibility_covenants_in_commercial_leases.pdf?sfvrsn=0> [Paquin].

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premises shall be reduced by ■ percent (■%) for each ■ percent (■%) or portion thereof that

the frontage is reduced below such ■ percent (■%).”

iv. No-Build Zones

Retail tenants may have negotiated to include certain stipulated no-build zones in their lease, as well

as restricted covenants from the landlord protecting the visibility of the tenant’s signage and

premises, unimpeded access to the premises and stipulations regarding the ratio and location of the

available parking spaces.

In negotiating the location of the relocated premises, retail tenants will need to take the current

location of the no-build zones and stipulated rights regarding visibility, access and parking into

account in the context of the possible location of the relocated premises and make the necessary

adjustments.

v. Access and Proximity Issues

Maintaining the same level of access will often be extremely important to retail tenants. Tenants who

are located in areas with a high amount of foot traffic, such as on the first floor of a mall or who are

located near the mall entrance or by the elevators, will want to ensure that the relocated premises to

be similarly situated. Likewise, it may be important to a retail tenant that its premises remain in close

proximity to a particular tenant or that they remain part of a particular retail hub. Below are some

issues that such retail tenants should consider in their negotiation of the landlord’s relocation rights:

the manner in which their customers will get to the space (e.g. whether the property needs to

be on the ground floor, by a major entry way, by the elevators, escalators, or stairs)

the number of access points that the relocated premises must have

the location of those access points

whether the relocated premises are handicapped accessible16

the quality of the access corridors e.g. that the interior access be commercially reasonable and

with appropriate décor so as not to appear to be a service corridor

maintaining proximity to particular tenants or remaining part of a particular retail hub.

b. Parking Ratios

Commercial leases may contain a clause addressing the number of parking spaces available to the tenant by using “parking ratios.” This term describes a ratio of allocated parking spaces per square foot leased (e.g. 1:1000 means one parking space for every 1000 square feet of leased space).

16 Paquin, supra note 13; ABA Relocation, supra note 12.

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Tenants should consider stipulating that the relocated premises maintain the same parking ratio and proximity to available parking as their original premises.

3. Office Tenants’ Additional Considerations

a. Parameters of the Relocated Premises

Office tenants will want to ensure that the relocated premises are substantially similar in terms of

size, configuration, visibility, and frontage to the existing premises. In addition, an office tenant may

want to ensure that the relocated premises will enjoy the same level of accessibility as their current

premises to suit the needs of their clients. They may be concerned about natural light, vista and a

host of other characteristics that made them decide to lease their existing premises.

As such, office tenants should seek as much specificity as possible regarding the features of the

relocated premises when negotiating the relocation clauses.17

The following sections will explore the specific parameters that are frequently negotiated.

i. Configuration

Even office tenants want to maintain the configuration (e.g. the shape of the premises, the height, the

vista, access to windows) of their existing leased premises so that the arrangement of their new space

will continue to suit their needs and the needs of their clients/customers. When acting for an office

tenant, you will want to canvas what attributes of the existing premises need to be preserved and

replicated in the new premises.

For example:

most office tenants will want to ensure that the new premises maintain the amount of natural

light in their space

where the space is located in the building will impact, either positively or negatively, on the

views enjoyed from the premises, you may want to identify what side of the building the

relocated premises can be relocated to in order to preserve certain vistas and to provide that

the relocated premises cannot be relocated to a floor below a stipulated floor of the building

it may matter to the tenant where on the elevator bank the premises are relocated in

buildings with low/high rise elevator banks

the actual configuration of the space will often matter – some office tenants require a large

amount of core space, while others do not

17 Paquin, supra note 13; ABA Relocation, supra note 5; Watkins, supra note 2 at 3-4.

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office tenants may not want to be relocated to crossover floors to avoid losing valuable office

space

ii. Vista and Other Attributes of the Existing Premises

Tenants whose premises enjoy a particular vista (e.g. Lake Ontario, Parliament Hill, a sports venue)

will want to ensure that the landlord must maintain this vista in selecting the alternative premises,

particularly if the desirability of the view has been reflected in a higher rent.

vi. Access

It may be important to certain office tenants that the relocated premises maintain the same level of

access in order to best serve their clients’ needs. For example, an OB/GYN may be concerned that it

not be moved from the ground floor if the building is not serviced by an elevator, and that its offices

remain as close as possible to the elevator lobby so that pregnant patients are not climbing stairs or

having to walk long distances to access their doctor’s office.

b. Parking

Parking rights are sometimes provided for in the lease on the basis of a ratio of parking spaces to rentable area. As such, if the new premises are larger, the tenant should also be entitled to more parking but this is not always the case (and may not be the tenant’s desired result) and should be specifically addressed. Often parking rights are dealt with by licensing to the tenant a specific number of parking spaces that it is not tied to the area of the premises.

Conclusion

For some tenants, the location and configuration of their premises will not be very important. But for

those tenants whose space is particularly suited to their requirements, a landlord’s right to relocate

raises a myriad of issues. Even if the tenant understands that the landlord requires this right in order

to properly manage the property, those tenants with sufficient bargaining power will contest the

scope and breadth of the landlord’s proposed right to relocate. The challenge is to find the “right”

balance between these competing interests.

____________________________________________________

The comments contained in this article provide general information only. They should not be regarded as or

relied upon as legal advice or opinions. Gowling WLG (Canada) LLP would be pleased to provide more

information or specific advice on matters of interest to the reader.

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TAB 9

Those For Whom One is in Law

Responsible

Steven Cygelfarb Fogler Rubinoff LLP

Max Reedijk, Student-at-Law,

Fogler Rubinoff LLP

February 22, 2017

THE SIX-MINUTE


THOSE FOR WHOM ONE IS IN LAW RESPONSIBLE

Steven Cygelfarb and Max Reedijk (Student-at-Law)

Fogler, Rubinoff LLP

Commercial leases often include the phrase "those for whom the landlord/tenant is in law

responsible". Who does this term include? Does it only refer to employees or agents of the

landlord/tenant, or does it also apply to third parties such as independent contractors retained by a

landlord/tenant?

Unfortunately, the judiciary has never developed a comprehensive list of parties for whom a landlord

or tenant are in law responsible. However, based on a consideration of the relevant case law, several

key principles emerge. Firstly, the courts have shown a willingness to enforce clauses in leases

conferring benefits on "those for whom the landlord/tenant is in law responsible" by relaxing the

doctrine of privity of contract. Secondly, the case law suggests that a landlord/tenant is "in law

responsible" for those for whom they are vicariously liable such as employees in the ordinary course

of the employment. Thirdly, two relatively recent decisions from Ontario courts suggest that in

certain situations, a landlord is "in law responsible" not only for its employees, but for third party

contractors.

The most comprehensive analysis of the phrase "those for whom the [landlord/tenant] is in law

responsible" comes from the 2013 Ontario Court of Appeal ("ONCA") decision in Williams-Sonoma

Inc. v. Oxford Properties Group Inc. et al, a copy of which is attached.

The facts of the case were straightforward. The applicants were tenants at the Yorkdale Mall. The

landlord, Yorkdale Shopping Centre Holdings Inc. ("Yorkdale Mall"), contracted for the respondent

EllisDon Corporation - an independent contractor - to perform certain construction work at the mall.

The respondent/contractor was using a vacant area of the mall as office and storage space. Early one 9 -1

morning, a vandal entered the space that was being used and occupied by the respondent/contractor

and turned on a fire hose. The resultant water leak caused an alleged $7,000,000 of damage to the

applicants/tenants premises. The applicants/ tenants sued the respondent/contractor, arguing that it

had breached a common-law and statutory duty owed to the applicants/tenants by failing to secure the

area where the fire hose was located.

In response, the respondent/contractor brought a motion for summary judgement, relying on an

exclusionary clause, section 8.3.1, of the lease agreement signed between each of the

applicants/tenants and the landlord. Pursuant to this clause, the applicants/tenants agreed to waive all

claims against the landlord and "those for whom the [landlord] is in law responsible" with respect

to occurrences required to be insured against by the applicants/tenants. Section 8.1 of the Lease

provided that the landlord was not required to take out or maintain any insurance with respect to any

loss, injury or damage required to be insured against by the applicants/tenants with respect to Tenant

Property. Section 8.2 of the Lease required the applicants/tenants to take out and maintain, among

other insurance, insurance coverage with respect to water damage however caused covering the

premises including leasehold improvements and other property owned by the applicants/tenants or for

which it was legally liable. Section 8.4 of the Lease provided that to the extent not released under

Section 8.3, each party shall indemnify and save harmless the other from all liabilities growing out

of….any loss, cost or expense occasioned by the act, default or negligence of the indemnifying party,

its officers, agents, servants, employees, contractors or licensees.

The main issue on appeal was whether the respondent/contractor, a third party, could take advantage

of the exclusionary clause in Section 8.3.1 of the lease. Specifically, the ONCA had to consider

whether the doctrine of privity of contract could be relaxed under these circumstances. Determination

of this issue hinged on whether the respondent/contractor, as an independent contractor, was an entity

for whom the landlord "was in law responsible". 9 - 2

The ONCA began its analysis by referencing the 1999 decision of the Supreme Court of Canada

("SCC") in Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd. In this case, the SCC held

that, in certain circumstances, the doctrine of privity of contract should be relaxed to recognize the

rights of a third party beneficiary to enforce contractual provisions made for its benefit to defend

against an action commenced by one of the contracting parties.

The ONCA stated the test from the Fraser River case for relaxing the doctrine of privity of contract

as follows:

1. Did the parties to the contract intend to extend the benefit in question to the third party

seeking to rely on the contractual provision; and

2. Are the activities performed by the third party seeking to rely on the contractual provision the

very activities contemplated as coming within the scope of the contract in general, or the

provision in particular, again as determined by reference to the intention of the parties.

Since the respondent/contractor was not a party to the lease, it could only claim the benefit of the

exclusionary clause in Section 8.3.1 of the Lease if it fell within the two prong test set out in Fraser

River. With respect to the first prong of the Fraser River case, Section 8.3.1 of the Lease extended

the benefit of the exclusionary clause to "those for whom the landlord is in law responsible". As such,

the ONCA had to determine whether the respondent/contractor was a person for whom Yorkdale

Mall was in law responsible. The ONCA considered the ordinary meaning of the words "in law

responsible", and stated as follows:

"[29] The Dictionary of Canadian Law defines “responsible” as meaning liable, accountable

legally, answerable [2]. The Canadian Oxford Dictionary defines “responsible” as “liable to

be called to account (to a person or for a thing),” and defines “liable” as legally bound. [3]

9 -3

[30] Vicarious liability is a theory that holds one person responsible for the misconduct of

another because of the relationship between them: 671122 Ontario Ltd. v. Sagaz Industries

Canada Inc., 2001 SCC 59 (CanLII), [2001] 2 S.C.R. 983, at para. 25.

[31] In my view, the ordinary meaning of the phrase “in law responsible” is liable,

accountable in law, or legally responsible; its ordinary meaning is not necessarily limited to

legal responsibility arising through vicarious liability, and the manner in which the phrase is

used in the Lease does not restrict its ordinary meaning.

The ONCA held that another way for legal responsibility to arise is through a contract of indemnity.

Pursuant to s. 8.4 of the lease agreements, "to the extent not released under s. 8.3", Yorkdale Mall

had specifically agreed to indemnify the applicants/tenants in respect of losses occasioned by the act,

default, or negligence of its "officers, agents, servants, employees, contractors, customers, or

licensees". Accordingly, pursuant to the said Section 8.4, Yorkdale Mall had agreed to indemnify

each of the applicants/tenants for damages caused by its contractors and as such, Yorkdale Mall had

made itself, by contract, legally responsible for the respondent/contractor and accordingly the first

prong of the test from Fraser River was met. The respondent/contractor was a person for whom the

landlord was "in law responsible", and as such, the parties intended the benefit of s. 8.3.1 to extend to

the respondent/contractor. The ONCA after having determined that the first prong of the test in the

Fraser River had been satisfied then addressed whether the second prong of the test in the Fraser

River was satisfied. In that respect the ONCA held that the activities performed by the

respondent/contractor were activities coming within the scope of Section 8.3.1 of the Lease as the

respondent/contractor was providing services to the Landlord as a contractor, which was specifically

contemplated by the indemnity provision in Section 8.4 of the Lease and as such the second prong of

the test was met with the result that the respondent/contractor was entitled to enforce the provisions

9 - 4

of Section 8.3.1 of the Lease as against the applicants/tenants even though it was not a party to the

Lease.

Another case which offers guidance with a very similar set of facts to Williams-Sonoma is the 2010

Ontario Divisional Court decision in Harlon Canada v. Lang Investment. In Harlon Canada, the

plaintiff tenant claimed damages resulting from a leak in the roof of a leased commercial premises.

The plaintiff tenant sued the landlord and a contractor that had been retained by the landlord to repair

the roof. The Lease contained a waiver of subrogation clause in favour of the Landlord whereby the

Tenant agreed that its insurance policies under the Lease were to contain a waiver of subrogation

rights which the Tenant's insurers had against the Landlord or those for whom it is in law responsible.

The defendant contractor brought a summary judgment motion, arguing that the provisions in the

lease which barred any claim against the “landlord or those for whom in law the landlord is

responsible” included the contractor and thus, there was no genuine issue for trial and the claim ought

to be dismissed as against it. The Master granted the summary judgement motion, and the Plaintiff

appealed.

The Divisional Court judge, Mackinnon J. dismissed the appeal and agreed with the Master's analysis

where he stated:

"The purpose of these lease terms is to allocate risk between the landlord and the tenant and

to require each party to insure its portion of the risk. It is an integral part of the bargain that

the allocation of risk and therefore cost will not be disturbed by exercise of subrogation

rights…"

The parties had included the waiver of subrogation clause to require the landlord and tenant to insure

their respective portions of the risk. In order to give effect to this intention, the Divisional Court

9 -5

decided that the benefit conferred by the waiver of subrogation clause was to be extended to the

Defendant.

Clauses that confer benefits or obligations on "those for whom the landlord/tenant is in law

responsible" are relatively ubiquitous in commercial leases. However, the case law surrounding the

interpretation of this phrase is still developing. What is clear, however, is the fact that there are

circumstances where Canadian courts will enforce these clauses by relaxing the doctrine of privity of

contract. The case law suggests that there are three circumstances in which Canadian courts are likely

to do so. The first is when rights, privileges or obligations are conferred on a party for whom the

landlord or tenant might be vicariously liable. The second is when the landlord or tenant has made

itself legally responsible for a third party by way of contract, for example, a contract of indemnity.

The third is in the context of release and waiver clauses from subrogation rights.

9 - 6

COURT OF APPEAL FOR ONTARIO

CITATION: Williams-Sonoma Inc. v. OxFord Properties Group Inc.,2013 ONCA 441DATE: 20130626DOCKET: C56194

Weiler, Gillese and Hoy JJ.A.

3~l~ll

Williams-Sonoma Inc., Williams-Sonoma C~n~d` ~, Inc., ~,~Pottery Barn and Pottery Barn Kids\ ~ x

--P1`aintiffs (Appellants)

~TJ

Oxford Properties Group Inc., Paragon Protection Ltd.and EIIisDon Corporation

Defendants (Respondent)

Yorkdale Shopping Centre Holdings Inc. andOmers Realty Management Corporation

T}iird Parties (Respondents)

Raj K. Datt and Gerry Grossi, for the appellants

Marcia J. Oliver, for the respondent, EIIisDon Corporation

Heard: May 9, 2013

On appeal from the judgment of Justice Darla A. Wilson of the Superior Court ofJustice, dated October 1, 2012, with reasons reported at 2012 ONSC 5448.

Hoy J.A:

9 - 7

Page: 2

~iP/ ~~~Il ~1~~~1

[1] Williams-Sonoma Inc., Williams-Sonoma Canada Inc., Pottery Barn and

Pottery Barn Kids (the "Tenants") appeal the October 1, 2012 judgment of the

motion judge, dismissing their action against the respondent, Ellis Don

Corporation.

[2] The Tenants are tenants at Yorkdale Shopping Centre in Toronto. The

landlord, Yorkdale Shopping Centre Holdings Inc., (the "Landlord") contracted for

the respondent — an independent contractor — to perform certain construction

work at the mall. Early one morning, a vandal opened a fire hose located in the

vacant, third floor area of the mall that the Landlord had permitted the respondent

to use for its office and storage. As a result, the Tenants' premises suffered what

they allege is some $7,000,000 of water damage.

[3] The leases between the Tenants and the Landlord (each a "Lease")

required the Tenants to take out and maintain insurance covering water damage

to the leased premises and to the Tenants' property within those premises.

Under subsection 8.3.1 of each Lease, the Tenant waives all claims against the

Landlord and "those for whom the [Landlord] is in law responsible" with respect to

occurrences required to be insured against by the Tenant.

[4] The Tenants sued the respondent contractor, alleging that it breached

common-law and statutory duties owed to the Tenants by failing to properly

9 - 8

Page: 3

secure the area where the fire hose was located. The respondent brought a

motion for summary judgment, arguing that the Tenants had waived all claims

against it pursuant to s. 8.3.1 of the Leases. The respondent argued that: the

Landlord is in law responsible for the respondent within the meaning of that

phrase in s. 8.3.1 of the Lease; s. 8.3.1 accordingly applies; the benefit of s. 8.3.1

extends to the non-party respondent; and the Tenants are therefore barred from

suing the respondent.

[5] The motion judge concluded that the respondent was an entity for which

the Landlord was responsible in law, and that, although the respondent was not a

party to the Lease, the benefit of s. 8.3.1 should be e~ended to it pursuant to

Fraser River Pile &Dredge Ltd. v. Can-Dive Services Ltd., [1999] 3 S.C.R. 108.

She accordingly granted summary judgment, dismissing the Tenants' claims

against the respondent.

[6] On this appeal, the Tenants argue that the motion judge erred in

concluding that the Landlord could be responsible in law for the respondent if not

vicariously responsible for it, and that the respondent did not fall within any

exception to the general immunity from vicarious liability for the negligence of an

independent contractor.

[7] The Tenants do not argue that this was a matter that should not have been

dealt with by way of a motion for summary judgment.

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Page: 4

[8] For the reasons that follow, I conclude that the Landlord is responsible in

law for the respondent, within the meaning of those words in the Leases, and that

the benefit of s. 8.3.1 should be extended to the respondent. I would accordingly

dismiss this appeal

II. THE RELEVANT PROVISIONS OF THE LEASES ff ,

[9] The Leases are the same in all material respects. The relevant provisions `'< ..,

are contained in Part 8, entitled "Insurance". That Part requires the Landlord and

the Tenant to take out certain insurance coverage and to release the other to the

extent of such coverage.

[10] Section 8.1 provides that the "Landlord shall not be required to take out or

maintain any insurance with respect to any loss, injury or damage required to be

insured against by Tenant or with respect to Tenant Properly."

[11] Section 8.2 then requires the Tenant to take out and maintain, among

other insurance coverage, coverage with respect to "water damage howsoever

caused...fully covering the Store (including all leasehold Improvements), all

Tenant Property and any other property owned by [the] Tenant or for which it is

legally liable and which is located within the Project."

[12] Pursuant to s. 8.3, the Tenant releases the Landlord and those for whom it

is "in law responsible" from claims arising out of the water damage with respect

to which s. 8.2 requires the Tenant to obtain coverage:

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Page: 5

8.3.1. Subject to sections 8.3.2 and 8.3.3, each of theLandlord and Tenant hereby releases the other andwaives all claims against the other and those for whomthe other is in law responsible with respect tooccurrences insured against or required to be insuredagainst by the releasing party, whether any such claimsarise as a result of the negligence or otherwise of theother or those for whom it is in law responsible.[Emphasis added.]

8.3.2. Such release and waiver shall be effective only tothe event of proceeds of insurance received by thereleasing party and proceeds which would have beenreceived if the releasing party obtained all insurancerequired to be obtained by it under this lease and forthis purpose deductible amounts shall be deemed to beproceeds of insurance received.

8.3.3. Notwithstanding anything to the contrary in thissection 8.3, Landlord and Tenant shall each be liable toany third person (being any person other than Landlordor Tenant) to the extent of their respective fault ornegligence and each shall be entitled to full indemnityand contribution from the other to the extent of theother's fault or negligence.

[13] Finally, pursuant to s. 8.4, "to the extent not released under s. 8.3", the

Landlord is required to indemnify the Tenant in respect of any losses occasioned

by the act, default or negligence of the respondent, which was its contractor:

8.4 To the extent not released under section 8.3, eachparty shall indemnify and save harmless the other fromall liabilities, damages, losses or e~enses growing outof:

2. ... any loss, cost or expense arising fromoccasioned by the act, default ornegligence of the indemnifying party, its

9 - 11

Page: 6

officers, agents, servants, employees,contractors, customers or licensees...[Emphasis added.]

111. EXCEPTIONS TO THE DOCTRINE OF PRIVITY OF CONTRACT

[14] In addition to the provisions of the Leases, the law regarding privity of

contract is relevant to the analysis that follows.

[15] In iwo decisions —London Drugs Ltd. V. Kuhne &Nagel Ltd., [1992] 3

S.C.R. 299 and Fraser River —the Supreme Court decided that, in certain

circumstances, the doctrine of privity of contract should be relaxed to recognize

the rights of a third party beneficiary to enforce contractual provisions made for

its benefit to defend against an action commenced by one of the contracting

parties.

[16] In London Drugs, a storage company was party to a contract limiting its

liability to $40 for any one package. A package — a 7,500-pound transformer —

was damaged while being moved by its employees. The owner of the

transformer sued the company and its employees for negligence. All were found

liable. At first instance, the liability of the company was limited to $40 while the

employees were found liable for the full amount of the damages. The traditional

exceptions to the doctrine of privity did not apply. At para. 107, the Supreme

Court held that an employee should be entitled to benefit from a limitation of

liability clause found in a contract befinreen his employer and a plaintiff if:

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Page: 7

1. The limitation of liability clause, either expresslyor impliedly, extends its benefit to the employeeseeking to rely on it; and

2. The employee seeking the benefit of the limitation -:rv;of liability clause was acting in the course of hisemployment and performing the very servicesprovided for in the contract befinreen the employer ~.and the plaintiff when the loss occurred.

[17] Fraser River followed some seven years later. That case dealt wifih a

subrogation clause in an insurance contract in which the insurer waived its right

of subrogation against persons to whom the insured owner chartered its vessels.

The owner chartered a barge to a third party. The barge sunk through the

negligence of the charterer. The insurer paid the loss; the owner waived the

subrogation clause, and sued the charterer for the benefit of the insurer.

[18] The Supreme Court clarified that the principled approach in London Drugs

was not limited to employee-employer relationships and applies where the

traditional exceptions to the doctrine of privity do not. At pars. 32, it rephrased

the test in London Drugs, in general terms:

1. Did the parties to the contract intend to extend thebenefit in question to the third party seeking torely on the contractual provision; and

2. Are the activities performed by the third partyseeking to rely on the contractual provision thevery activities contemplated as coming within thescope of the contract in general, or the provisionin particular, again as determined by reference tothe intentions of the parties.

9 - 13

'.~-

[19] The Supreme Court found that the first prong of the test was clearly met:

the clause e~ressly referenced "charters". The second prong was also met: "the

relevant activities arose in the context of the relationship of Can-Dive to Fraser

River as a charterer, the very activity anticipated in the policy pursuant to the

waiver of subrogation clause" (at Para. 39).

IV. MOTION JUDGE'S REASONS

[20] ll~e motion judge considered the two factors in Fraser River.

[21] As to the first, she concluded that the parties must have intended the

protection arising from s. 8.3 of the Lease to extend to others involved in the

renovation work ongoing in the mall. At para. 28, she reasoned that one of the

i ntentions of the release was "the allocation of risk and certainty that cost will not

be affected by one party asserting subrogation rights. In order to give effect to

this intention, in my opinion, the benefit must be extended to a contractor such as

[the respondent]." The first part of the test was therefore satisfied.

[22] With respect to the second part of the test, she concluded that "the

consideration of vicarious liability is irrelevant." The motion judge found that the

Landlord was responsible for the presence of the respondent at the mall: the

Landlord hired the respondent to perform work to satisfy the Landlord's

obligations to its tenants. Moreover, the respondent "utilized the third floor space

9 - 14

Page: 9

to house its site office and to store equipment and other items necessary for the

work it was conducting."

[23] The motion judge concluded, "In my view, the waiver of subrogation

extends to the benefit of [the respondent], being an entity for whom the landlord

is responsible in law. To permit [the Tenants] to advance a subrogated claim

against [the respondent] when it cannot advance a claim against the landlord

would lead to a result that the subrogation clause is intended to prevent."

V. ANALYSIS

(1) Summary

[24] I come to the same conclusion as the motion judge, although for slightly

different reasons.

[25] The Respondent was not a party to the Leases; consequently, it can only

claim the benefit of s. 8.3.1 if it falls within the test set out in Fraser River. In this

case, as in Fraser, the parties specifically indicated the persons to whom they

intended the benefit of the waiver of subrogation extend. Here, the Lease

extends the benefit of the waiver of subrogation to those for whom the Landlord

is in law responsible. The first task for the court, therefore, is to determine

whether the respondent was a person for whom the Landlord was "in law

responsible," within the meaning of those words as used in the Lease. Applying

the ordinary principles of contract interpretation, ( conclude that the Landlord was

9 - 15

Page: 10

in law responsible for the respondent, within the meaning of those words as used

i n the Lease.

[26] I also conclude that the two-part test in Fraser is met in this case, and that

the respondent was accordingly entitled to invoke s. 8.3.1 of the Lease as a

defence to the Tenants' claims against it.

(2) Interpretation of "in law responsible"

[27] The Tenants argue that s. 8.3 is in essence a waiver, or exclusion of

liability, and, as such, should be strictly construed against the party seeking to

invoke it: Hunter Engineering Co. v. Syncrude Canada Ltd., [1989] 1 S.C.R. 426,

pars. 132. In Hunter Engineering, sellers sought to rely on provisions in their

contracts to preclude the application of the warranty implied by the Sale of Goods

Act that the goods supplied were reasonably fit for the purpose. In this case,

unlike Hunter Engineering, the exclusion clause is a mutual one. In my view, the

principle of strict construction relied on by the Tenants is therefore not applicable

The ordinary principles of contract interpretation apply.'

A commercial contract is to be interpreted,(a) as a whole, in a manner that gigs meaning to all of its terms and avoids an interpretation that

would render one or more of its terms ineffective;(b) by determining the intention of the parties in accordance with the language they have used in the

written document and based upon the "cardinal presumption" that they have intended what theyham said;

(c) with regard to objecti~,e evidence of the factual matrix underlying the negotiation of the contract,but without reference to the subjective intention of the parties; and

(d) to the extent that there is ambiguity in the contract, in a fashion that accords with soundcommercial principles and good business sense, and that avid a commercial absurdity.

Ventas Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205, 85 O.R. (3d) 254, atpara. 24.

9 - 16

Page: 11

[28] I start by considering the ordinary meaning of the words "in law

responsible."

[29] The Dictionary of Canadian Law defines "responsible" as meaning liable,

accountable legally, answerable.2 The Canadian Oxford Dictionary defines

"responsible" as "liable to be called to account (to a person or for a thing)," and

defines "liable" as legally bound.3

[30] Vicarious liability is a theory that holds one person responsible for the

misconduct of another because of the relationship befinreen them: 671122

Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59, [2001] 2 S.C.R. 983,

at para. 25.

[31] In my view, the ordinary meaning of the phrase "in law responsible" is

liable, accountable in law, or legally responsible; its ordinary meaning is not

necessarily limited to legal responsibility arising through vicarious liability, and

the manner in which the phrase is used in the Lease does not restrict its ordinary

meaning.

[32] The respondent argues that a person may become legally responsible for

another through the operation of a contract of indemnity. I agree. Indeed, in this

2 D.A. Dukelow ed, The Dictionary of Canadian Law, 4th ed. (Toronto: Carswell, 2011), at p. 1124.3 K. Barber ed, Canadian Oxford Dictionary, 2nd ed. (Don Mills, ON: Oxford Uni~rsity Press, 2004), atpp. 1317 and 883.

9 - 17

Page: 12

case, under s. 8.4, "to the extent not released under s. 8.3," the Landlord

specifically agrees to indemnify the Tenant in respect of losses occasioned by

the act, default or negligence of the Landlord's "officers, agents, servants,

employees, contractors, customers or licensees" — a class of persons including ~,,

the respondent. Under this clause, the Landlord agrees to indemnify the Tenant f'"̀

for damages caused by its contractors, such as the respondent. In other words, £.;,

the Landlord has specifically made itself legally responsible for the respondent. In

my view, the effect of s. 8.4 is that the Landlord is generally "in law responsible"

to the Tenant for the respondent within the meaning of s. 8.3.1.

[33] My conclusion is not altered by the phrase "to the extent not released

under s. 8.3" that prefaces s. 8.4. Part 8 of the Lease is entitled "Insurance"; it

allocates risk between the parties based on which party is required to obtain

insurance coverage. The indemnity in s. 8.4 is situated in the part of the Lease

dealing with insurance. The effect of the phrase "to the extent not released

under s. 8.3" is that the Landlord is not required to indemnify the Tenant in

respect of the act, default or negligence of a person listed in s. 8.4.1, if the claim

is with respect to an occurrence insured against or required to be insured against

by the Tenant. It does not mean that the Landlord is not in law responsible to the

Tenant for such persons within the meaning of s. 8.3.1

[34] In my view, any other interpretation of the interplay of ss. 8.3.1 and 8.4 is

inconsistent with the overall scheme of risk allocation envisaged by Part 8 of the

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Page: 13

Lease and would not make commercial sense. For that reason, I reject the

Tenants' argument that if it were the intent of the parties that the release in s.

8.3.1 were to extend to the parties' "officers, agents, servants, employees,

contractors, customers or licensees" then they would have used that wording,

and not the words "those for whom the other is in law responsible".

[35] Having concluded that the Landlord is, under the Lease, in law responsible

for the respondent, it is unnecessary to address the arguments of the Tenants

regarding vicarious liability.

(3) The application of the test in Fraser River

[36] I turn next to the issue of whether the finro-part test in Fraser has been met.

[37] It follows from my conclusion that the respondent is a person for whom the

Landlord is "in law responsible" that the parties intended the benefit of s. 8.3.1. to

extend to the respondent, and that the first prong of the test is met.

[38] I also conclude that the activities performed by the respondent were

activities contemplated as coming within the scope of s. 8.3.1. The respondent

was providing services to the Landlord as a contractor — an activity specifically

contemplated by the indemnity provision contained in s. 8.4 of the Lease. The

second prong of the test is also met.

[39] The respondent is accordingly entitled to enforce s. 8.3.1.of the Leases to

defend against the Tenants' claim against it.

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Page: 14

VI. DISPOSITION AND COSTS

[40] I would accordingly dismiss this appeal, and award costs in the agreed

upon amount of $ 30,000, inclusive of disbursements and applicable taxes, to the

respondent.F`>c̀

Released: June 26, 2013 "Alexandra Hoy J.A.""EEG" "I agree K.M. Weiler J.A."

"I agree E.E. Gillese J.A."

9 - 20

CITATION: Harlon Canada I:nc. v. Lang Investment Corporation, 2010 ONSC 5264COURT FILE NO.: 08-DV-14l 1

DIVISIONAL COURT

ONTARIO

SUPERIOR COURT OF JUSTICE(Appeal in action OS-CV-030861)

BETWEEN:

HARLON CANADA INC. Thomas V. Ozere, for the Plaintiff(Appellant)

Plaintiff (Appellant)

- and -

LANG INVESTMENT CORPORATION andLEE STEPHENS carrying on business asSTEPHENS MECHANICAL

J. Stephen Cavanagh, for the Defendant,Lee Stephens c.o.b. as Stephens Mechanical(Respondent)

Defendants (Respondents)

BEARD: September 22, 2010

REASONS FOR JUDGMENT

Madam Justice J. Mackinnon

Introduction

[1] This is an appeal from the decision of Master MacLeod dated March 31, 2008, grantingsummary judgment dismissing the action against Lee Stephens carrying on business as StephensMechanical ("Stephens"). The action against Lang Investment Corporation has been dismissedon consent and does not form part of this appeal.

9 - 21

~1.~

[2] The claim involves water damage that occurred as a result of leaks in the roof of theAppellant's business and manufacturing premises. Lang Investment Corporation was thelandlord.

[3] In 1.997 and 1.998, Stephens was hired by Lang to effect roof repairs at the premises. InFebruary 2002, the Appellant's inventory was damaged by water as a result of a leak in the roofof the premises. Stephens was retained again to effect additional roof repairs. In August 2003,the Appellant's inventory was damaged again, as a result of a leak in the roof.

[4] The lease between the Appellant and Lang included a waiver of subrogation clause thatstates, in part, as follows:

Section 10.01 Tenant's Insurance

TENANT'S INSURANCE the Tenant shall during the terms of this lease and during suchother time as the Tenant occupies the leased Premises or any other part thereof, at its solecost and expense take out and keep in full force and effect the following:

(a) "all risks" insurance, including but not limited to loss, or damage causedby, or resulting from fire, lightning, theft, collapse, water damage,sprinkler leakage, earthquake assumption, wind storm, and otheradditional perils defined in the Insurance Bureau of Canada (I.B.C.)approved "all risks" policy upon property of every description and kindowned by the Tenant, or for which the Tenant is legally liable and whichis located in, at or on the Leased Premises including...

Each of the foregoing policies of insurance shall name the Landlord andits mortgagee(s), if any, as additional named insured as their interests mayappear and shall contain: The Insurance Bureau of Canada (I.B.C.)approved standard mortgage clause as may be reasonably required by theLandlord's mortgagee(s); a waiver of any subrogation rights which theTenant's insurers may have against the Landlord or those for wlzorrc theLandlord is in law responsihle. [Emphasis ac~c~ed.]

[5] There is no question it is the responsibility of the landlord to keep the roof in good repair,that the landlord hired Stephens to carry out roof repairs and the action was brought by thePlaintiff's insurer pursuant to a right of subrogation. As noted, the Plaintiff conceded that thelease protects the landlord from a subrogated claim and consented to an order dismissing thatclaim.

[6] The question before the Master was whether there was a genuine issue for trial, w11et11eror not the subrogation waiver also precluded recovery against the Defendant Stephens.

The Decision of the Master

9 - 22

-3-

[7] The Master found. that there was no genuine issue for trial. In so doing, he held that therewas no genuine issue whether Stephens fell within the ambit of one for whom "in law thelandlord is responsible." He reached this conclusion based on the terms of the lease, which wasin evidence before him, and the applicable case law.

[8] The Master concluded that the landlord could not escape its contractual obligation torepair the roof by hiring a contractor and delegating the work; the landlord was responsible inlaw for the contractor's work; and accordingly, the subrogation bar extended to the contractor.He noted that there was no evidence before him to suggest that the applicable provisions of thelease were intended to have any other meaning. Indeed, the Appellant filed no evidence on themotion.

[9] The Master also ruled that the fact that s. 6.01 of the lease, in setting out the tenant'sobligations, expressly includes its "contractors and contractors' agents" among those ~-ar whomthe tenant is "...in law responsible..." did not raise a genuine issue for trial with respect to thelandlord's responsibility for its contractors.

Standard of Review

[l0] In Zeztoun et al v. Economical Insurance Group, the Court of Appeal held that theappropriate standard of review of a master's order, whether interlocutory or final, is thatinterference is justified only if the master made an error of law, exercised discretion on wrongprinciples or misapprehended the evidence such that there is a palpable and overriding error: see¶40-¶41.

[11] Applied to this appeal from the Master's order granting summary judgment, the Mastermust be correct in his determination that he had ,jurisdiction to hear the motion. The Master wasentitled to interpret the lease in order to apply it to the uncontested facts before him to determinewhether there was a genuine issue for trial2, provided he applied the proper principles ofcontractual interpretation. Failure to do so is an error of law attracting review on the standard ofcorrectness. In terms of the factual context of this motion, the Master's determination that nogenuine issue for trial exists, must be one that is "open to him to find" "on the record beforehim."3

Jurisdiction

[12] Rules of Civil Procedure¢, r. 20.04(4) provides that:

' (2008) 292 D.L.R. (4`~') 31.3 (O.C.A.)Z Iroquois Falls Canmunity Creddt Union Ltd. v. Co-operators General Insurance Cofnpuny et al, (2009) 97 O.R.(3d) 53 (C.A.) at ¶83 Goldman et al v. Devine et al, 2007 ONCA 301 at ¶254 R.R.O. 1.990 Reg. 194

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(4) Where the court is satisfied that the only genuine issue is a question of law,the court may determine the question and grant judgment accordingly, but wherethe motion is made to a master, it shall be adjourned to be heard by a judge.

[l3] The Appellant submits that the Master was prohibited from hearing the motion becausethe interpretation of the words "in law responsible," raises a question of law. However, bothUnilease v. Lee-Mar Developrrrents Ltd.s and Astella Pharn~a Canada Inc. v. Wellsp~^ingPharmaceutical Canada Corp.6 hold that interpretation of a contractual provision is a matter offact, not a matter of law. Nor, in my view, is Unilease Inc., supNa, authority for the propositionthat a master can only interpret a clause in a contract where the words can only bear onereasonable meaning or have been previously interpreted by a judge's decision. Those were thefacts in Urrilease, supra, but not the legal principal underlying the decision. I agree with thereasons set out in Nezghbou~~hoods of Cornell Inc, v. 14401 US Or~tar^zo Inc. ~ at ¶ 14 in relation tothe requirement for a master to adjourn the motion to a judge if he/she concludes that there is agenuine issue of law:

14 It is important to understand what that means. Obviously the rule was notintended. to preclude a master from deciding any legal issue or applying the law tothe facts. A master is empowered to decide that there is no genuine issue of law inthe same way as he or she may determine there is no genuine issue of fact. Therule only reserves a "genuine issue" of law to a judge.9 To put this in simplestterms, if a point of law is unclear and it seems possible to determine it on amotion then the issue will be adjourned to a judge. In all other cases in which thelaw is clear and there is no genuine factual or legal issue, a master may grantsummary judgment. For example, in Haick v. Smith, Master Peppiatt concludedthat a defence of equitable setoff to a bill of exchange could not raise a genuinelegal defence because the Court of Appeal had foreclosed that possibility.l° Asimilar result was reached in Pee/ Ha/ton Kitchens v. 1485625 Ontario Inc. inwhich the master found that the unavailability of equitable setoff to a promissorynote was settled law in Ontario.l' In Uni/ease Inc. v. Lee-Mar Deve/opments Ltd.the master rejected the argument that he could not interpret a contract anddetermine the effect of certain exculpatory clauses in order to decide if there wasa genuine question of law.17 In Taske Techno/ogy Inc, v. PrarieFyre SoftwareInc.13 the master was found to be competent to interpret the terms of a release. Allof these decisions were either affirmed on appeal or have been referred to withapproval by higher courts.

[14] Por these reasons, I find that the Master correctly determined that he had jurisdiction tohear this motion for summary judgment.

5 (1987) 23 C.P.C. 2d 46 (O.S.C., Master) at p. 53G [2008] O.J. No. 4278(2006) 40 C.P.C. (6'~') 117, (Sup. Ct., Master)

9 - 24

-5 -

Was There a Genuine Issue for Trial?

[15] The Appellant submits that the Master erred in finding that there was no genuine issuewhether Stephens was an individual for whom the landlord was "in law responsible." TheAppellant submits that this is a determination that requires evidence at trial and that there are ~~~-`circumstances in which a landlord may escape its contractual obligation by hiring a contractorand delegating its contractual obligation to it. Thus, the Appellant submits a trial is necessary to ~:_,~..determine whether this case falls into those circumstances or not. ,,

[16] I disagree. The Appellant did not deliver any evidence on the motion. It did not set forthany factual basis for a submission that the landlord was not responsible in law for the work done ~by the contractor to repair the roof, thereby fulfilling its contractual obligation to the tenant. ~::Instead, the Appellant submitted that Stephens had not filed any evidence to show that Lang was"in law responsible" for his work or addressing the intention of the landlord and tenant to extendthe protection of the waiver of subrogation clause to an independent contractor.

[17] Again, I disagree. Stephens presented the lease as evidence. The terms of the lease showthe intention of the parties. The Master was correct in describing it this way:

6 The purpose of these lease terms is to allocate risk between the landlord andthe tenant and to require each party to insure its portion of the risk. It is an integralpart of the bargain that the allocation of risk and therefore cost will not bedisturbed by exercise of subrogation rights. In Sally Wasserman Interiors &GiftsInc. v. Centre City Capztal Ltd.. ~ a similar provision in a standard form lease washeld to be effective even when the tenant had only signed an offer to lease. In thecase at bar, the lease was executed and an executed copy is before the court. Theplaintiff quite properly concedes the lease protects the landlord from a subrogatedclaim and consents to an order dismissing the claim against the landlord.

15 1 find that the claim against Stephens is barred by the lease. There is noevidence to suggest that the intention of the parties concerning the allocation ofrisk, responsibility and insurance is other than clearly stated in the lease. With theexception of the 13roben decision which on this point is clearly distinguishable,the weight of authority leads to this conclusion. I am of the view that on this pointthere is no genuine issue either of fact or law and accordingly summary judgmentshould be granted.

[l8] In Esses v. Friedberg & Co.B, the Court of Appeal elaborated on the obligation of aresponding party on a motion for summary judgment:

8 2008 ONCA 646 at ¶45

9 - 25

44 On a motion for summary judgment, the motion judge must bear in mindthe placement and substance of the onus on the parties to the motion. The movingparty, here Esses, bears the legal or persuasive burden to satisfy the court thatthere is no genuine issue for trial before summary judgment can be granted. Hi-Tech Group Inc. v, Sears Canada Inc., [2001.] 0.1. Nn. 33 (C.A.) at Para. 30. Theresponding party assumes an evidentiary burden, or something similar, to respondwith evidence setting out specific facts showing that there is a genuine issue fortrial. But, failure of the responding party to tender evidence does notautomatically result in summary judgment. Hi-Tech at para. 30.

45 The nature of the "evidential burden" imposed on a responding party to af_.,

summary judgment motion warrants brief mention. The "evidential burden" r::::involves the presentation of evidence, whether affidavit or• other material, capable '~`'of supporting the position advanced by the responding party. The respondingparty may not rest his or her defence on unsupported defence allegations ordenials, but may nonetheless urge that the moving party's claim as supported byaffidavit, is so obviously deficient that it raises a triable issue about the movingparty's right to succeed.. Hi-Tech at Para. 30.

[19] Having regard to the terms of the lease and what they show of the parties' intention, theAppellant cannot merely rest on an allegation that the parties did not intend to extend theprotection of the waiver of subrogation clause to an independent contractor.

[20] Next, the Appellant submits that there are circumstances in which a landlord may escapea contractual duty to a tenant by hiring an independent contractor to fulfill the contract and thatStephens was required to, but did not, tender evidence that the landlord was not in this category.

[21] In my view, this submission is based on a misapprehension of the applicable legalauthorities. The Appellant relies on McNichol v. Malcolm9 where Justice Duff states:

But I cannot agree that, assuming the work in question had been committed to thecontrol of an independent contractor, the landlord could, in the circumstances ofthis case, for that reason, escape responsibility. The landlord's contract was tosupply heat absolutely. This, I think, clearly brought him under an obligation tosee that the contract was carried out with reasonable care with a view to the objectof the parties in entering into it -that the demised premises should be in a fit stateto enable the plaintiff to carry on her business.

[22] The Appellant submits that the words, "to see that the contract was carried out withreasonable care" require an evidentiary inquiry into whether the landlord took reasonable careand precaution with regard to overseeing or inspecting the work, or simply abandoned the workto the contractor. His submission is that the words, "in the circumstances of this case" refer tothat inquiry. With respect, in McNichol, supra, the landlord was held liable both for his own

9 (1907) 39 S.C.R. 265 at 27l

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-~-

negligence in the work he was directly involved in doing and because of his contractualresponsibility to the tenant, which he could not escape by delegating. These were "thecircumstances" of the case. Moreover, the words "to see that the contract is carried out withreasonable care", in my view, have the same meaning as those set out in Chap ell's Ltd. v. CapeBreton (County)~0 as referred to by Justice Duchartne in SheNnzan v. 21 Degrees Heating et al~~atoll:

11 ...21 Degrees cannot avoid contractual liability by subcontracting toanother party. As Martland J. explained in Chappell:s Ltd. v. Cape ]3retorr(County), [19631 S.C.R. 340 (S.C.C.), at 343:

By contracting to do the work the [defendant who hired theindependent contractor] would have been under an obligation to the[plaintiff) to do the work itself, or to ensure that it was done,carefully. In such a case the [defendant who hired the independentcontractor] could not have evaded its contractual duty by delegatingthe performance of the work to someone else.

[23] The duty "to ensure that it was done, carefully" refers to the principle of liability fornegligent performance of its contractual obligation by another party it hires to fulfill thatobligation.

[24] These words are analogous to the words relied upon by the Appellant from McNichol,supra, namely "to see that the contract was carried out with reasonable care..." They do notdescribe a separate defence for the principal, rather state its liability for the negligentperformance of the contractor it hired to fulfill a contractual obligation to another.

[25] The outcome in Chappell 's Ltd, supra and in Sin v. Mascioli et a112 turned on whether ahirer of an independent contractor was liable for its acts of negligence absent a contractualrelationship between the plaintiff and the hirer.13 These are not the facts here. Accordingly, Idisagree with the Appellant that Szn, supra, at ¶14 sets out the law applicable in this case, wherethere is a contractual obligation from the landlord to the tenant. Rather, in my view, C,'raven v.Strand Holidays (Can) Ltd~~ at ¶16 and x(19 applies:

16 If a person agrees to perform some work or services, he cannot escapecontractual liability by delegating the performance to another. It is his contract.

19 It has been recognized that, apart from certain exceptions which do not applyin the present case (work inherently dangerous or unlawful or constituting a

10 [].963] S.C.R. 340~ ~ 2006 CanLII 8476 (Sup. Ct.)12 (1999) 43 O.R. (3d) 1 (C.A.)13 Sherman, supra at ¶7614 40 O.R. (2d) 186

9 - 27

-8 -

nuisance), a person is not liable for the negligence of an independent contractorunless he had a primary obligation to carry out anon-delegable duty imposedupon him by law or by contract.

[26] This is also consistent with Fraser River Pzle &Dredge Ltd. v. Can-Dive ~S'ei~vices Ltd. ~5at ¶32:

32 In terms of extending the principled approach to establishing a newexception to the doctrine of privity of contract relevant to the circumstances of theappeal, regard must be had to the emphasis in London Drugs that a new exception rfirst and foremost must be dependent upon the intention of the contracting parties. s:,:;,Accordingly, extrapolating from the specific requirements as set out in London jDrugs, the determination in general terms is made on the basis of two critical andcumulative factors: (a) Did the parties to the contract intend to extend the benefitin question to the third party seeking to rely on the contractual provision? and (b)Are the activities performed by the third party seeking to rely on the contractualprovision the very activities contemplated as coming within the scope of thecontract in general, or the provision in particular, again as determined byreference to the intentions of the parties?

[27] I agree with the Master where he distinguished the outcome in Broben Investi~aent Ltd. v.Cadillac Contractors & Developf~zents Ltd. 16 on the basis that the indemnity clause in that lease"protects and was only intended to protect the landlord and not any other person." In I3robe~,supra, the independent contractor was not protected by the exculpatory clause. The fact that13roben, supra was a trial decision is not helpful to the Appellant; the decision is authority forwhen a principal is responsible in law for the tort of a hired contractor and correctly identifies thecircumstance which exists here, namely "where contractors are employed to do lawful acts whichthe employer himself would do at his own risk, and therefore are cases where the employerwould be liable in breach of contract if he did the work and in so doing caused the damage.""

[28] In this case, the Master interpreted the contractual provisions and, in the absence of anyother evidence found that the language used expressed the intention to extend the benefit of thesubrogation waiver to the independent contractor hired by the landlord to fulfill its contractualobligation to repair the roof. The Appellant asserts that the phrase "in law responsible" is opento numerous meanings requiring analysis, interpretation and evidence at trial., but it cannot pointto evidence or legal principles that support this assertion.

[29] Finally, the Master's reference to the existence of the cross-claim by Stephens against thelandlord does not amount to drawing a conclusion or finding facts based only on a statement inthe pleading, but rather is used to illustrate a difference between I3roben, supra where the tetlantwas successful directly against the landlord's contractor because the clause in issue only

15 [1999] 3 S.C.R. 108~~ [1962] O.R. 207 (H.C.)~' Supra, at p. 217

9 - 28

protected the landlord. Here, the landlord secured a clause which gave the protection of thewaiver of subrogation clause to himself and to the contractor he is in law responsible for and thelandlord is entitled to the protection he had bargained for in the lease. The existence of thecross-claim is pointed to merely to illustrate why a landlord would, on his own behalf, seek thatprotection.

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~~~

Conclusion

[30] The appeal is dismissed. If the parties are unable to agree on costs, I may be spoken to.

J. Macki~lno~1 J.

Released: September 30, 201.0

r

s >~.~

9 - 30

CITATION: Harlon Canada Inc. v. Lang Investment Corporation, 2010 ONSC 5264COU12T FILE NO.: 08-DV-14l 1

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

HARLON CANADA INC.

Plaintiff (Appellant) ~.

- and —

LANG INVESTMENT CORPORATION and I.,EESTEPHENS carrying on business as STF.,I'HENSMECHANICAL

Defendants (Respondents)

REASONS FOR JUDGMENT

J. Mackinnon J.

Released: September 30, 2010

9 - 31

TAB 10

Consent to Transfer: Procedure;

What is Reasonable?

Stephen Posen Minden Gross LLP

Oladipo (Ladi) Onayemi, Student-at-Law,

Minden Gross LLP

February 22, 2017

THE SIX-MINUTE


*Special thanks for assistance in drafting this paper to Oladipo (Ladi) Onayemi, Student-at-Law, Minden Gross LLP

CONSENT TO TRANSFER: PROCEDURE;

WHAT IS REASONABLE

Stephen Posen, Partner

Minden Gross LLP*

INTRODUCTION

REMINDER TO ADD SECTION ON CHANGE OF CONTROL

Absent any restriction in a lease, a tenant may assign or sublet the leased premises (“Transfer”)

without restriction. In a commercial lease, there is invariably a restriction on the tenant’s right to

transfer without the landlord’s prior written consent. The landlord’s ability to refuse consent is

often limited as it is usual for a commercial lease to provide that a landlord’s consent may not be

unreasonably withheld.

Part I of this paper outlines the types of Transfers commonly effected by tenants and

provides an overview of the rights and obligations of both the tenant and landlord in relation to

Transfers. Part II of this paper outlines the procedures that should be followed to obtain

landlord’s consent to a Transfer. Finally, Part III of this paper will discuss reasonable grounds for

a landlord to withhold consent to a Transfer.

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PART I: TRANSFERS OF LEASE

A Transfer is a transaction that results in the change of identity of the actual or guiding mind

behind the person or entity that is occupying the leased premises.1 Typically a lease will provide a

broad definition of Transfer to mean that, in addition to the usual methods of transfer –

assignment of lease and sublease – Transfers will also include other arrangements such as sharing

of possession by licence or otherwise, granting concessions, franchising, mortgaging,

amalgamation and receiverships. In addition, it should be noted that a change in the corporate

control of a tenant is also an indirect form of Transfer and should be treated as such. Such

methods of Transfer may include rights and limitations that are specific to each.

Rights of Transfer

In the absence of any restriction in the lease, a tenant may proceed with a Transfer without

restriction.

Tenant’s Perspective: A tenant may have several reasons to effect a Transfer. The tenant’s ability

to sell its business, the ability of some tenants to operate their business through franchising or by

concession and the ability to of a tenant to finance its operation by mortgage, a tenant’s ability to

move to larger or smaller space or to cease operating and mitigate its contractual obligations may

all depend – in one way or another – upon the right or limitations on the right to Transfer. It is no

surprise then, why a tenant would want to eliminate or limit restrictions in the lease agreement,

with respect to a tenant’s right to Transfer.

Landlord’s Perspective: Landlords are concerned with maintaining as much control over the

rights of Transfer as possible. There are various objectives of a landlord to control the tenant’s

1 Faruk Gafic, “Lease Transfers: Everything You Always Wanted to Know But Were ‘Afraid’ to Ask” (2013), online: ,www.mcleankerr.com>.

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ability to effect a Transfer, as I previously outlined in Shopping Centre Lease, 2nd Edition include

as follows:2

(a) The occupant’s ability to pay the rent and perform the covenants under the lease;

(b) The uses of the occupant being compatible with the building itself and with the present

and future uses of other tenants or premises in the area in which the Landlord has an

interest;

(c) The character and reputation of the occupant as it reflects on the landlord’s property;

(d) The likelihood that the occupant would properly care for the Landlord’s and its own

property; and

(e) In a Shopping Centre complex, the merchandising mix.

As stated above, absent any restriction in a lease, a tenant will have the unlimited right to

effect a Transfer. Virtually all commercial leases include a provision that expressly restricts the

tenant’s freedom to Transfer. The typical clause in a commercial lease is similar to the following:

Tenant shall not assign this Lease in whole or in part and shall not sublet or part with or

share possession of all or any part of the Premises and shall not grant any licenses or

other rights to others to use or share the use of any portion of the Premises without the

prior written consent of Landlord in each instance, which consent shall not be

unreasonably withheld.

The effect of the above provision, or a similar provision restricting a tenant’s right to

Transfer, is that its inclusion bars a tenant from transferring the lease or its interest in the

premises without restriction. Including the words “consent shall not be unreasonably withheld” in

2 Shopping Centre Leases, 2d ed, (Aurora, Ont: Canada Law Book, 2008) at 387.

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such provision is not, strictly speaking, necessary. Section 23(1) of the Commercial Tenancies

Act of Ontario3 (“CTA”) provides that, if a lease contains a clause restricting assigning or

subletting without consent, and does not contain an express provision to the contrary (such as

“which consent may be unreasonably withheld”), the lease is “deemed to be subject to a proviso

to the effect that such…consent is not to be unreasonably withheld”. There is similar legislation

in the other common law provinces in Canada.4

Case law is now clear (though in my view incorrect) that, if a landlord is found to have

unreasonably withheld consent, and if, as a result, a tenant loses a Transfer transaction or

otherwise suffers damages, the landlord will be liable to the tenant for such damages.

If the landlord wishes to maintain absolute control over any occupant of its property, and

if, accordingly, it wishes to be able to withhold consent with or without reason, because of the

provisions of Section 23(1) of the Commercial Tenancies Act, it is necessary for the landlord to

provide in the lease that a tenant may not effect a Transfer without the landlord’s consent, which,

notwithstanding any law to the contrary, the landlord may withhold in its sole, uncontrolled and

unreasonable discretion. It is necessary to provide that the landlord need not act “reasonably”

because otherwise Section 23(1) of the Commercial Tenancies Act will impose a standard of

reasonability. In a rather curious and unreported decision of the Ontario Court of Appel in 1962,

Bridge v. Silver, Kelly J.A., for the majority, upheld a County Court decision which held that the

Landlord’s right to “arbitrarily” withhold consent does not effectively contract out of the

provisions of s. 23(1) of the CTA because “arbitrarily” is not the same as “unreasonably”.

Unfortunately the reasons of the Court of Appeal were not reported and at this time are no longer

available.

3 R.S.O. 1990, c. L.7. 4 Shopping Centre Leases, 2d ed, (Aurora, Ont: Canada Law Book, 2008) at 388.

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Forms of Transfers

The differences between the various methods by which a tenant may transfer the lease or its

interest in the premises are important in the commercial leasing context. Although the same

practical result may follow, the legal rights of the parties depend upon the legal form of the

Transfer. A lease agreement creates a relationship between a landlord and tenant and the rights

established by such a relationship exist both in estate and contract, known respectively in legal

terminology as “privity of estate” and “privity of contract”.5 With the foregoing in mind, one

must appreciate that a transfer affects the relationships and rights among the Landlord, Tenant

and Transferee. The most frequent methods of Transfer pursued by tenants are the following:

1. A Sublease refers to a lease by a Tenant to another party of part or all of the premises. If

the sublease is for all of the premises for all of the remaining terms, it will be considered

an assignment. To avoid such result, it is typical to provide that the last day of the term is

reserved for the original Tenant.

2. An Assignment of Lease, in contrast to a sublease, refers to a complete transfer of the

Tenant’s interest under the lease. This can be in respect of all or any part of the leased

premises.

3. Sharing of possession can take many forms including a tenant’s licensing a third party to

use part of the leased premises, on a non-exclusive basis, with the tenant.

4. Change of Control of a corporate tenant results in an indirect transfer of a lease interest

by a Tenant. The effect of such change of control achieves the same result as an

assignment insofar as concerns the directing mind of the occupancy of leased premises

and, in the absence of a carefully drawn restriction in a lease, provides a methodology by

5 Shopping Centre Leases, 2d ed, (Aurora, Ont: Canada Law Book, 2008) at 389.

10 - 5

which a Tenant can circumvent the intent of the Transfer restrictions set out in a lease

agreement.

PART II: PROCEDURE TO OBTAIN CONSENT TO A TRANSFER

Request for Landlord’s Consent to Transfer

The parties to a lease should consider including provisions in their agreement that outline the

method by which a tenant requests consent and conversely how a landlord is required to respond

to such request. Providing for this process in the lease itself can eliminate unnecessary confusion

and potential litigation. The lease should clearly outline that a request for consent to a Transfer

should be in writing and should provide such information as a landlord should have when

considering a request for consent to a transfer. The lease should provide that, in addition to the

requirement that the request for consent is to be made in writing to the landlord but should also

provide that such request be accompanied by such other information in writing which would be

material to the landlord’s consideration of the request and to which a prudent owner would be

entitled in considering such a request.6 It would also be prudent to include a provision stating the

amount of time within which to respond to a request to consent. Finally, from the landlord’s

perspective the lease should expressly state that a lack of response to a request is not to be

deemed to be consent.

The specific information that may be required by the landlord to assess whether or not it would be

reasonable or unreasonable for the landlord to withhold consent to a Transfer may include:7

(a) most importantly, particulars of the present financial position and the credit rating of

the prospective transferee, including current audited financial statements;

6Shopping Centre Leases, 2d ed, (Aurora, Ont: Canada Law Book, 2008) at 401. 7Shopping Centre Leases, 2d ed, (Aurora, Ont: Canada Law Book, 2008) at 409-410.

10 - 6

(b) all terms of the proposed transfer;

(c) a copy of the proposed transfer document;

(d) details of the business experience and present business position of the proposed

transferee including details of the precise types of business being then or previously

conducted by the proposed transferee and its level of success therein;

(e) references to confirm the business and personal reputation and character of the

proposed transferee including credit, business and personal references;

(f) in case of merger or amalgamation, details of tenant’s current corporate structure and

pro forma corporate structure and balance sheet following the completion of the

transaction; and

(g) if the Transfer is a component of a sale of a business, it is possible that secured loans

may be required to finance the acquisition; accordingly, a prudent landlord should also

inquire as to the post-closing balance sheet of the tenant and transferee.

The landlord may well request all that information, and to facilitate the process, a tenant or

proposed transferee would be well advised to be pro-active and provide all of such information as

part of a request for consent to a transfer.

Non-Consent Transfers

In order for a tenant to be free to reorganize its business affairs without requiring

landlord’s consent to a transfer, it is common for sophisticated tenants, and these days for less

sophisticated tenants, to require a term of a lease that certain transfers be permitted without

landlord’s consents. Such transfers, commonly referred to as a “Permitted Transfer” may

include:

(i) a transfer to an affiliate;

(ii) a merger or amalgamation; and

10 - 7

(iii) transfer to a purchaser of tenant’s business.

It is reasonable for a tenant to request that a lease provide for a “Permitted Transfer” without

landlord’s consent. However, a Permitted Transfer may be part of a transaction, which may

include, as referred to above, financing and the securitization of such financing, the net result of

which could be a substantial erosion of the financial covenant of the tenant or transferee. For

such reason, even though the transfer may be a “Permitted Transfer”, a wary landlord would be

well advised to require that the Transfer may proceed without landlord’s consent only if it is

shown that the financial covenant of the tenant and transferee not be adversely affected by such

transaction. That may seem like an indirect method of requiring landlord’s consent to a

“Permitted Transfer”; however, a landlord has a critical interest in ensuring that it has a financial

covenant capable of meeting tenant’s obligations under a lease, which seems, to the author, to be

a reasonable requirement in a lease.

Process

Regrettably, parties to a lease frequently leave their request for a landlord’s

consent until very late in their planning or process. That practice is not reasonable, and

the landlord must be afforded a reasonable period of time within which to respond to the

question as to whether or not it is prepared to consent to a Transfer.

If a landlord does not consent, a tenant may either:

(i) proceed to effect a Transfer without landlord’s consent, leaving

open the prospect that a landlord may subsequently terminate the

lease and, possibly, claim damages against the tenant;

10 - 8

(ii) proceed with a Transfer conditional upon subsequently obtaining

the landlord’s consent, this is an awkward prospect as, if consent is

not ultimately obtained, the Transfer would have to be reversed; or

(iii) apply to a Court for a Court-ordered consent; for such purpose

there is a summary procedure provided for in Part 3 of the

Commercial Tenancies Act.

If a Transfer proceeds without the landlord’s consent and the landlord terminates

the lease for such default, that is one situation provided for in Section 20(7) of the

Commercial Tenancies Act pursuant to which the tenant does not have the right to claim

relief from forfeiture. Notwithstanding Section 20(7) of the Commercial Tenancies Act,

Section 98 of the Courts of Justice Act affords a tenant the equitable right to seek relief

from forfeiture.

From a landlord’s perspective, there are substantial risks in a landlord failing to

consent to a Transfer for the reason that, as stated above, if a landlord is subsequently

found to have been incorrectly withholding its consent, it can be liable for substantial

damages pursuant to existing case law. In order to avoid the risk of being held liable for

damages:

(i) a landlord, in drafting its lease, should provide that a landlord will not be

liable in damages for withholding consent to a Transfer and that a tenant’s

only remedy for a landlord improperly withholding consent is for a tenant

to seek a Court-ordered consent; there is (theoretically) a summary

10 - 9

procedure pursuant to Section 23(2) of the Commercial Tenancies Act for

a tenant to seek a Court-ordered consent; or

(ii) it is also open for a prospective assignee or sub-tenant to apply to a Court

pursuant to Part 3 of the Commercial Tenancies Act for an order as to

whether or not the landlord is acting reasonably in withholding its consent;

or

(iii) as a possible protection for a landlord where the lease does not contain a

“no damages provision” as referred to above, a landlord might notify a

tenant that it is not prepared to consent to a proposed Transfer but will

agree to attend a tenant’s application for a Court-ordered consent on short

notice; in such a case, a tenant would be hard pressed, in the author’s

view, to abandon the prospective Transfer and subsequently claim

damages from a landlord for improperly withholding consent, inasmuch as

the tenant was afforded an opportunity to seek a Court-ordered consent

and declined to take advantage of that opportunity.

PART III: REASONABLE GROUNDS FOR

LANDLORD’S WITHHOLDING CONSENT

“Reasonable Grounds” for Landlord to Withhold Consent

Grounds for a landlord to withhold consent, which have been held to be reasonable, are

frequently a matter of common sense.

However, the case law describing refusals to consent that are held to be reasonable

continues to develop as various issues in commercial leases continue to arise.

10 - 10

Established reasonable grounds for a landlord refusing consent include:

1. The failure of the tenant or transferee to demonstrate satisfactory ability of the

prospective Transferee to successfully operate the business or meet the financial

obligations of the tenant under the lease;8

2. The proposed use by the Transferee being more demanding on the building than the

existing use;9

3. The character or personality of the proposed Transferee being unrespectable or

irresponsible (such as a known criminal, poor credit rating, frequent bankruptcies) or the

failure of the Tenant or proposed Transferee to provide financial information reasonably

requested by the Landlord10

4. The transfer resulting in a downgrading of the value of the property (such as a sublease at

a low rent)11

5. The transfer creating a breach of a restrictive covenant within the lease12

6. The proposed use being different from that which is permitted by the lease13

7. The proposed sub-tenants were in possession of the leased premises before consent of the

Landlord was requested14

8. Refusal by the landlord until damages to the leased premises are repaired.15

8 1455202 Ontario Inc. v. Welbow Holdings Ltd. (2003), 33 B.L.R. (3d) 163, 9 R.P.R. (4th) 103; Digalakis v. Fred T. Reisman & Associates Ltd., [1991] O.J. No. 2086 (QL) (Ont. C.A.); 434916 Ontario Ltd. v. Blackburn (unreported, June 15, 2005, Ont. S.C.J., docket No. 03-CV-258086SR); Figur Magic International Ltd. (1974) 19 C.B.R. (N.S.) 92 (Ont. S.C.); New Miracle Food Mart Inc. v. General Leaseholds Ltd. (1993), 1 D.R.P.L. 524 (Ont. Gen. Div.). 9 Zellers Inc. v. Brad-Jay Investments Ltd. (2002), 117 A.C.W.S. (3d) 814 (Ont. S.C.J.); Community Drug Marts P & S Inc. v. William Schwartz Const. Co. (1980), 31 A.R. 466 (Q.B.) 10 Digalakis v. Fred T. Reisman & Associates Ltd. (unreported, November 21, 1991, Ont. C.A., File No. 789/91) (the proposed subtenant refused to submit a credit report). 11 Moore v. New Progress Construction Ltd. (1980), 9 Man. R. (2d) 434 (Man. Co. Ct.). But see Dominion Stores v. Bramalea Ltd. (1985), 38 R.P.R. 12 (Ont. Dist. Ct.) (it was held that the landlord unreasonably withheld consent with the purpose to renegotiate the rent.) 12 Ayre’s Ltd. v. Atlantic Shopping Centres Ltd. (1989), 246 A.P.R. 347, 62 D.L.R. (4th) 12, 79 Nfld. & P.E.I.R. 347 (Nfld. C.A.) 13 Re Acklands Leasehold Properties Ltd. and Steehild Invts. Ltd. (1981), 127 D.L.R. (3d) 646 (Ont. C.A.) 14 Pink Panther Food Corp. v. N.D. McLennan Ltd. (1988), 75 O.R. (2d) 651, 1 R.P.R. (2d) 651, 1 R.P.R. (2d) 89 (Dist. Ct.), affirmed (1990), 75 O.R. (2d) 651 (C.A.) 15 F.B.D.B. v Starr (1986), 55 O.R. (2d) 65 (H.C.). See also Colasanti v. Katz (1996), 1 R.P.R. (3d) 200 (Ont. Gen. Div.) (where the Court took a broader approach encompassing consideration of the surrounding circumstances, commercial

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9. The business of the proposed transferee is likely to affect the business of other tenants in

a shopping centre.16

10. The proposed use of the transferee would not fit into the nature of the mall.17

11. The Landlord has equivalent, alternative premises available for lease in the property.18

To elaborate on point 1 above, see the following cited in footnote 8 above.

New Miracle Food Mart Inc. v. General Leaseholds Ltd. (1993), 1 D.R.P.L. 524 (Ont.

Gen. Div.) [Under footnote 8].

(a) Tenant was a major food store with a 25-year lease and was to be the

anchor tenant for the mall;

(b) Tenant sought to assign the lease to an independent food store operator but

the landlord refused to give its consent

(c) The tenant's application for an order that the landlord was unreasonably

withholding its consent was dismissed

(d) Proposed assignee had neither the name nor the qualifications of an anchor

tenant.

(e) The landlord had valid concerns regarding the experience and financial

capabilities of the proposed assignee.

In 1455202 Ontario Inc. v. Welbow Holdings Ltd. (2003), 2003 Carswell Ont 1761, 9

R.P.R. (4th) 103 (Ont. S.C.J.),

(a) Landlord was entitled to take into consideration the lack of financial information

concerning the company's net worth, and its ability to finance the acquisition.

realities and the economic impact of the assignment or subletting on the landlord within the context of a reasonable person standard). 16 16 (1980), 36 C.B.R. (N.S.) 265, 116 D.L.R. (3d) 450; affirmed 5th February, 1981 (Alta. C.A.). 17 17 Corydon Village Mall Ltd. v. Tel Management Inc. (2015), 2015 MBQB 67 (Man. Q.B.). 18 Windsor Apothecary Ltd. v. Wolfe Group Holdings Ltd. (1996), 140 Sask. R. 233 (Sask. Q.B.), aff’d (1996) 148 Sask. R. 234 (Sask. C.A.).

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(b) In addition, the court should be slow to substitute its judgment for the business

judgment of the landlord.

(c) The following propositions are set out in that case at para. 9:

(1) The burden is on the tenant to satisfy the court that the refusal to consent

was unreasonable.

(2) In determining the reasonableness of a refusal to consent, it is the

information available to, and the reasons given by, the landlord at the time

of the refusal, and not any additional facts or reasons provided

subsequently to the court, that is material.

(3) The question must be considered in light of the existing provisions of the

lease that define and delimit the subject matter of the assignment as well as

the right of the tenant to assign, and that of the landlord to withhold

consent.

(4) A probability that the proposed assignee will default in its obligations

under the lease may, depending upon the circumstances, be a reasonable

ground for withholding consent.

(i) A refusal to consent will not necessarily be unreasonable

simply because the Landlord will have the same legal rights

in the event of default by the assignee as it has against the

assignor: Ashworth Frazer Ltd. v. Gloucester City Council,

[2001] H.L.J. No. 57 (U.K. H.L.).

(5) The financial position of the assignee may be a relevant consideration.

(i) This was encompassed by the references to the

"personality" of an assignee in the older cases see, for

example, Slanly v. Ward (1913), 29 T.L.R. 714 (Eng.

C.A.); Dominion Stores Ltd. v. Bramalea Ltd., [1985] O.J.

No. 1874 (Ont. Dist. Ct.)

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(6) The question of reasonableness is essentially one of fact that must be

determined on the circumstances of the particular case, including the

commercial realities of the market place and the economic impact of an

assignment on the landlord.

However, in Windsor Apothecary Ltd. v. Wolfe Group Holdings Ltd.,19 the

Saskatchewan Court of Appeal affirmed a lower court decision in favour of a landlord who had

withheld consent to a transfer that would have put the landlord in direct competition with the

tenant in leasing space in the landlord’s property. The mall’s landlord refused to consent to the

tenant’s proposed sublease to a doctor, as the landlord had been actively pursuing a doctor –

without success – to fill one of the vacant spots in the mall. Looking at the surrounding

circumstances, the commercial realities in the marketplace and the economic impact of the

intended sublease, the trial judge determined that the landlord’s withholding of consent was not

unreasonable.20

However, in Lehndorf Canadian Pension Properties Ltd. v. Davis Management Ltd.,21

while the factual background was significantly different, the court suggested that the real reason

for the landlord’s refusal was fear of competition from a rival landlord, and that did not form a

reasonable basis on which to withhold consent.22

To assist in determining what are reasonable grounds for a landlord to withhold

consent and to avoid some disputes which may arise in respect of such a question, it is

19 Windsor Apothecary Ltd. v. Wolfe Group Holdings Ltd. (1996), 140 Sask. R. 233 (Sask. Q.B.), aff’d (1996) 148 Sask. R. 234 (Sask. C.A.). 20 Ibid, at para 10. 21 Lehndorf Canadian Pension Properties Ltd. v. Davis Management Ltd. (1989), 59 D.L.R. (4th) 1 (BC C.A.). 22 Ibid, at para 25.

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recommended that a lease provide grounds upon which the parties agree that it would be

reasonable for a landlord to withhold consent to a Transfer. Such grounds might include

the following:

1. The period of time which has lapsed since the commencement of the lease or since the

last transfer of the lease (e.g., no transfer within three years of commencement of the

term or within three years after the preceding transfer);

2. The business experience of the proposed transferee including:

a. its experience in the same type of business;

b. its success in its conduct of business; and

c. its experience in conducting its business in the manner in which the tenant

conducts business (e.g., high quality or budget quality merchandise);

3. That the transfer be for substantially all of the leased premises;

4. General business reputation of the proposed transferee;

5. The name under which the transferee will operate the business;

6. Whether the prospective transferee will agree to execute an agreement with the landlord

to be bound by all of the tenant’s obligations contained within the lease;

7. The term of any proposed temporary transfer (for example, a sublease for a short portion

of the balance of the term would necessitate two changes in occupancy which would be

undesirable to the landlord in a shopping centre environment);

8. The tenant-mix or merchandising balance within the shopping centre;

9. The likelihood of the prospective transferee being as large a draw to the consuming

public as the tenant;

10. The likelihood of the prospective transferee generating as high a volume of sales as the

Tenant;

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11. The amount of consideration being received by the tenant for the transfer and the terms of

payment (if it were very high the landlord might be concerned as to the ability of the

transferee to carry on its business; especially if the amount were payable over a period of

time); and

12. What the post-closing financial strength of the tenant will be; for instance, if the

transferee is giving security on the business to secure the payment of the purchase price,

reducing or eliminating the financial net worth of the tenant.

CONCLUSION

Though it may seem that the issue of the obtaining or granting of consent and the

grounds upon which a landlord might withhold consent are fairly straightforward,

circumstances arise, not infrequently, which cause disagreement and conflict between the

parties. It is recommended that the parties seek to “legislate” the process for obtaining of

consent and the grounds upon which a landlord might withhold consent while drafting

and agreeing upon the terms of a lease.

#2688978 | 4000007

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TAB 11

A ‘Smaller’ Tenant’s “Top 10”:

Lease Provisions to Think About When You

Don’t Have Clout

Elizabeth Earon Blake, Cassels & Graydon LLP

February 22, 2017

THE SIX-MINUTE


A ‘Smaller’ Tenant’s “Top 10”:

Lease Provisions to Think About When You Don’t Have Clout

When acting for tenants, it is often the case that a client will approach its lawyer with the request

to review and comment on a lease with a focus only on the most material issues or ‘red flags’.

Sometimes, even when the client’s instructions include a more rigorous review, the landlord will

only accept a less fulsome set of comments on the lease. This scenario may be a result of the

client’s hampered bargaining position, which can arise for any number of reasons: the lower

amount of rent payable, the short term of the lease or the small size of the leased premises

relative to the complex as a whole combined with the reality that the nature of the tenant’s

business is such that it will not be material source of customer traffic to the complex or building.

Whatever the reason, where the scope of the negotiation must be curtailed, as counsel, one

must focus on those provisions in the lease where we can provide the most value and protect

the client from unreasonable risk. While every deal is different, in these scenarios there tends

to be a subset of issues important to most transactions and this paper will focus on these ‘top

10’ issues.

Surrender/Restoration

When leases are first negotiated, terms governing the end-of-term surrender of the leased

premises are often not the most pressing issue for either of the parties, and surrender

provisions in the landlord’s lease are often viewed as mere boilerplate. However, failing to

negotiate the surrender provisions can result in material unexpected costs, a lot of headaches at

the end of the term and, occasionally, threatened or actual litigation.

A landlord’s form of commercial lease typically includes a provision whereby a tenant, on the

expiration or earlier termination of the term, is required to remove (often at the landlord’s option)

any or all leasehold improvements. Occasionally, this requirement is accompanied by an

obligation to restore the leased premises back to “base building condition” or “shell” condition, if

so required by the landlord. This obligation can present serious concerns for a tenant: these

removal and restoration obligations can be extremely costly and can consume a material

amount of time, all while a tenant is turning its mind to transitioning its business to a new

location.

Accordingly, a tenant should consider trying to negotiate out this kind of restoration obligation. If

this is not an option and the landlord is strongly resistant, a compromise position is the removal

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at end of term of those leasehold improvements installed by or on the tenant’s behalf. The

advantage of this step-down is that the tenant is not obligated to remove leasehold

improvements installed by previous tenants, nor restore the leased premises back to base

building condition if it did not receive them in such condition in the first place.

What many tenants find useful is to negotiate into the lease a provision whereby the tenant only

has to remove those leasehold improvements which the landlord has indicated at the time it

grants its consent to the installation of such leasehold improvements that it will require to be

removed at the end of term. This provides the tenant with the opportunity to perform the cost-

benefit analysis as to whether it wishes to install the leasehold improvement in the first place,

bearing in mind the end of term cost to remove such item.

Relocation

Where a tenant client is leasing space in a multi-tenant facility, it is not uncommon to see a right

entitling the landlord to unilaterally relocate the tenant to alternative premises, usually within the

same building. Of course, from a tenant’s perspective, it is preferable to negotiate out this right,

as the location or characteristics of a particular unit or suite may be of critical importance to the

tenant. For example, those particular premises may be attractive to the tenant on the basis of

the square footage, visibility or access to pedestrian or vehicular traffic. Moreover, relocating to

alternative premises can carry with it material costs and significant disruptions to the tenant’s

business. For a tenant with less bargaining power, however, negotiating out this right may not

be possible. In these circumstances, a tenant should consider the obligations that the landlord

must fulfil in order to exercise the right to relocate the tenant, and ensure that the lease contains

appropriate tenant protections.

Firstly, the lease should be clear as to what the geographic limitations are on the landlord’s

exercise of the right. Most often, the right is limited to space within the same building or

complex, and the lease should clearly spell this out; the last thing a tenant would want to deal

with in addition to having to relocate its business is to find that it is being relocated to the

landlord’s neighbouring development. In addition, the lease should require that the tenant can

only be relocated to a comparable location. For example, a retail tenant may want assurances

in terms of its location within the mall vis-à-vis customer traffic, whereas an office tenant may

want to ensure that it has similar vistas or views and proximity to elevators.

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Similarly, a tenant will likely wish to ensure that the new premises are similar to the existing

premises, in terms of size and configuration. For example, a lease may specify that the

relocated premises should not vary more than five to ten percent of the rentable area of the

existing premises. A tenant may also wish to ensure that the relocated premises contain

leasehold improvements of similar quality to those in the tenant’s existing premises.

Thirdly, the lease should contemplate adequate notice to the tenant of the exercise of the

relocation right. Typically, between 90 to 120 days is considered reasonable notice.

Finally, the lease should allocate the costs associated with the relocation to the landlord, such

as packing and moving costs, reprinting of a limited supply of stationery and supplies, and

disconnection and reconnection of telephone and computer equipment and systems. If the

tenant will have to install new leasehold improvements in the relocated premises or otherwise

improve the relocated premises, these construction costs should also be borne by the landlord.

Assignment, Subletting and Changes of Control

Most commercial leases prohibit a tenant from assigning its lease, subleasing the leased

premises or undergoing a change of control without the landlord’s prior consent. Wherever

possible, exceptions to these consent requirements should be negotiated into the lease. These

might include an exception for internal reorganizations, for assignments or subleases to an

affiliate entity of the tenant, or for a change of control of the tenant where, after the change of

control, control vests in an affiliate of the tenant. These exceptions to the general consent

requirement may be required for tax, restructuring or other bona fide business reasons.

In addition, a tenant may wish to consider negotiating an exception to the consent requirement

in the event of a sale of the tenant’s business. Doing so will enable the tenant to sell its

business without the possibility of a landlord consent holding up or otherwise impeding the

closing.

Secondly, many commercial leases include a right in favour of the landlord to terminate the

lease in lieu of granting its consent to an assignment, sublease or change of control of the

tenant. Where possible, this right should be struck out of the lease. If this is not possible, the

tenant should at the very least ensure that the termination right does not apply to any non-

consent transfers.

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Finally, occasionally a commercial lease will include certain onerous provisions that are

triggered by an assignment, sublease or change of control, such as an increase in the basic or

minimum rent. These transfer provisions should be carefully reviewed and any onerous

provisions should be struck out.

Operating Costs

Most net commercial leases require the tenant to contribute to the landlord’s costs to operate,

maintain and repair the complex or building within which the leased premises are located. As

operating costs form a material component of the tenant’s cost obligations during the term of the

lease, these provisions should be read with a careful eye and, at a minimum, the lease should

ensure that a number of items are addressed.

Firstly, the lease should contain a positive obligation on the landlord to respond to the tenant’s

questions with respect to the landlord’s calculation of operating costs, as well as a positive

obligation to provide reasonable supporting documentation and information to support the

landlord’s calculation.

Most operating costs provisions include the right of the landlord to recover certain capital

expenses incurred by the landlord. These capital expenses should be amortized over a

reasonable period, which is typically over the anticipated useful life of the item in question, and

paid by the tenant during the remainder of the term on an amortized basis. This will prevent a

scenario in which a tenant is obligated to pay its share of the total cost of a major expenditure,

such as the cost of a new roof, where a tenant has little time left on its term and will derive little

benefit from that expenditure.

Lastly, many landlords seek to recover an administration fee or management fee as a

component of operating costs. The lease should only entitle the landlord to recover one of

these fees. In addition, the amount of the fee should be reasonable having regard to the size of

the property and commensurate with the nature of the services provided by the landlord. For

example, where the tenant is performing all or substantially all of the maintenance and repair

obligations, the fee should be lower. It is not uncommon to see fees equal to 15% of the

tenant’s share of operating costs or two to five percent of the gross rent payable by the tenant

under the lease. Where the lawyer or law clerk does not have sufficient experience in

negotiating administration and management fees, the client’s real estate broker should be able

to provide useful guidance.

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Repair Obligations

Typically, commercial leases allocate certain maintenance and repair obligations to each of the

landlord and the tenant, which obligations can vary depending on whether the property is a

multi-tenant facility or a single-tenant facility and, if the latter, how much or how little of the

property management aspects the tenant wishes to assume. Sometimes, however, a lease will

not contain a positive obligation on the landlord to perform any repair or maintenance, or the

obligation is very ‘bare bones’, leaving unclear who is responsible for certain elements of the

complex or building. Where this is the case, the lease should either be amended to include an

obligation on the landlord to perform certain obligations or the provision should be amended to

ensure that there is no ambiguity or gaps in the allocation of responsibility.

Typically, in a multi-tenant lease, the landlord should be obligated to perform repairs and

maintenance (and replacements) to the building’s foundation, structure and roof, as well as its

common areas, systems, facilities and equipment, excluding those repairs to building systems,

facilities and equipment located within the leased premises or outside of the leased premises

but exclusively serving the leased premises. The landlord’s obligation should be to perform

these repairs and maintenance to an agreed-upon standard, such as that of a prudent owner of

a similar property.

Similarly, the tenant’s repair and maintenance should also be closely reviewed. A tenant will

want to ensure that its obligations are subject to reasonable wear and tear, and that the

standard to which the tenant is required to maintain and repair is reasonable in light of the

quality, condition and age of the building. For example, a tenant will not wish to be obligated to

maintain the leased premises in first-class condition and repair when the building in which the

leased premises are located is an older building, or if the leased premises were received in a

deteriorated condition or state of disrepair.

Insurance and Risk Allocation

Much like the surrender provisions, the insurance provisions contained in a lease are often

thought of as mere boilerplate. However, when acting for a tenant client, care should be taken

in reviewing these provisions. As a preliminary matter, the tenant’s insurance consultant should

be asked to review the requirements in the lease. The consultant can confirm that these

requirements either conform to the tenant’s existing insurance policies, or can be satisfied by

the tenant and that the associated costs to do so are not exorbitant.

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By entering into a lease, most tenants expose themselves to significant liability, both as a result

of the express indemnities granted to landlord under the lease as well as pursuant to common

law. However, for damage or loss suffered by the landlord in connection with matters for which

the landlord is insured, it is not unreasonable to shift the risk over to the landlord and its insurer.

The tenant is paying the landlord’s premiums through operating cost contributions and thus it

should derive some benefit from the landlord’s insurance. By shifting risk to the landlord in this

manner, the tenant avoids liability for damage to the landlord’s property. Where the tenant

causes substantial and costly damage to the landlord, shifting this risk helps to ensure that the

tenant is not bankrupted as a result, as could be the case where the damage exceeds the

tenant’s liability insurance coverage. The shifting of risk to the landlord can be accomplished in

many ways. Most typically, tenants ensure that the lease includes a release in favour of the

tenant in respect of damage or loss suffered by the landlord which is covered under any of the

property damage insurance policies that the landlord is required to carry or otherwise carries.

Compliance with Laws

Many commercial leases contain the landlord’s standard form boilerplate to the effect that the

tenant is responsible for compliance with all laws relating to the premises and effecting all

maintenance and repairs required pursuant to all such laws. However, unless this is the deal

struck between the landlord and the tenant at the outset, the tenant should not be responsible

for any existing non-compliance of the premises with all laws as of the commencement date.

That way, a client will not find themselves in the unfortunate position of having to, for example,

completely replace the sprinkler systems in the leased premises on the commencement date

because the premises did not then comply with the applicable building code. Another way to

address this issue is to only make the tenant responsible for compliance with laws relating to the

tenant’s specific use of the premises. In this case, the tenant will only be responsible for the

work and costs associated with its specific business needs, and will not need to ensure that the

leased premises comply with all laws generally.

Subordination/Non-Disturbance

At law, a lease is subordinate to any existing mortgages registered on title to the real property,

and is in priority to those entered into after the lease, subject to certain intricacies such as

whether or not the lease is registered, when it was registered and whether a lender had notice

of an unregistered lease. However, most commercial leases contain boilerplate language that

11 - 6

the lease is “subject and subordinate to any and all existing and/or future” mortgages, the result

of which is to effectively render the lease subordinate to all of the landlord’s mortgages.

Consequently, in the absence of an agreement between the lender and the tenant, the tenant

may face the risk of eviction should the landlord default under its obligations to its lender and

the lender seek to enforce under its security, even though the tenant has continually complied

with its obligations under the lease. This can present a material risk to the client, particularly

where the tenant plans to invest a considerable amount of money in performing leasehold

improvements or considers its new business location to be critical to its operations.

When faced with these automatic subordination requirements under the lease, tenants should

seek to amend the provision in a manner depending on how critical the previously mentioned

risk is to the client. For a client to whom the risk is significant, the subordination provision

should be modified to indicate that it will only become effective upon the lender executing and

delivering a non-disturbance agreement in its favour, vis-à-vis any future mortgages.

Additionally, to the extent that there are any mortgage existing as of the date of the lease, the

landlord should be required to deliver a non-disturbance agreement for that mortgage

concurrently with the execution and delivery of the lease. A non-disturbance agreement will

create a direct contractual relationship between the tenant and the lender and will provide that

the lender will not disturb the tenant’s possession and quiet enjoyment of the leased premises

on the terms of the lease upon loan enforcement for as long as the tenant continues to pay rent

and otherwise complies with the terms and conditions of the lease. For a less risk-averse client,

or to a client for whom the leased premises do not represent a material investment, the client

may be willing to accept the landlord’s “commercially reasonable efforts” to obtain a non-

disturbance agreement.

Events of Default

The majority of commercial leases contain a provision whereby the landlord is entitled to

terminate the lease upon the occurrence of certain events. These ‘events of default’ should be

carefully reviewed, particularly in respect of certain items.

Firstly, commercial leases occasionally entitle the landlord to terminate the lease without notice,

for example, for the non-payment of rent. In order to avoid a situation whereby a tenant is in

default simply because someone in the client’s mailroom forgot to mail the cheques, these

provisions should include a cure period and notice requirements. For example, the default

11 - 7

should only occur if the tenant has failed to pay rent, and has not cured such failure within a

certain period of time after receiving written notice from the landlord. Similarly, if the tenant has

failed to perform any of its obligations under the lease that are capable of being remedied by the

tenant, such as the tenant’s repair and maintenance obligations, the lease should also provide

for a cure period and prior notice. This will provide the tenant with the opportunity to remedy

any issues before finding itself in the unpleasant position of having had its locks changed or the

landlord distraining against the tenant’s property in respect of an inadvertent default, or where

the default in question is the source of a legitimate dispute between the landlord and the tenant.

In addition, the events of default should be reviewed to ensure that they accord with the other

deal terms in the lease. For example, if there is no requirement in the lease that the tenant

continuously and actively carry on business during the term, the events of default should not

include a default for the tenant having gone dark.

Environmental Risk

It is increasingly rare to find a commercial lease that does not impose at least some

environmental liability on a tenant. Indeed, most leases contain broad obligations on the tenant

to remediate and indemnify the landlord for certain environmental contamination. These

provisions need to be reviewed to ensure that the risk allocation is appropriate in the

circumstances and the tenant is not responsible for remediation of, and indemnifying the

landlord for, environmental contamination that it did not cause, such as pre-existing

contamination or contamination caused by other tenants or other third parties. Accordingly, any

overly broad obligations should be amended to limit the tenant’s obligations to contamination

brought onto the leased premises by the tenant or otherwise caused by the tenant and those for

whom it is responsible at law. Where the landlord is resistant to such an amendment to the

lease, at the very least, the tenant should not be responsible for pre-existing contamination or

contamination caused by the landlord and those for whom the landlord is responsible at law.

The foregoing are only some of the multitude of items that could potentially be subject to

negotiation in a lease transaction. Indeed, it would be prudent when acting for a tenant to ask

whether it requires any special rights, such as renewal or extension options, parking rights, an

exclusive, and signage or rooftop rights, to name but a few. Accordingly, each lease transaction

should be tailored as much as possible to the specific needs of the client and the appetite of the

landlord to accommodate them. However, the foregoing are intended to provide a roadmap of

11 - 8

issues that may require special attention when reviewing a lease for a tenant client with limited

bargaining power.

11 - 9

TAB 12

Landlord Remedies

Sarah Turney Fasken Martineau DuMoulin LLP

February 22, 2017

THE SIX-MINUTE


Landlord Remedies

Sarah J. Turney*

Overview

This paper explores the fundamental principles that every leasing lawyer should know

about a landlord’s remedies in the event of a breach by its tenant. This paper is divided into two

parts. Part I provides a summary of the Supreme Court of Canada’s landmark decision in Highway

Properties Ltd. v Kelly, Douglas and Co. Ltd. (“Highway Properties”), which remains the starting

point for analysing a landlord’s legal options in the event of a breach by its tenant. Part II provides

an update on case law from the past year, including a summary of the Court of Appeal’s decision

in Pickering Square v. Trillium College Inc. 1, which, at the lower court level, provided an

important analysis of the application of the Real Property Limitations Act, R.S.O. 1990, c L. 15

(the “RPLA”)2. The Court of Appeal’s decision refers back to Highway Properties and provides

an important reminder of how a landlord’s election will affect the running of the applicable

limitation period.

Part I - Highway Properties Ltd. v Kelly, Douglas and Co. Ltd.

In 1971, Canadian commercial real estate law was transformed by the landmark Supreme

Court of Canada Highway Properties decision. In Highway Properties, Justice Bora Laskin

affirmed that a fourth remedy was available for landlords when tenants repudiate a lease.

According to Justice Laskin, landlords have the option to terminate the lease on notice to the

surrendering tenant while still reserving the ability to claim for prospective damages. One of the

elements of these prospective damages is unpaid future rent for the unexpired term of the lease.

Historically, remedies for breach of a commercial lease in Canada were governed by an

Ontario Court of Appeal decision, Goldhar v Universal Sections and Mouldings Ltd.3 (“Goldhar”),

in which landlords only had three options available to recover from defaulting tenants. First, a

landlord could do nothing to alter the landlord and tenant relationship, and elect to sue the tenant

for rent or damages while the lease continues to remain in force. Second, the landlord could

terminate the lease, retaining the right to sue for rent due until such termination, or for damages

accrued up to the date of termination for previous breaches of a covenant. Finally, the landlord

could give notice to the tenant that he wishes to re-let the premises on the tenant’s account and

retake possession of the property on that basis.

Highway Properties raised the issue of whether breach of a commercial lease should be

governed under property law or contract law principles. Unlike in contract law, where a repudiated

contract entitles the innocent party to claim for prospective damages, the three traditional remedies

were governed by property law principles; as long as the lease remains in effect, the landlord has

1 2014 ONSC 2629 [“Pickering”] aff’d in 2016 ONCA 170 2 Generally, sections 4 or 17 of the RPLA.

* Sarah J. Turney is a partner at Fasken Martineau DuMoulin LLP. Thank you to Niusha Arbabi (student-

at-law) and Jennifer Parker (student-at-law) for their outstanding work in developing this paper. 3 Goldhar v Universal Sections and Mouldings Ltd., 1962 CanLII 116 (ON CA), [Goldhar].

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not yet suffered any loss until rent has accrued and is in arrears. Therefore, a landlord was not

entitled to sue a breaching tenant for prospective damages, such as the remainder of the rent left

under an unexpired lease. Further, should the lease be terminated prior to the expiry date, no

obligation technically continues to exist as the lease was terminated and the landlord then has a

right to re-possess the property.

Justice Laskin grounded his decision in the idea that a commercial lease is not simply a

conveyance in land, but also a contract. Therefore, the full “armoury” of remedies available to

redress repudiation of covenants should be available to landlords, despite the covenants being

associated with an estate in land. As Justice Laskin stated:

I do not think that it must follow that an election to terminate the estate as a result of the repudiation

of a lease should inevitably mean an end to all covenants therein to the point of denying prospective

remedial relief in damages.4

Facts:

In Highway Properties, the dispute between the Landlord and Tenant arose from a 1960

lease, under which the Landlord leased a retail location in its shopping centre to the Tenant. Under

the fifteen year lease, the Tenant was to use the premises for a grocery store and super market.

At issue under the lease was a clause wherein the Tenant covenanted to carry on its business

on the premises continuously. Within the year, the Tenant sub-leased the premises to a

supermarket sub-tenant. However, by the following year, the shopping centre did not prosper and

the sub-tenant closed its business. The Landlord received an assurance from the Tenant in a letter

that it would endeavour to sublet its leasehold to fulfill its obligation under the lease for continuous

use. However, the Tenant was unsuccessful in finding a new sub-tenant.

In May 1963, the Landlord commenced an action asking for a declaration that the lease

was binding upon the Tenant, for a decree of specific performance, for a mandatory order and an

injunction, as well as for damages. In September 1963, the Tenant brought a counterclaim stating

that it repudiated the lease. Following this claimed repudiation, the Landlord advised the Tenant

that it would take possession of the premises and attempt to re-let the premises for the unexpired

term of the lease.

At trial, the trial judge applied the law from the Goldhar case which enunciated that the

lease and its covenants ceased to exist with the surrender. Therefore, the Landlord could only

recover for the breaches that occurred up to the date of surrender.

Issue:

The issue in this case was whether the Tenant could be held liable for damages suffered by

the Landlord as a result of its repudiation, including future rent due after the Landlord retook

possession of the premises.

4 Highway Properties Ltd. v Kelly, Douglas and Co. Ltd. [1971] SCR 562 at p. 573, [Highway Properties].

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Analysis:

In his decision, Justice Laskin noted that Canadian courts have long recognized the doctrine

of anticipatory breach to a contract, and he believed that the court should consider its application

to a commercial lease. According to Justice Laskin, a lease’s anticipatory feature lies in the fact

that instalments of rent are payable for future periods. As such, repudiation of the lease raised the

question of whether an immediate remedy covering the loss of such rent and of other advantages

extending over the unexpired term of the lease may be pursued, despite the estate in the land being

terminated.

Justice Laskin noted that under regular contract law, where repudiation occurs, the innocent

party has an election to terminate the contract and sue for damages for prospective loss as well as

for accrued loss. However, following the doctrine applied in Goldhar, upon a tenant’s repudiation

of a lease, the landlord was allowed to re-let the premises but was barred from claiming for

prospective losses such as unpaid future rent. The court in Goldhar grounded their decision in

property law principles, holding that although the lease contained contractual provisions, the lease

operated to convey possessory title. Once the landlord reclaimed the property, there was not only

a termination of the estate in the land but also the elimination of all the terms in the document of

the lease which granted possessory title.

Justice Laskin recognized that Canadian case law has given standing to a limitation on the

operation of surrender, if the landlord, before repossessing, notifies the defaulting tenant that the

landlord is re-possessing with a view to re-letting on the tenant’s account. No such notice was

given in the Goldhar case and while Laskin agreed that the letter in the case at hand was not

sufficiently explicit to that end, he believed that the repossession and re-letting was on the

repudiating tenant’s behalf. Thus, this protected the landlord’s rights under the lease and at the

same time mitigated the liability of unpaid rent. Laskin briefly recognized that under present case

law, the landlord is not under a duty of mitigation, but he did state that “mitigation is in fact

involved where there is a re-letting on the tenant’s account.”5

Justice Laskin then discussed a 1906 High Court of Australia case, Buchanan v Byrnes6

(“Buchanan”), the facts of which were very similar to the facts of the case at hand. In Buchanan,

the lease similarly included a covenant by the tenant to carry on the business for which the lease

was given, for the full term of the tenancy. In that case, the High Court held that the landlord was

entitled to claim damages over the unexpired term of the lease notwithstanding a surrender by the

tenant. Speaking on the case, Laskin held:

The approach of the High court of Australia commends itself to me, cutting through, as it does,

artificial barriers to relief that have resulted from overextension of the doctrine of surrender in its

relation to rent… I see no logic in a conclusion that, by electing to terminate, the landlord has limited

the damages that he may then claim to the same scale that would result if he had elected to keep the

lease alive.7

5 Supra 2, at p. 572. 6 Buchanan v Byrnes (1906), 3 CLR 704. 7 Supra 2, at p. 575-576.

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Justice Laskin also noted that this is apparently the majority American view as well,

lending authority to the view that when a lessee abandons a lease, in accordance with the doctrine

of anticipatory breach, the lessor may sue for all of its damages without waiting until the end of

the term.8

Highway Properties changed the landscape of Canadian commercial real estate law by

importing contractual legal principles into property law issues. Justice Laskin affirmed that a

fourth remedy allowing landlords to sue for prospective damages while also re-possessing their

leased property from a repudiating tenant was available to landlords. Prior to Highway Properties,

landlords were also not under a duty to mitigate their losses following a tenant’s repudiation of a

lease. Despite only a brief mention of mitigation, Justice Laskin’s decision also imports a duty of

mitigation by the landlord, in accordance with contractual law principles, when there is a re-letting

on the tenant’s account.

Part II – Case Law Update

Penretail Management Ltd. v 2380462 Ontario Inc.9

In January 2016, the Ontario Superior Court (“ONSC”) heard a case concerning a signed

lease agreement between Penretail Management Ltd., as landlord, and 2380462 Ontario Inc.

(“Bolton Health”), as tenant. The lease provided for a ninety-day fixturing period, during which

Bolton Health was to commence construction work in the unit and, at the end of construction and

the fixturing period, commence business operations and begin paying rent.10 Bolton Health took

no steps to start or finish construction work in the unit and did not commence business or pay rent.

2380460 Ontario Inc., Erin Mills Medical Centre Inc. and Gary Cardoso (collectively with Bolton

Health the “Defendants”) had signed indemnity agreements in favour of the landlord.11 There

was no dispute that Bolton Health had breached the terms of the lease. The landlord brought a

motion for summary judgment against the Defendants for damages owing under the lease.12 The

ONSC found for Penretail on the basis that that there was no genuine issue requiring trial and that

the landlord had given proper notice that it would be terminating the lease and seeking damages.13

The landlord was awarded $567,610.60 in damages. 14

Northridge Property Management Inc. v Champion Products Corp.15

In April 2016, the ONSC heard a case involving Northridge Management Inc. a property

management company, as landlord, and Champion Products Corp., a cleaning supply and party

supply company, as tenant.16 In 2011, the tenant had signed an offer to lease certain premises from

8 Ibid, at p. 576. 9 2016 ONSC 600. [Penretail] 10 Penretail, at paras 1-3. 11 Ibid., at para 2. 12 Ibid., at para 4. 13 Ibid., at para 26. 14 Ibid., at para 41. 15 2016 ONSC 2715. [Northridge] 16 Northridge, at para 1.

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the landlord. The tenant moved into the property in November 2011 and vacated the premises

later that same month. The landlord sought damages for breach of contract, as the term of the lease

was five years.17 The tenant argued that there was no binding agreement, or in the alternative that

there was fundamental breach of the agreement.18 The tenant claimed that the landlord had failed

to ensure that the property was fit for the operation of their business.19

The ONSC considered the discussion leading up to the offer to lease and the actual

documentation of such discussions and found that although the discussion leading up to the offer

was not clear, the offer to lease was comprehensive. The offer to lease contained the term, a

description of the premises, the rent, name of the parties, the commencement date, an arbitration

clause, the floor plan, the scope of the landlord’s work and a standard form of lease that the tenant

was to execute. Accordingly, the offer to lease was held to form a complete agreement. The court

also considered the deficiencies the tenant had complained of. The offer to lease stipulated that the

premises were to be accepted on an “as is, where is” condition except for the scope of work to be

completed by the landlord.20 The only documentation of the tenant’s complaints were in the form

of an email and there was evidence that these concerns were addressed prior to Champion moving

out. The issues raised by Champion at trial had not been raised previously and were dismissed as

a result.21

The ONSC found in Northridge’s favour and ordered damages in the amount of

$233,146.30, less any rebate for property taxes that the landlord was entitled to with interest

calculated at a rate of 12 percent per annum, compounded monthly.22 The landlord had mitigated

its losses and re-let the majority of the premises.23 The court relied on Highway Properties in

determining that the landlord was correct in its calculation of damages, namely that damages

included the present value of the unpaid future rent for the unexpired period, less the actual rental

value received through mitigation.24

Boyce v Labelle25

Boyce v Labelle is a motion for summary judgement in respect of a claim for rental arrears

and prospective losses during the unexpired portion of a repudiated lease.26 The landlord claimed

that the tenant wrongfully repudiated the lease before the end of the term.27 The tenant claimed

that there was inadequate parking for her customers, which, she submitted, was a material breach

of the lease.28

17 Ibid., at para 2. 18 Ibid., at para 3. 19 Ibid., at para 41. 20 Ibid., at para 34. 21 Ibid., at para 49. 22 Ibid., at para 100. 23 Ibid., at para 79. 24 Ibid., at para 81. 25 2016 ONSC 3503. [Boyce] 26 Boyce, at para 1. 27 Ibid., at para 1. 28 Ibid.

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The ONSC found that the tenant was not justified in repudiating the lease.29 The landlord

had terminated the lease on notice to the tenant that it would be claiming damages for rent arrears

and the lost rent arising as a result of the repudiation of the lease. The ONSC held that this notice

was sufficient to meet the requirements of Highway Properties.30 The motion was granted in part

and the tenant was ordered to pay $22,957.46, representing rent arrears.31 The claim for lost future

rent was ordered to proceed to a summary trial.32

Stearman v Powers33

Stearman v. Powers is a case from British Columbia. Randall Stearman, as landlord, and

Penny Faith Powers operating as Walkabout Casual Wear, as tenant, had entered into a five-year

lease.34 The tenant operated a retail clothing business and had repeatedly complained about a

strong odour in the unit that affected her ability to run her business.35 Approximately one year

after the lease was signed, the tenant stopped paying rent and vacated the premises. The trial judge

found that the unpleasant odour complained of was a breach of the landlord’s covenant to provide

quiet enjoyment and awarded the tenant $18,861.60 in damages.36 The British Columbia Court of

Appeal (“BCCA”) overturned the lower court’s finding on the basis that the tenant could not prove

any loss of sales or profits due to the odour. Additionally, the BCCA noted that the tenant had

made no effort to determine the source of the odour.37

In its analysis, the British Columbia Supreme Court (“BCSC”) considered the Highway

Properties decision. It noted that the tenant returned the keys to the landlord, who then used the

keys to show the premises to prospective tenants, and later to repair plumbing, the BCSC held that

the landlord’s conduct demonstrated that he treated the lease as at an end.38

The BCSC found that the landlord had not provided clear notice of his intent to re-let the

property as an agent for the tenant nor had he insisted on the tenant continuing to pay rent for the

unexpired term of the lease. Accordingly, he had exercised the second option in Highway

Properties thereby retaining merely the right to claim for rent accrued to the date of termination

of the lease.39 The landlord had retained a deposit for first and last month’s rent and two months’

additional rent, GST and a security deposit, thus the claimed amount was set off against the rent

owing giving rise to damages of $62.28.40

29 Ibid., at para 6. 30Ibid., at paras 9-10. 31 Ibid., at 7. 32 Ibid., at para 13. 33 2016 BCSC 263. [Stearman] 34 Stearman, at para 1. 35 Ibid. 36 Ibid., at para 5. 37 Ibid., at para 6. 38 Ibid., at paras 89-90. 39 Ibid., at paras 40-42. 40 Ibid., at paras 93-94.

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M. Thompson Holdings Ltd. v Haztech Fire and Safety Services41

In September 2016, the Saskatchewan Court of Queen’s Bench (“SKQB”) heard a

summary judgement motion concerning the breach of a ten-year lease between M. Thompson

Holdings Ltd., as landlord, and Haztech Fire and Safety Services Inc., as tenant.42 The tenant

advised the landlord that it would be breaching the lease. The landlord responded with a formal

demand for outstanding rental arrears. At issue in the action was the calculation of damages arising

from the breach.43 The tenant asserted that the landlord had failed to take all reasonable steps to

mitigate its loss, even though the landlord had successfully re-let 67.93 percent of the premises to

two separate tenants for ten and five year terms. The basis for the tenant’s claim was that its

landlord had refused certain purchase offers and declined to lease the property to certain tenants.44

The SKQB allowed the application in part, but found that the tenant had not established that the

landlord had failed to mitigate its damages. The assessment of damages for future rent owed past

November 30, 2015 was referred to court.45

Pickering Square v. Trillium College Inc.

Pickering Square v. Trillium College Inc. contains one of the most comprehensive

discussions of the application of the RPLA in recent history. Trillium College Inc. (the “Tenant”)

leased space from the plaintiff, Pickering Square Inc. (the “Landlord”). The Landlord sought

damages for the Tenant’s failure to comply with certain obligations under its lease. The Tenant

moved for summary judgment on grounds that all arrears of “rent” had been paid and that all other

claims were statute barred by the passing of the limitation period set out in the Limitations Act,

2002. The Landlord, not surprisingly, took the position that the payments were “rent” and

therefore governed by either the 6 or 10-year period set out in the RPLA.

The Tenant’s motion was successful in part. The reason for that success was that Justice

Mew found that many of the payments sought by the landlord were not “rent”, as that term is used

in the RPLA. This was despite the lease’s apparent intent that all payments be treated as “rent”

for the purpose of that contractual relationship. Notwithstanding the definitions in the lease,

Justice Mew concluded that to include all payments within the definition of “rent” under the RPLA

would defeat the legislative intent behind both that Act, and the Limitations Act, 2002, which act

is intended to establish a broad, comprehensive set of rules for all claims for injury, loss or damage,

except those falling under specified exceptions.46 As such, Justice Mew concluded that the

Limitations Act, 2002, governed.

41 2016 SKQB 294. [Haztech] 42 Haztech, at para 1. 43 Ibid., at paras 3-6. 44 Ibid., at para 21. 45 Ibid., at para 43. 46 Pickering at para. 40.

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The Appeal Decision

The Pickering Square decision was upheld by the Court of Appeal, without comment on the

two-year vs six-year limitation issue. The Court’s decision focuses primarily on the issue of

continuing breach. In its decision, the Court found as follows:

Trillium’s argument that breach of its covenant to operate its business continuously established

a complete cause of action as of October 1, 2008 overlooks the consequences of its breach.

In the face of Trillium’s action – a serious breach or repudiation of the lease – Pickering had

an option. It could either cancel the lease or affirm it and require performance: see

Highway Properties Ltd. v. Kelly, Douglas & Co. Ltd., [1971] S.C.R. 562, at p. 570; TNG

Acquisition Inc. (Re), 2011 ONCA 535, 107 O.R. (3d) 304, at para. 33.

The election to cancel a contract as a result of a serious breach or repudiation brings a contract

to an end and relieves the parties of any further obligations under it. The contract is not void

ab initio: the innocent party may sue for damages for breach of the contract.

By contrast, if the innocent party elects to affirm the contract despite the serious breach or

repudiation, the contract remains in effect and the parties are required to perform their

obligations under it. The innocent party retains the right to sue for past and future

breaches: Guarantee Co. of North America v. Gordon Capital Corp., [1999] 3 S.C.R. 423, at

para. 40.

Pickering elected not to cancel the lease following Trillium’s October 1, 2008 breach. It

affirmed the lease and, as a result, the parties were required to perform their obligations

under it as they fell due.

Trillium could have resumed performance of its obligations at any time prior to the end of the

term of the lease by carrying on its business at the leased premises in accordance with the

terms of the covenant. Had it done so, Pickering would have been required to accept Trillium’s

performance and would have been unable to terminate the lease in the absence of a further

serious breach or repudiation. Trillium would have been liable for damages from the date of

its October 1, 2008 breach until the date it resumed the performance of its covenant

obligations, but would not have incurred liability for breach of the lease beyond that date.

[Emphasis added.]

In short, Justice Mew’s decision in Pickering, does not affect the long-standing principle

described in Highway Properties: in the face of a serious breach, the innocent party has the option

of either cancelling the contract and suing for damages, or keeping the contract alive and insisting

on performance. Once Pickering Square elected not to cancel its lease with Trillium, both parties

remained obligated to perform the contract and each day that Trillium failed to perform these

obligations (in this case, by failing to operate its business), a new cause of action arose.

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TAB 13

Tenants Just Wanna Have Fun-damental Breach

David Thompson WeirFoulds LLP

Robert Eisenberg WeirFoulds LLP

February 22, 2017

THE SIX-MINUTE


Tenants Just Wanna Have Fun-damental Breach

The State of the Doctrine of Fundamental Breach in Canadian Common Law

David R. Thompson

Partner, WeirFoulds LLP

Robert A. Eisenberg

Associate, WeirFoulds LLP

A Brief History of Fundamental Breach

Canadian commercial contracts contain three sets of "promises": warranties, intermediate

terms, and conditions. Warranties (often also referred to as covenants) are the "lesser" promises

of a contract, the breach of which will entitle the innocent party to a claim for damages but not to

terminate the contract. Conversely, a condition is a "major" promise, which, if breached, entitles

(but does not require) the innocent party to end the contract and claim damages. Intermediate

terms – as suggested by their name – have variable legal consequences depending on the

seriousness of the breach.1

A "fundamental breach" occurs when a condition in a contract (or a lease) – which goes

to the heart of the contract – is breached. In Hunter Engineering Co. v Syncrude Canada Ltd., the

Supreme Court of Canada stated that:

A fundamental breach occurs where the event resulting from the failure of one

party to perform a primary obligation has the effect of depriving the other party

of substantially the whole benefit that the parties intended should obtain from

the contract. Fundamental breach represents an exception to the rule that the

contract continues to subsist and that damages be paid for the unperformed

obligation for it gives the innocent party an election to put an end to all

unperformed primary obligations of both parties. This exceptional remedy is

available only where the very thing bargained for has not been provided.2

[emphasis added]

A claim for fundamental breach must be made on a balance of probabilities. If

fundamental breach is not proven, an innocent party will be obligated to continue to perform the

contract but may be entitled to sue for damages; if fundamental breach is proven, the innocent

party will have the option to affirm the contract and sue for damages, or to treat the contract as at

an end and also sue for damages.

1 For a more fulsome discussion, please see Paul M. Perrell, "Tenant's Remedies and the Fundamental Breach", in

Tenant's Rights and Remedies in a Commercial Lease: A Practical Guide, 2nd ed, Harvey Haber, 2014. 2 [1989] 1 SCR 426.

13 - 1

Fundamental Breach in the Leasing Context

At its core, fundamental breach is a contractual principle; however, since commercial

leases are both real property conveyances and commercial contracts, it is applicable in the

context of commercial leasing law.3

One of the earliest applications of fundamental breach to the leasing context by a higher

court in Canada occurred in the British Columbia Court of Appeal's decision in Lehndorff Can.

Pension Properties Ltd. v Davis Mgmt. Ltd.4 There, the Court of Appeal held that a landlord's

unreasonable refusal to consent to an assignment of the lease "effectively depriv[ed] D.M.L. of

the economic benefit and enjoyment of the balance of D.M.L.'s estate in the Burrard leases", and

constituted "a breach of a fundamental term of those leases amounting to anticipatory repudiation

on the part of Lehndorff" entitling the tenant to treat the lease as at an end.5 This case was

especially significant in that it extended the right to terminate a lease to tenants where a landlord

committed a fundamental breach, and not just to innocent landlords in cases of a tenant's breach.

As stated in Hunter Engineering and further alluded to in Lehndorff, fundamental breach

in leasing requires that the tenant be deprived of "substantially the whole benefit" of that for

which it bargained; it is not enough for there to be mere inconvenience or for the breach to be

temporary. Rather, the breach by the landlord must be such as to permanently deprive the tenant

of (at least) the value of its tenancy.

In 2008, the Ontario Court of Appeal reiterated its earlier five-part analysis for evaluating

whether a fundamental breach has occurred:

1) the ratio of the party's obligations not performed to the obligation as a whole;

2) the seriousness of the breach to the innocent party;

3) the likelihood of repetition of such breach;

4) the seriousness of the consequences of the breach; and

5) the relationship of the part of the obligation performed to the whole obligation.6

In that case, the tenant (Spirent) had entered into a sublease with a third party (Quake) for

premises in an office building. However, there were construction delays caused by weather and

construction errors, and Quake's occupancy date was delayed for six weeks. Quake then advised

Spirent that it would not continue with the sublease agreement, so Spirent accepted Quake's

"repudiation" of the sublease and mitigated its damages by subleasing to another party at a lower

rent. Spirent then sued Quake for the difference in rental rates. At trial, the judge found that the

3 See Highway Properties Ltd. v Kelly, Douglas and Co. Ltd., [1971] SCR 562. 4 (1989), 59 DLR (4th) 1 (BCCA) at paras 33-48. 5 Ibid at para 48. 6 Spirent Communications of Ottawa Limited v Quake Technologies (Canada) Inc., 2008 ONCA 92 at para 36.

13 - 2

delay in possession was a fundamental breach and that the consequences to Quake were

"material", entitling Quake to treat the sublease as at an end without penalty.

The Court of Appeal rejected the trial judge's reasoning, on the basis that the trial judge

did not properly measure Spirent's breach against the correct standard of a fundamental breach

(depriving the innocent party of substantially the whole benefit of the contract). The court found

that the delay in the possession date did not constitute a fundamental breach: Quake's sublease

was for three years, and in that context, a delay in occupancy of six weeks was not so significant

that it amounted to deprivation of substantially the whole benefit of the sublease. Since there was

no fundamental breach by Spirent, Quake was not entitled to terminate the sublease, but itself

had repudiated the agreement, thereby entitling Spirent to damages.

This five-part test is inherently subjective and context-specific which makes it impossible

to create an exhaustive list of defaults which would/would not be fundamental breaches;

something that is a fundamental breach in one lease may not be a fundamental breach in another,

depending on the analysis set out above.

Moreover, the entirety of the benefit of the leased premises need not be denied to the

tenant so long as the tenant is prevented from using the leased premises for the purpose that was

fundamental to its leasing the premises in the first place. In Abraham v Coblenz Holdings Ltd.,7

the tenants operated a hair salon specializing in African hairstyling, but offering hair and beauty

services for all types of hair. Although the lease was silent as to the particular use permitted, the

landlord later sought to impose restrictions on the tenants, by preventing them from advertising

men's haircuts and limiting them to the cutting of men's hair to afro hairstyles, only in order to

protect the business of other nearby tenants. The trial judge found that these restrictions were a

fundamental breach of the lease entitling the tenants to treat the lease as at an end. On appeal, the

British Columbia Court of Appeal upheld the decision on the basis that:

It is, I think, unrealistic to view the commercial impact of the proposed restrictions as nothing

more than a matter of arithmetic, with the analysis turning on the proposition that only two of

twenty activities were restricted. The cutting of men's hair, in styles other than the Afro style, was

fundamental to the reason why the premises were rented and the nature of the business to be

carried on there.8

Another useful example of the uncertainty surrounding fundamental breach can be seen

in cases dealing with physical impediments to the use of the premises.

In 1723718 Ontario Corp. v MacLeod,9 the landlord argued that a 1941 decision by the

Court of Appeal limited a tenant to the right to sue for damage, but not to terminate the lease, in

cases where the landlord breached its covenant to repair and maintain the building's heating

system.10 Justice Heeney began by noting that the Court of Appeal's 1941 decision was pre-

Highway Properties, and so was determined based on the understanding that leases were solely

real property conveyances, rather than also contracts. The court continued by finding that the

7 2013 BCCA 512. 8 Ibid at para 19. 9 2010 ONSC 6665 [MacLeod]. 10 Johnston v Givens, [1941] OR 281-286 at para 10.

13 - 3

landlord's failure to repair a boiler serving the leased premises was a fundamental breach, since

the temperature drop was so severe that it prevented the tenant from continuing to operate his

medical practice from the leased premises, thereby depriving him of substantially the whole of

the benefit that he had contracted for in the lease (the premises could no longer be used as a

medical office and would continue to be unusable until the boiler was replaced – which never

happened – or until winter ended)11.

Conversely, in Kenny Alwyn Whent Inc. v J. Mao Dentistry Professional Corp.,12 the

court held that mice and spider problems in the leased premises did NOT amount to a

fundamental breach, but rather simply an "annoyance". In making its decision, the court found

that the tenant continued to operate his dental practice from the leased premises and that no

patients of the tenant were made sick from being there. Since the tenant continued to operate his

practice from the leased premises, the court held that the landlord's failure to keep the premises

free of mice and spiders clearly did not deprive the tenant of substantially the whole of what he

bargained for and was therefore not a fundamental breach. The tenant also made additional

claims that the landlord's failure to properly remove garbage from the common areas and its

overcharging of the tenant through year-end reconciliations constituted fundamental breach by

the landlord; both of these claims were also rejected.

Furthermore, in order for an innocent party to be entitled to treat the lease as at an end in

the event of a fundamental breach by a landlord, the party must elect to terminate the lease and

communicate this choice to the offending party within a reasonable time.13 Put quite clearly by

the British Columbia Court of Appeal:

An election between inconsistent rights must, however, be made promptly and communicated to

the other side. Parties cannot adopt a "wait-and-see" approach to fundamental breach, as their

election simultaneously determines the position of the counterparty to the contract. Either the

contract is not repudiated and the rights and obligations under it still exist, or the contract is

rescinded because of an accepted repudiation and then very different rights come into being in

respect of a cause of action. In either case, parties must have prompt notice of their position.14

Again, while the analysis for fundamental breach is inherently context-specific and very

few hard and fast rules can be made, the case law has provided some guidelines for the types of

breaches that can be considered "fundamental" breaches, at least in specific contexts:15

Cases where Fundamental Breach was Found

Lehndorff Canadian Pension Properties Ltd. v Davis Management Ltd. (1989), 59 DLR

(4th) 1 (BCCA): Unreasonable refusal by the landlord to consent to an assignment of the

lease on grounds not supportable under the lease;

11 MacLeod, supra note 9 at para 100. 12 2016 ONSC 584. 13 Ibid at para 53. 14 A & G Investment Inc. v 0915630 B.C. Ltd., 2014 BCCA 425 at para 38. 15 The authors would like to thank Jordan Stone, an articling student at WeirFoulds LLP, for his assistance with

compiling the following case law.

13 - 4

Berhe v Coblenz Holdings Ltd., 2013 BCCA 512: The landlord imposed restrictions on

the tenant's intended business (African hairstyling) by preventing them from advertising

men's haircuts and limiting the cutting of men's hair to "Afro hairstyles";

1723718 Ontario Corp. v MacLeod, 2010 ONSC 6665: The landlord refused to fix a

broken boiler, rendering the premises too cold for the tenant to conduct his medical

practice;

Canadian Western Bank v 702348 Alberta Ltd., 2010 ABCA 227: The tenants had agreed

to leases with a specified occupancy date, but construction delays meant that the tenants

would not be able to take possession until at least 15 months after the specified date;

Bassiouny v Lo (2008), 79 RPR (4th) 179 (ONSC): Fire and smoke damage rendered the

premises unfit for the tenant's business and the landlord refused to repair the damage or

retain an architect to make an independent assessment of damages. The fire damage

caused problems to the tenant's day-to-day business that were so extensive that they

prevented the tenant from carrying on business; and

Sun Cheong Holdings B.C. Ltd. v Gold Ocean City Supermarket Ltd., 2000 BCSC 574:

Failure to repair leaks of contaminated liquid and sewage causing obnoxious smells,

contamination of food products, and unsafe working conditions. The landlord failed to

repair the leaks for months and the tenant's business required meeting health and safety

standards and attracting customers.

Cases where Fundamental Breach was NOT Found

Spirent Communications of Ottawa Limited v Quake Technologies (Canada) Inc., 2008

ONCA 92: Delay of occupancy date by 6 weeks for 3-year lease was not a fundamental

breach;

Kenny Alwyn Whent Inc. v J. Mao Dentistry Professional Corp., 2016 ONSC 584: The

mice, spiders, and garbage were an annoyance, but the tenant continued to carry on his

practice for years after problems arose, so the problem did not prevent the tenant from

carrying on business, which was the heart of the contract;

Statti Investments Ltd. v Baresa Kitchen Cabinets Inc., 2014 ONSC 2466: Multiple

incidents of flooding occurred in the premises and the tenant immediately moved out

after final incident of flooding. The tenant claimed significant damages from flooding,

but put forward no evidence to substantiate its claim. The tenant made no effort to

investigate the source of the flood or consider how to rectify the problem. The timing of

the move to a different unit suggested that the tenant did not prudently weigh whether he

could continue his business in the unit; and

Northridge Property Management Inc. v Champion Products Corp., 2016 ONSC 2715:

(1) The property was zoned for industrial uses only, meaning the tenant could not carry

on business; and (2) there were significant deficiencies in renovations. (1) Zoning placed

no limitation on ability of tenant to carry on business. The issue was discussed between

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the parties and was not raised by the tenant until it occupied the premises; (2) the tenant

could have fixed the renovation issues and advanced a claim against the landlord. The

tenant's claims were inconsistent, and several claims were not the responsibility of the

landlord under the lease.

Fundamental Breach in Quebec

Although largely beyond the scope of this paper, fundamental breach can also be found in

Quebec law. The Civil Code of Quebec states that:

Where the obligations arising from a synallagmatic contract are exigible and one of the parties

fails to perform his obligation to a substantial degree or does not offer to perform it, the other

party may refuse to perform his correlative obligation to a corresponding degree, unless he is

bound by law, the will of the parties or usage to perform first.16

Similarly, there is a specific clause dealing with leases in Quebec:

The nonperformance of an obligation by one of the parties entitles the other party to apply for, in

addition to damages, specific performance of the obligation in cases which admit of it. He may

apply for the resiliation of the lease where the nonperformance causes serious injury to him or, in

the case of the lease of an immovable, to the other occupants.17 [emphasis added]

Moreover, the Quebec Court of Appeal utilized article 1863 in its 2003 ruling in Hôtel de

l'Aéroport de Mirabel inc. c Aéroports de Montréal.18 In that case, the Mirabel Airport Hotel

sued the Mirabel Airport Authority and attempted to cancel its lease on the basis that the Airport

Authority fundamentally breached the terms of its lease with the hotel when it closed Mirabel

Airport to passenger flights. The Court of Appeal found that while not explicitly stated in the

lease, the existence of sufficient passenger traffic through the airport was an implicit but clear

condition of the tenant entering into the lease, and maintained that the tenant had the right to

cancel the lease for fundamental breach causing "serious injury".

A Note on the Tercon Case

In 2010, the Supreme Court of Canada rendered a decision19 in which the Court largely

did away with the doctrine of fundamental breach in the context of exclusion of liability

clauses.20 As other commentators have noted, however, the decision has caused some confusion

among practitioners who are unfamiliar with the differing contexts in which fundamental breach

operates.

In Canada, fundamental breach can be used to describe a legal doctrine whereby courts

relieve an innocent party of the limitation of liability imposed by an exclusionary clause written

into the contract which attempts to exclude liability for a breach of the contract by the offending

party. It was the doctrine of fundamental breach in this context that the Supreme Court attempted

16 1991, c 64, a 1591. 17 Ibid, a 1863. 18 [2003] RJQ 2479 (CA). 19 Tercon Contractors Ltd. v British Columbia (Transportation and Highways), 2010 SCC 4. 20 Ibid at para 62.

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to lay to rest. While this use of fundamental breach is somewhat relevant to commercial leasing

lawyers and should be noted, the Supreme Court's ruling was context-specific and does not

impact the doctrine of fundamental breach in a leasing context, as set out above.

Nevertheless, there remains some confusion in Ontario about the efficacy of fundamental

breach post-Tercon.

In 1328773 Ontario Inc. o/a Angling Outfitters v 2047152 Ontario Limited, Justice Leach

wrote the following about fundamental breach:

I doubt that such arguments survive the Supreme Court of Canada’s decision in Tercon

Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1

S.C.R. 69, rejecting "fundamental breach" analysis in favour of adherence to the wording of freely

negotiated contracts barring some paramount consideration of public policy sufficient to override,

(although I appreciate that the Supreme Court’s decision was focused on the enforceability

of exclusion clauses).21 [emphasis added]

While Justice Leach went on to find that the innocent party (the landlord in this case) was not

deprived of "substantially the whole" of the contract's benefit, the questioning of whether the

entire doctrine of fundamental breach bears further watching.

Well That Was Interesting, But How Do I Deal With This In My Drafting?

Unfortunately, regardless of whether an obligation is labeled as a condition or a covenant

in a lease, courts will ultimately look not to the label chosen by the parties, but to the effect of

the contractual term.22 For example, while leases often include "covenants with a right of re-

entry in the case of non-payment of rent", these terms – either within the lease itself or through

statute – provide the landlord with the right to terminate the lease if they are breached. Therefore,

despite being labeled as covenants, they are really conditions of the lease (which, practically

speaking, makes sense since the lease is conditional on the landlord receiving rent!).

The simple – though not always easy – way to work around this problem is not through

the wording of the nature of the obligations themselves (as above), but rather through explicitly

stating what a party's remedies are in the event of a breach of an obligation under a lease.

For example, if it is critical to a tenant that it obtain possession of the leased premises

prior to a certain date, it would behoove the tenant's lawyer to write-in a specific right to

terminate the lease if the possession date has not occurred prior that day. Conversely, a landlord

may wish to specify that in the event that possession is delayed, the tenant's only remedy will be

the right to sue for damages. Practically speaking, the parties will not follow this method for

every obligation, but it could be useful in situations where there is uncertainty or where an issue

is particularly important to either party.

21 2013 ONSC 4953 at para16. 22 Jorian Properties Ltd. v Zellenrath et al (1984), 46 OR (2d) 775 (CA).

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Conclusion: Alive & Well, but Extremely Narrow

While the doctrine of fundamental breach – and a tenant's associated right to treat the

lease as at an end – remains alive and well in Canada, the subjective and context-specific nature

of the test for fundamental breach means that tenants (and their lawyers!) should think carefully

about deciding whether to rely on fundamental breach as a basis for terminating a lease. While

the specific nature of the alleged default may vary, the key factor that a tenant must prove in

making its claim is that it was denied of substantially the whole benefit of the lease; otherwise,

the tenant will be forced to keep performing its obligations under the lease and will be limited to

suing the landlord for damages.

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TAB 14

Issues in Commercial Leases to and from

Municipalities

Jack Payne, Legal Department,

City of Toronto

February 22, 2017

THE SIX-MINUTE


ISSUES IN COMMERCIAL LEASES TO AND FROM MUNICIPALITIES

By: Jack Payne, Solicitor, Real Estate Law, City of Toronto1

I. INTRODUCTION

Municipalities in Ontario are creatures of statute and are governed, in the case of the City of Toronto, by

the City of Toronto Act, 2006 (the “COTA”),2 and in the case of all other municipalities, by the Municipal

Act, 2001 (the “MA”). 3 Both statutes, as well as certain other municipal legislation like the Municipal

Freedom of Information and Protection of Privacy Act ("MFIPPA"),4 contain various provisions which

apply to commercial leases entered into by municipalities, either as landlord or tenant. In addition,

municipalities, as governmental entities, typically enact a wide variety of by-laws, policies, rules and

procedures governing many aspects of their conduct, including the entering into of leases of land.

The purpose of this paper is to provide a high-level overview of some of the statutory provisions,

policies and procedures that affect commercial leases where municipalities are either landlord or

tenant. The focus will be on those matters that are unique or particular to municipal leases.

Municipalities are, of course, subject to laws of general application that are often important to

commercial leases (for example, environmental protection legislation), but this paper is not intended to

discuss those types of issues.

Further, the list of matters discussed in this paper is by no means comprehensive, as any number of

statutory provisions, policies or procedures may be engaged in any given lease transaction, depending

on its terms and conditions. There will also be a great deal of variation in policies and procedures

between different municipalities, and thus between the terms and conditions of their respective lease

documents. But the issues discussed will, hopefully, provide a useful reference, whether you are acting

for, or across the table from, a municipality in a commercial lease negotiation.

A caveat: as my experience is as a solicitor with the City of Toronto, most of this discussion will be

focussed on the COTA and Toronto policies and procedures, and how they affect and are incorporated

into our lease transactions and documentation. However, the COTA provisions discussed in this paper

have analogous provisions in the MA, which I’ve identified. Also, some of the City of Toronto policies and

procedures discussed may be similar to those of other municipalities.

II. AUTHORIZATION OF THE LEASE TRANSACTION

1. MUNICIPAL COUNCIL AND DELEGATED AUTHORITY

Both the MA and the COTA provide that the powers of a municipality shall be exercised by the municipal

council, and shall be exercised by by-law unless the municipality is specifically authorized to do

1 I gratefully acknowledge the assistance of Graham Thomson, Student-at-Law, in preparing this paper. 2 SO 2006, c 11, Sch A [COTA]. 3 SO 2001, c 25 [MA]. 4 RSO 1990, c M.56 [MFIPPA].

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otherwise.5 Therefore, when acting in relation to a municipal lease transaction, it is critical to ensure

that the lease is properly authorized. The requirement for municipal council is a key consideration from

a timing perspective, as councils typically meet only on specified dates and there are often various

procedural steps required before a matter is even brought before council and the necessary by-law

passed.

However, both the COTA6 and the MA7 confirm the ability of municipalities to delegate authority in

administrative (as opposed to legislative or quasi-judicial) matters, subject to various limitations. In the

City of Toronto, many lease transactions may now be approved at the staff level, pursuant to a 2010

delegation of authority by City Council regarding certain real estate matters, as subsequently amended.8

Pursuant to this delegation, leases where the City is landlord or tenant may be authorized by certain

staff positions, where the total compensation does not exceed the thresholds provided (i.e., $1 million

for Director of Real Estate Services, $3 million dollars for Chief Corporate Officer, $5 million for Deputy

City Manager and Chief Financial Officer and $10 million for City Manager). The delegation of authority

is subject to various general conditions, including several that are specific to leases.9 Also, wherever

approving power has been delegated, staff may determine that the matter is of such special interest

that it should be returned to City Council for determination.

Despite these qualifications, the majority of lease transactions involving the City of Toronto, whether as

landlord or tenant, are now approved pursuant to this delegated authority. This has significantly

streamlined the approval process for these transactions. But any transactions falling outside of the

parameters of the delegation of authority (for example, very high value leases or most leases where the

City is landlord granted at below fair market rent)10 will still need City Council approval. Also, as noted,

transactions that would otherwise fall within the delegation’s parameters may be referred to City

Council where staff judges the matter to be of special interest.

It should be noted that, in order to promote transparent and accountable decision making, both statutes

require that municipal council meetings be public, subject to limited prescribed exceptions.11 Similarly,

where the City of Toronto is transacting using delegated authority, it maintains both a paper and web-

based register of Delegated Approval Forms (DAFs) for such transactions, including leases.12 Therefore, a

5 COTA, supra note 2, s 132; MA, supra note 3, s 5. 6 Supra note 2, s 20. 7 Supra note 3, s 23.1. 8 See EX43.7, adopted by City Council on May 11 and 12, 2010, as amended by GM24.9, adopted by City Council on October 8, 9, 10 and 11, 2013, DAF 2013-307, DAF 2014-087, and further amended by EX 44.22 "Strategic Property Acquisitions" adopted by City Council on August 25, 26 27 and 28, 2014. 9 Among the general conditions are: the local Councillor is to be consulted; delegated authorities are subject to all policies, statutes and laws; documents must be approved the City Solicitor; financial commitments are subject to budget being available; property interests are to be granted at market value unless specifically authorized (and subject to anti-bonusing provisions); and several conditions regarding calculation of compensation in leasing matters. 10 Below market leases with a term of up to 12 months can be authorized by delegated authority, subject to anti-bonusing provisions and any other applicable laws or policies. 11 COTA, supra note 2, s 190; MA, supra note 3, s 239. 12 http://www1.toronto.ca/wps/portal/contentonly?vgnextoid=2f3be9d747471410VgnVCM10000071d60f89RCRD.

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party contracting with the City should keep in mind that the terms and conditions of the lease

transaction, including financial terms, will, unless one of the statutory exceptions applies, be a matter of

public record.

2. REQUIREMENTS FOR DISPOSAL OF LANDS

Both the COTA13 and the MA14 require municipalities to adopt and maintain policies with respect to

various matters, including the sale and other disposition of land. In Toronto, this is relevant to long term

leases where the City is landlord, since the City’s policy defines “Sale” as “A commitment to sell or

otherwise dispose of land, including a disposal by way of a lease of 21 years or longer.” 15 Therefore,

such leases will be subject to the City’s disposal policy.16

This has practical implications since, before the lease can be entered into, the land subject to the lease

must be declared surplus and the intended manner of disposal be approved.17 Under the policy,

authority for both of these steps is delegated to the Chief Corporate Officer, following consultation with

the local Councillor (and provided the Councillor does not require the matter to be determined by City

Council). At least one appraisal of the fair market value of the land must be obtained and notice must be

given to the public.18 Furthermore, prior to the surplus declaration, the City generally undertakes an

extensive circulation process under which the City’s departments, agencies and corporations, as well as

other parties such as utilities and school boards, are given an opportunity to express interest in the

property. The timing required for these processes must be taken into account by the parties to the

transaction.

Where a long term lease involves lands owned by the City of Toronto that are designated as “Parks and

Open Space Areas” (“POSA”) under the City’s Official Plan, additional considerations arise.19 The Plan

prohibits the sale or disposal of City owned POSA lands, unless they are exchanged for other nearby land

of equivalent or larger area and comparable or superior green space utility,20 or unless they are subject

to a site-specific exemption.21 If neither of these exceptions apply, a party wishing to enter into a lease

with a term of 21 years or greater would need to apply for and obtain an Official Plan amendment to

either add a site-specific exemption to the lands or to remove them from the POSA designation. This

application must be adopted by City Council based on staff recommendation contained in a Planning

Report. Note that the lands would also need to be declared surplus, as discussed above.

3. THE CITY AS MUNICIPAL CORPORATION

When a municipality enters into a lease as landlord or tenant, it is acting as the holder of an interest in

land (either leasehold or freehold). It is important to distinguish the covenants and obligations of the

13 COTA, supra note 2, s 212(1). 14 MA, supra note 3, s 270(1). 15 Toronto Municipal Code, Chapter 213, Real Property, Sale of, s 213-2 [Municipal Code]. 16 I have been advised by counsel for certain other municipalities that long term leases are considered sales or dispositions under their disposal by-laws. 17 Municipal Code, supra note 15, s 213-3. 18 Ibid, s 213-3, 213-7 19 City of Toronto, Official Plan, s 4.3, Policy 1. 20 Ibid, s 4.3, Policy 8. 21 Ibid, Chapter 7, Policy 265.

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municipality as landlord or tenant under a lease from its rights, duties and responsibilities as a

municipality. Therefore, City of Toronto leases typically contain a clause similar to the following:

Nothing in this Lease derogates from, interferes with, or fetters the exercise by the City of all of

its rights and obligations as a municipality (whether discretionary or mandatory), or imposes any

obligations on the City in its role as a municipality, and the City shall not be prevented from or

prejudiced in carrying out its statutory rights and responsibilities, including its planning rights

and responsibilities. Nothing in this Lease derogates from, interferes with, or fetters the

exercise by the City's officers, employees, agents, representatives or elected and appointed

officials of all of their rights, or imposes any obligations on the City's officers, employees, agents,

representatives or elected and appointed officials, other than as expressly set out in this Lease.

III. MATTERS RELATING TO RENT

1. MARKET VALUE REQUIREMENTS

When entering into a lease where the landlord is a municipality, it is important to be aware of the “anti-

bonusing” provisions of both municipal statutes.22 These sections prohibit the municipality from

assisting, directly or indirectly, any manufacturing business or other industrial or commercial enterprise

through the granting of bonuses for that purpose. The rationale for this is to prevent a municipality from

providing an unfair advantage to a private business or enterprise over its competitors,23 and to allow

municipalities to compete for such businesses on a level playing field.24 The provision is important in the

leasing context, since both statutes specifically prohibit the granting of assistance by leasing or selling

any property of the municipality at below fair market value. As this is a statutory requirement, it cannot

be overridden by the municipal council. Therefore, a municipality should have processes in place to

ensure that the financial terms of leases to these types of businesses reflect fair market value.

There are a number of statutory exceptions to the prohibition that are specifically applicable to leases.25

Furthermore, there is caselaw which indicates that leasing land at nominal monetary rent may not

constitute bonusing, if the lease is part of a larger commercial relationship between the municipality and

the private party that confers benefits to both parties, and that the courts will give a high level of

deference to good faith municipal decisions in this area.26 But in such cases, the municipality must be

able to demonstrate that the benefits obtained constitute fair market value for the tenancy.

22 COTA, supra note 2, s 82; MA, supra note 3, s 106. 23 Leo Longo & John Mascarin, A Comprehensive Guide to the City of Toronto Act, 2006 (Markham: Lexis Nexis Canada Inc., 2008) at 120. 24 See Friends of Lansdowne Inc. v Ottawa (City), 2012 ONCA 273 at para 40, 2012 CarswellOnt 5315 (WLCan) [Friends] 25 See e.g., COTA, supra note 2,s 84(6), MA, supra note 3, s 108(6) (with respect to small business programs); COTA, supra note 2, s 82(3), MA, supra note 3, s 106(3) (relating to community improvement projects under the Planning Act, RSO 1990, c P.13); COTA, supra note 2, s 252(3), MA, supra note 3, s 110(3) (regarding below market leases for municipal capital facilities). 26 See Friends, supra note 24, aff’g 2011 ONSC 4402 at paras 27-31, involving a complex public-private partnership, where the Court rejected the applicant’s contention that each element of the transaction should be analyzed separately, concluding that “an isolated provision cannot be interpreted as a prohibited bonus if that

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2. LEASES BELOW FAIR MARKET RENT

In both the COTA and the MA, the restriction on bonusing is immediately followed by a general power to

make grants. This power specifically includes the power to sell or lease land for nominal consideration or

to make a grant of land (subject to the bonusing restrictions).27 Therefore, it is open to a municipality to

enter into a lease with a tenant at below market value rent, as long as such lease would not contravene

the anti-bonusing provisions.

In fact, many municipalities frequently enter into below market leases with appropriate tenants. A

prudent municipality will have policies and procedures in place to guard against the potential for abuse

of such programs. In Toronto, City Council has implemented a Policy for City-owned Space Provided at

Below-Market Rent through a number of resolutions adopted from 2002 onwards.28 This Policy is based

on the principles of fairness (in the determination of eligibility of below market tenants and allocation of

space), openness and transparency (in that information regarding evaluation criteria is to be publicly

accessible) and accountability (in that City decisions regarding space allocation will be public). The

eligibility criteria have been standardized as follows:

The proposed tenant must have incorporated not-for-profit or charitable status;

The services, programs and initiatives of proposed tenant must primarily serve and benefit City

residents;

The proposed tenant’s activities must support City objectives; and

The proposed tenant’s mandate must not be the responsibility of a senior level of government.

The proposed tenant must pass a financial review, execute a Service Agreement setting out its

programming and performance standards, and meet various other requirements. A standardized form

of net lease has been developed which provides for consistency regarding term, additional rent, repair

obligations, indemnification and release and other matters. City Council approval is required for all

leases entered into under this policy.

interpretation is not available upon a reading of the contract as a whole.” In the trial decision, Hackland J. held, at para. 77: “I do not accept the submission that leasing land at a nominal rental as part of a public private partnership is per se an illegal bonus… The commercial arrangement must be viewed as a whole and the question asked as to whether the City has conferred an obvious advantage on the private developer … which is not balanced by a concomitant benefit to the City.”; see also Gilbert v Metropolitan Toronto (Municipality) (1985), 50 OR (2d) 654, 1985 CarswellOnt 672 (WLCan) (Ont Div Ct); and, though not specifically relating to leasing, Kendrick v Nelson (City), [1997] 31 BCLR (3d) 134, 1997 CarswellBC 83 (WLCan) (BC Sup Ct); and Nowak v Fort Erie (Town), 2012 ONSC 2152, 2012 CarswellOnt 5351 (WLCan). 27 COTA, supra note 2, s 83(2); MA, supra note 3, s 107(2). 28 Report No. 13, Clause 1, Policy and Finance Committee, adopted by City Council on October 1, 2 and 3, 2002; Report No. 5, Clause 14, Policy and Finance Committee, adopted by City Council on June 24, 25 and 26, 2003; Report No. 4, Clause 23, Policy and Finance Committee, adopted by City Council on April 12, 13 and 14, 2005; Community Services Committee Report No. 4, Clause 10, adopted by City Council on June 27, 28 and 29, 2006; Policy and Finance Committee Report 7, Clause 24, adopted by City Council on September 25, 26 and 27, 2006; EX13.3, adopted by City Council November 19 and 20, 2007; GM33.9, adopted by City Council August 25, 26 and 27, 2010; EX25.7, adopted by City Council on November 27, 28 and 29, 2012. Note the Policy is subject to ongoing review to ensure it continues to protect the City’s interests while best meeting the needs of appropriate tenants.

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3. MUNICIPAL CAPITAL FACILITIES AND TAX EXEMPTIONS

Both the COTA29 and the MA30 provide that a municipality may exempt all or part of taxes levied for

municipal and school purposes against land on which a “municipal capital facility” is or will be located,

provided that the land is owned or leased by a person who has entered into an agreement with the

municipality for the provision of such facility on such land, and that the land is to be entirely occupied

and used for a service or function that may be provided by the municipality. The municipality must pass

a by-law authorizing the agreement and the tax exemption. The purpose of this provision is to ensure

that facilities providing municipal services or functions are not subject to municipal taxes, merely

because they are located on lands that are otherwise subject to such taxes. This situation most

commonly arises where municipal facilities are located in premises leased by the municipality from third

parties, although it can also arise in situations where a third party is providing a municipal capital facility

on lands that it leases from a municipality.

Regulations passed under the Acts define the classes of municipal capital facilities that are eligible for

tax exemptions.31 These classes are exhaustive. Among the classes are: facilities used by the council;

facilities used for the general administration of the City; roads, highways and bridges; local

improvements and public utilities; facilities relating to policing, fire-fighting and law enforcement; public

libraries and several others. Parking facilities ancillary to most of the classes are also eligible for tax

exemption, as are general municipal parking facilities.

Municipal capital facilities may be the subject of a tax exemption even if they are contiguous or part of

land or works that are not municipal capital facilities.32 Therefore, leased premises within a larger

commercial building may be eligible for tax exemption, even though the remainder of the building is not.

In order to take advantage of these tax exemptions, a municipal tenant will likely insist that the lease

contain a clause requiring the landlord, upon request, to enter into a municipal capital facilities

agreement and to pass the full benefit of such exemption on to the municipal tenant (as opposed to, for

example, allocating the benefit of the exemption among all tenants of a building based on their

proportionate share of the rentable area). A typical clause from a City of Toronto lease is as follows:

The Landlord acknowledges that the Tenant [i.e. the City] has the right, in its discretion, to

request Council to exempt the Premises from taxation for municipal and school purposes if the

Tenant considers that the Premises may be used as a municipal capital facility. Provided Council

grants satisfactory approval to this effect, the Landlord agrees to enter at its sole cost and

expense into the necessary municipal capital facility agreement with the Tenant pursuant to

Section 252(1) of the City of Toronto Act, 2006, as amended, in a form acceptable to the City

Solicitor and legal counsel for the Landlord, and to pass the full benefit of such exemption on to

the Tenant during the entire period of any such exemption.

While this requirement may add somewhat to the transaction paperwork, the landlord should not be

particularly concerned, as it is only required to pass any benefit to the tenant during such time as the tax

exemption is in force. Thus, the landlord should not be prejudiced financially. In addition, the municipal

29 Supra note 2, s 252(6). 30 Supra note 3, s 110(6). 31 O Reg 598/06, s 2 (under COTA); O Reg 603/06, amended to O Reg 151/16, s 2, (under MA). 32 Ibid, s. 4.

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capital facilities agreement will likely be very straightforward and should require little, if any,

negotiation.

IV. MUNICIPAL FREEDOM OF INFORMATION AND PROTECTION OF PRIVACY ACT

While a full analysis of MFIPPA and its application to municipal leases is beyond the scope of this

discussion, a party contracting with a municipality should be aware of the provisions of this statute,

particularly if the transaction involves the disclosure to the municipality of sensitive information. At

minimum, the party should understand that a municipality is legally required to grant access to any

record (which is very broadly defined) in its custody or control, unless it falls within one of the statutory

exceptions or the head of the municipality decides that the request is frivolous or vexatious.33 A party

disclosing information to a municipality should be familiar with the statutory exceptions, in particular

those relating to Third Party Information, under section 10 of MFIPPA. If a party intends to argue that

particular information falls within this, or any other, exception, it should ensure that this is clearly

communicated to the municipality. But the party should be aware that the municipality or, upon appeal,

the Ontario Information and Privacy Commissioner, may nonetheless determine that such information

must be disclosed.

With respect to confidentiality of the lease transaction, please also keep in mind the matters discussed

under the heading “Municipal Council and Delegated Authority”, above.

V. OTHER POLICIES AND MUNCIPAL REQUIREMENTS

Municipalities typically enact a myriad of policies and procedures, many of which will be relevant to

leases. While it’s not possible to identify and discuss all of these, the following are several matters that

affect the City of Toronto’s lease transactions and documentation. While this list is not exhaustive and is

particular to City of Toronto leases, it will hopefully provide some indication of the wide variety of issues

that can affect municipal leases.

1. LABOUR TRADE CONTRACTUAL OBLIGATIONS IN THE CONSTRUCTION INDUSTRY

The City of Toronto is bound by province-wide collective agreements applicable to various trades in the

Industrial, Commercial and Institutional (ICI) sector of the construction industry.34 These agreements

require that unionized labour be used when the City is contracting out certain work. This applies

whether the work is undertaken by contractors engaged by the City, or subcontractors engaged by the

contractor. Compliance with these Labour Trade Contractual Obligations in the Construction Industry

(the “Obligations”) is managed and enforced by the City’s Fair Wage Office.35

The following types of work within the ICI sector are subject to the requirement to use unionized labour:

33 MFIPPA, supra note 4, s 4. 34 Municipal Code, supra note 15, Chapter 67, Schedule B 35 Ibid, Schedule A. The Fair Wage Office also manages the City’s Fair Wage Policy, but since that Policy only applies where the City is directly procuring construction services, it is less relevant in the leasing context.

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Insulation;

Bricklaying/masonry;

Carpentry;

Electrical;

Glazing;

Iron work;

Mechanical and pipe trades;

Painting; and

Sheet metal.

For this reason, where a lease involves significant construction work by the non-City party, the City will

typically include clauses requiring strict compliance with the Obligations during any construction and

provision of proof of compliance to the City. The City will likely also require the other party to release

and indemnify the City and its offices, employees, agents and elected and appointed officials from any

claims or losses resulting from any non-compliance with the Obligations.

The non-City party should ensure it has familiarized itself with the Obligations and how they apply to the

proposed work, as the requirement to use unionized labour may have an impact on the project’s

budget.

2. CARBON CREDITS POLICY

In 2013, the City of Toronto implemented a revised Policy concerning carbon credits and other

environmental attributes generated by City activities.36 The general intention of the Policy is to

recognize such attributes as financial assets and establish common administrative procedures by the

City’s divisions, agencies and corporations in the management of such attributes. Among other things,

the Policy requires City divisions, agencies and corporations to claim ownership of all environmental

attributes, including carbon credits, as a general provisions in its procurement processes, and to take

reasonable steps to safeguard this ownership in any contracts, procurements or other arrangements.

Accordingly, where City staff determine that a lease transaction could give rise to carbon credits or

other environmental attributes, a clause will be incorporated into the lease to comply with this Policy.

3. OTHER POLICIES

A wide variety of other policies can affect City of Toronto leases in certain circumstances, including the

Municipal Alcohol Policy,37 Prohibition on Selling or Distributing Bottled Water in City Facilities,38 the

prohibition of shooting ranges, gun clubs and the promotion of firearms use on City property,39 and even

36 EX31.15, adopted by City Council on May 7, 8, 9 and 10, 2013. “Environmental Attributes” is defined as a “broad range of rights and benefits associated with greenhouse gas emissions reduction, renewable electricity and energy efficiency activities including, but not limited to the environmental rights and benefits that may take the form of carbon credits, renewable energy certificates, green tags, white tags, labelled/certified "green" power, negawatts, water conservation credits, and related attributes.” 37 HL33.3, adopted by City Council on August 25, 26, 27 and 28, 2014. 38 PW20.1, adopted by City Council on December 1, 2 and 3, 2008. 39 EX21.2, adopted by City Council on June 23 and 24, 2008.

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a restriction on the release of large numbers of balloons from City property.40 You will commonly see

clauses in City of Toronto leases requiring compliance with these, and other, policies. If your client is

entering into a lease with the City of Toronto, it is important that it familiarizes itself with these policies,

and any other City requirements specified in the lease documents.

VI. CONCLUSION

Leases involving municipalities, whether as landlord or tenant, are subject to a number of unique legal,

policy and procedural requirements. It is hoped that this paper, while certainly not comprehensive, will

provide a useful reference for lawyers representing municipalities, or parties contracting with

municipalities, in the commercial leasing context.

40 This Policy is actually based on a sound environmental objective: the protection of wildlife from ingesting the debris resulting from large numbers of deflated balloons.

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TAB 15

Issues in Leases to Health Clubs and Gyms: Make Sure Your Lease is in

Good Shape!

Michael Horowitz Minden Gross LLP

February 22, 2017

THE SIX-MINUTE


Issues in Leases to Health Clubs and Gyms:

MAKE SURE YOUR LEASE IS IN GOOD SHAPE!

Michael Horowitz, Partner

Minden Gross LLP

Introduction:

Leasing to a health club or gym has advantages:

o If the tenant has to alter the premises to meet their specific needs, they will likely want

to maintain a lengthy tenancy in order to ensure that their investment in the property is

worthwhile;

o This use may also increase foot traffic to the Center, thereby benefitting other tenants.

Throughout this presentation, I will use the general term “fitness centre” to refer to various

types of health clubs and/or gyms and this reference may include big box fitness centres as

well as smaller clubs, gyms or studios such as spinning studios, yoga studios, boxing clubs,

etc.

When negotiating a lease for a fitness centre there are some unique issues that require extra

attention and perhaps some beefing up of standard provisions in the lease. These issues can

range from the design and construction of the tenant’s premises to use and operational matters.

When drafting and negotiating fitness centre leases for either a landlord or a tenant they may

have different “hot buttons” depending on the type and size and whether they are a major

fitness chain or just a one store operation.

Landlords and Tenants should go back to the standard form offer and lease and make sure it is

carefully worded to deal with this special type of use.

Fitness Centre Lease issues:

1. Use Clauses:

WHAT IS A FITNESS CENTRE?

WHAT IS THE TENANTS USE? DO WE KEEP IT BROAD OR GO INTO SPECIFICS?

IS A FITNESS CENTRE A…..…?

YOGA STUDIO?

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BOXING/KICK BOXING STUDIO?

SPINNING STUDIO?

KARATE CLUB?

DANCE STUDIO?

CROSS/FIT STUDIO

BOOT CAMP?

AEROBICS STUDIO

If so, are the foregoing uses “primary” or “secondary”?

Fitness centre operations may also offer a variety of extras, including, without limitation,

vitamin/juice/smoothie bars, snack bars, valet parking service, registered massage,

chiropractor, and other physical therapies, hair/nail/tanning salon, nutrition counselling, day

and evening childcare, and the sale of fitness clothing and accessories.

TENANT PERSPECTIVE: Is your tenant an anchor? If so, demand that they be treated as

one.

If the tenant is an anchor are they the first or last to the Center?

What can and can’t the fitness centre tenant do in the premises? Are there any limitations on

secondary or ancillary uses?

LANDLORD PERSPECTIVE: It might be wise to limit the square footage of certain ancillary

uses (i.e. cap ancillary use to 1,000 square feet of the rentable premises)

o Is the fitness centre tenant allowed to put in a “name brand” food/restaurant use i.e.

Tim Hortons or Starbucks or are they only permitted to put in a “generic non-branded”

use?

The fitness centre’s use can and may go against some of the Exclusive use clauses that other

tenants in the Center have already negotiated.

o It may be difficult to determine what falls inside and outside of the exclusive use clause.

For example, a large anchor fitness centre vs. a small boxing club or karate club is not

always clear and may raise important issues.

These issues can be resolved through careful drafting, if necessary negotiated amendments,

waivers or acknowledgements, but it is important to settle this as early as possible so you do

not end up with costly disputes later.

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TENANT PERSPECTIVE: It would also seem unfair that after investing in special fixtures to

create a “juice bar” for example, that they are unable to use it because there is a tenant that has

an exclusive use to run a café, which includes freshly made juices.

Once you figure out what the Tenant’s Use is be prepared for their next request. What

“Exclusive” use(s) will you give me? Again, these must be discussed and carefully drafted

depending on the agreed upon Use clause with the tenant and what other uses the landlord may

have now or in the future at the Center.

1A. Tenant’s Business Hours

WHEN WILL THE FITNESS CENTRE OPERATE AND WHAT EXTRA DEMANDS

WILL BE PLACED ON THE REST OF THE CENTER?

A fitness centre may want to extend their operating hours past the typical 9am-5pm business

hours. In order to accommodate their customers that want to exercise before or after work, a

fitness centre may want to open early and close late in the evening. Additionally, fitness centres

in high traffic areas may even wish to operate on a 24/7 basis.

Different operating hours may raise important issues for the landlord and tenant such as:

o Do customers and employees have the necessary access to the fitness centre, but not

the rest of the Center;

o Safety and security issues such as properly lit common areas and parking lots in the

evening and hiring additional security for the premises are very important.

Who pays for any required Additional Services?

o It will be important to determine who will be responsible for the costs of these

measures. It might not be fair for all of the tenants in the Center to split the charges if

these services are only benefiting the fitness centre.

o If additional services need to be provided to accommodate the fitness centre’s extended

hours, the landlord should negotiate that the fitness centre will pay for these excess

costs.

Some landlords and tenants may also be concerned with the ‘prime hours’ that fitness centres

have. Whereas other tenants of the Center may have a consistent flow of customers coming to

their premises throughout the day, some fitness centres may be busier in the early morning, at

lunch, and immediately after work.

o During the fitness centre’s “prime hours” there may be concerns about parking because

the fitness centre’s customers may park their vehicles in parking spaces that have been

designated to other tenants of the Center.

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o Is there adequate parking which may also vary depending on whether this is an enclosed

vs. outdoor center. Does the Center charge for parking and if so will they allow for

parking validation?

o The landlord and tenant should discuss these operational issues and how they should

be handled in the lease.

1B. Noise & Vibrations

Fitness centres may play music throughout the premises and run fitness classes or spin classes

that use a specialized lighting and stereo system or other amplification equipment. Fitness

centres may also make repetitive noises and vibrations i.e. step classes, dance classes, boxing

classes. Similarly, specialized fitness machines and equipment such as heavy ropes or the

dropping of heavy weights may cause excessive noise and vibrations. These noises may be

disruptive and annoying to neighbouring tenants.

TENANT PERSPECTIVE: Get an acknowledgement from the landlord upfront regarding this

type of use and the noises and vibrations it may cause.

When negotiating the lease it is important that the landlord and tenant discuss and agree upon

the noise levels that will be permitted and how excess noise will be enforced. Noise and

vibration attenuation measures may be installed in the premises. However, it is likely that these

measures will not completely block all noise and vibrations that may disrupt other tenants.

Noise and vibration issues will be further addressed in the Landlord’s and Tenant’s Work

section below.

2. Landlord’s and Tenant’s Work

When negotiating the lease for a fitness centre, another early consideration that should be

discussed relates to the construction of the premises (if there is no existing building) or possible

renovations to the premises (if there is an existing building).

o For example, fitness centres may require special venting, windows, flooring and/or

higher ceilings in order to fit and support their services and equipment, which should

be considered when determining if any changes are required to the design of the

premises and if necessary a structural engineer should be consulted.

There may also be unique construction concerns related to:

o Potentially increased levels of heat and humidity from the pool areas as well as saunas

and showers and taking steps to prevent mould, mildew and water damage. This will

be particularly important if the proposed fitness centre includes a specialty yoga studio,

sauna or a pool where the heat and humidity generated by the operation of the fitness

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centre may cause expensive water damage if precautionary measures are not taken at

the construction stage;

o There are different ways to deal with noise or vibrations coming from a fitness centre

so as not to disturb other tenants. A fitness centre may be in a basement or a multi-

floored building where there are other offices or stores around. Noise from stereo

systems or public address systems or vibrations from the dropping of weights, could be

a disruption to other tenants. As a result, it may be wise to hire a sound expert and

implement noise/vibration/sound attenuation measures and these may be installed

without making major structural changes to the premises. Taking steps to deal with

vibrations may require more severe measures and costs such as major alterations to

floor and walls and the landlord will want to be involved if this type of work is required.

Requiring the tenant to make alterations to the premises could pose issues given that the

landlord’s form of lease usually contains prohibitions on tenant’s work that may affect the

mechanical systems or structure of the Center.

o Landlords may have to decide whether or not they want to be responsible for

completing the work or whether or not it would be better if the tenant were responsible

for the work;

o In some cases it may be more beneficial for the landlord to agree to do the work as this

would give the landlord control over the design of the premises. In doing so, the

landlord would be able to make sure that the premises would ‘fit in’ with the rest of the

building and would provide the landlord with more control over the timing and quality

of work and materials being used;

o In other cases it may be more time and economically efficient to require the tenant to

perform the work either using the landlord’s contractor or an “approved” contractor.

Timing and deadlines must be considered by both sides. If the landlord decides that they want

to be responsible for the work, attention should be placed on the required timelines for the

construction or alterations to take place. For example, if a fitness centre is due to open on a

specified date at or at the beginning of a specified season in the year in order to gain the

business of prospective customers, it is crucial that all construction and alterations be

completed on time.

o Possible remedies should be negotiated ahead of time, such as if the landlord’s work is

not completed “X” days before the opening of the fitness centre, the tenant may

complete the landlord’s work on the landlord’s behalf and the tenant may be given free

rent based on an agreed upon formula;

o Although successfully negotiating such a remedy will depend on the bargaining power

of the parties, the timing issues may propose serious risks to the tenant and, as a result,

leasing lawyers should get their client’s input on this matter and address this issue when

negotiating the lease.

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If the landlord decides that the tenant will be responsible for the work the landlord will still

want to be able to hold the tenant responsible for any failure of humidity, noise and vibration

attenuation measures, regardless of whether the landlord has previously approved the tenant’s

construction plans and specifications.

o Additionally, the landlord may nevertheless need to get involved in some part of the

construction or alteration of the premises if cooperation and coordination with other

tenants in the building or Center is required. For example, the fitness tenant may need

to access part of the common areas or even part of the adjacent tenant’s premises in

order to install its soundproofing.

3. Utilities

Fitness centres may easily consume more utilities than other CRU tenants in the Center.

Fitness centres often place increased higher demands on water and electricity as a result of

their longer hours and requirements for washrooms/showers, pools, whirpools and saunas,

increased demands on the HVAC system, and other special services i.e. towel laundry services

that aren’t ordinarily offered by other tenants in the Center.

LANDLORD PERSPECTIVE: Landlords must recognize the potential excess use of utilities

by the fitness centre. Landlords should ensure that their lease contains language giving them

the ability to reasonably allocate utility costs and not only charge based on proportionate share

and if necessary revise their lease to deal with a fitness centre tenant.

o As a result, a landlord may want to consider having the fitness centre metered

separately or install check metres so that the landlord can monitor and charge the fitness

centre for all utilities it specifically consumes.

4. Transfer/Assignment/Sublet/License

The Transfer clause in a fitness centre lease should be carefully reviewed.

Are Permitted Transfers without Landlord’s consent allowed? Fitness Centers are bought and

sold all the time and tenants may ask for this.

TENANT PERSPECTIVE: Tenant would like this freedom to be able to sell without the

Landlord’s consent.

LANDLORD PERSPECTIVE: Is a Permitted Transfer clause something Landlord is willing

to give? Is this a major chain and if more than a minimum number of stores are sold perhaps

the Landlord can live with this request vs. is this a one-off tenant with no other locations, and

if so perhaps in that case the Landlord cannot live with this request.

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Partial Subletting and/or Licenses should be carefully looked at as your fitness tenant may wish

to sublet/license one or more parts of its premises for other uses. This was touched upon when

discussing the Tenant’s “Use” clause and again should be very closely looked at to ensure there

are no conflicts with the tenant’s Use and existing or future Exclusives.

5. Expiry/Termination of the Lease

As important as the initial construction of the premises is, the surrender (and potential

deconstruction) of the premises when the lease expires or the tenancy is terminated is just as

important. It is especially important that when negotiating this type of lease that the landlord

and tenant agree up front upon each of the party’s obligations at the end of the tenancy.

While the fitness centre tenant may have insisted upon structural changes to the premises such

as reinforced flooring, and the installation of saunas, specialty washrooms and showers,

whirlpools and pools, which require specialized plumbing, the landlord may prefer to reassume

possession of the “shell/base building” premises at the end of the tenancy.

How is the premises surrendered? As-is vs. base building? Who pays for putting the premises

back into its original condition?

TENANT PERSPECTIVE: If the tenant is required to bring the fitness centre premises back

to its original condition, this can be incredibly costly for the tenant.

LANDLORD PERSPECTIVE: A landlord should have the flexibility to require the tenant to

remove all fixtures and improvements or the landlord may require the tenant to leave the

premises ‘as is’ because they believe that they will be able to find another fitness centre tenant

and leaving the premises in the renovated condition would be the most economically efficient

way to do so.

o TENANT PERSPECTIVE: The tenant will want to negotiate that they will be able to

remove all of the fixtures that they have installed in order to reuse them in a new

location or prevent a competitor from moving into the old premises and using these

items.

o In this instance clearly defining what IS and IS NOT a “fixture” vs. an “improvement”

and when these items can and cannot be removed is crucial.

Alternatively, a landlord may be contemplating demolishing the centre for redevelopment at

the end of the tenant’s term, and may not care as much about requiring the tenant to restore the

premises.

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Conclusion:

The above-noted list of issues is by no means meant to be exhaustive and there are many other

issues that may arise on a deal by deal basis. Lawyers need to have a good understanding of

their client’s special needs and goals in order to properly negotiate and draft leases and this

especially holds true with a fitness centre lease.

When negotiating a fitness centre lease, lawyers need to make sure that special terms and

clauses set out above are introduced and negotiated early into the process, preferably at the

Offer stage to best protect their client’s interest.

Whether you are acting for a landlord or tenant on one of these very special leases the issues

set out above should be carefully reviewed and discussed with your client to avoid uncertainty,

ambiguity and ensure a smooth transition from build-out to opening and continued successful

operation of your client’s “fitness centre” in whatever shape or form it may take.

2677128 v1 | 2222222

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TAB 16

Sale-Leasebacks

David Holmes First Capital Asset Management ULC

February 22, 2017

THE SIX-MINUTE


SALE-LEASEBACKS

By David C. Holmes, Director of Legal Affairs

First Capital Realty Inc., Toronto, Ontario

February 22, 2017

The concept of a “sale-leaseback” transaction has, until fairly recently, been adopted and

applied in other jurisdictions – particularly the United States and the United Kingdom – as a

particularly efficient means of utilizing and capitalizing upon the value of real estate. Moreover,

a form of sale-leaseback has often been used in the financing and leveraging of equipment.

However, as the Canadian economy has ebbed and flowed in the past decade or so, the unique

attributes of the typical sale-leaseback transaction has proven itself to be a more lucrative method

of extracting maximum equity from commercial real estate. The following paper will examine

some of the nuances and intricacies of a sale-leaseback transaction; the scenarios in which these

types of value-added models are utilized; and the challenges that these types of arrangements can

present.

In the parlance of an in-house counsel in a large commercial real estate owner and

developer, the notion of a sale-leaseback was typically seen as a temporary measure for securing

rental income from property that would otherwise be delivered to a purchaser with vacant

possession. The sale-leaseback would be used as a vehicle to provide a guaranteed income stream

for (typically) a short period of time until a more long-term leasing arrangement could be obtained.

The transaction was used – in essence – to render the purchaser “whole”, for lack of a better of

word, and would help to support the valuation of a property (which is based, usually, on the income

stream generated from the real estate asset). However, history has revealed that the concept of a

“sale-leaseback” has been regarded for several years as an effective tool for institutional investors

looking to invest in real estate holdings that have the added incentive of being leased by financially

sound tenants. The concept has also evolved into an effective and useful option for corporations

during periods of economic downturn, when they wish to extract value from the equity held by

corporations in their real estate holdings, thereby allowing them to refocus this value in other ways.

In short, the sale-leaseback has been seen as an increasingly innovative manner of using and

holding real estate.

In a nutshell, a sale-leaseback is a concept whereby the owner of a property sells the asset

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and then leases the same property back at terms to be negotiated between the seller and the

purchaser. As previously noted, the author has been exposed to sale-leaseback transactions that

have been used to facilitate the temporary occupancy of recently-acquired real estate that would

otherwise be vacant on closing. It has provided the purchaser of a real estate asset with ability to

secure a rental income stream on a temporary basis – but oftentimes on terms that would mirror,

for the most part, the terms that would have been available to the purchaser, as landlord, in the

commercial marketplace – until the purchaser is able to enter into a lease, as landlord, with a long-

term, creditworthy tenant. However, the concept is typically applied so as to enable a corporation

– whose core business does not involve real estate holdings – to shift its allocation of capital from

its real estate assets into its core business by divesting itself of expensive real estate holdings, but

in a manner that would not disrupt its ability to continue to occupy its property for the purposes of

allowing it to continue to operate its business from the premises. In most instances, the typical

sale-leaseback transaction involves the entering into of a long-term lease (the term of which can

often be 20 years or more).

The concept of the sale-leaseback has also become increasingly attractive to companies

who have set up real estate investment trusts (REITs) as a vehicle for the corporate ownership of

real estate assets. The ownership of real property is transferred from the corporation to its REIT,

and a lease is entered into between the company, as tenant, and the REIT, as landlord.

Alternatively, the REIT may be held at arm’s length from the company, with the sale-leaseback

being used as a vehicle for the company to generate capital, while providing income-producing

assets to the investors that hold units in the REIT.

On the topic of capital itself, a sale-leaseback transaction presents itself as an effective

option for the seller who is looking to raise capital, sometimes akin to mortgage financing. The

sale-leaseback is a mechanism whereby the vendor sells its real estate asset(s) to a purchaser

(thereby generating funds through the sale proceeds), in exchange for the vendor agreeing to enter

into a lease, as tenant, with the purchaser, as landlord, and to pay rent to the purchaser/landlord

and to otherwise occupy the premises on the terms and conditions set forth in the leaseback

agreement. Unlike mortgage financing, however, where the owner/borrower continues to retain

an ownership interest in the property (albeit one that is secured by way of a mortgage or charge in

favour of the lender, and one which does not fully vest in the owner/borrower until the debt has

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been repaid in full), under a sale-leaseback, the vendor’s freehold interest shifts to that of a

leasehold interest. Moreover, in comparing the sale-leaseback to typical mortgage financing, the

value of the asset to the vendor is usually fully realized upon completion of the transaction of

purchase and sale, when the vendor should receive one hundred percent of the value of the property

through the sale proceeds; in a standard mortgage transaction, however, the value extracted from

the property through the funding received from the lender will certainly be much lower. As well,

the sale-leaseback became a more interesting option to property owners when commercial lenders

become increasing nervous or hesitant to lend money (or to lend on previously low interest rates)

on real estate assets. This is something that became increasingly evident following the most recent

downturn in the economy that occurred back in 2008-2011.

As previously noted, the sale-leaseback transaction is also used to assist with the

reallocation of capital away from real estate holdings and towards the focal point of their key

business operations. Holding real estate, while often regarded as one of the more stable assets for

the purposes of building equity, is also an expensive enterprise. The cost of upkeep, insurance,

and the like, can be astronomical. The sale-leaseback has been used to help a company to refocus

their efforts on supporting their business which, in turn, should lead to the company achieving a

higher return – one that is usually higher than any return generated by their retaining an interest in

real estate assets. By selling off valuable (but expensive) real estate assets and reinvesting the

proceeds generated from the sale back into the corporation’s key business, the company has not

only helped to reduce the cost of owning real estate – for example, standard expenses associated

with the day-to-day maintenance and repair of real estate assets (including capital repairs) can be

very high – they have also often helped to reduce their debt but paying off mortgage debt associated

with the previous ownership of the asset by the company. On this point, while the obligation to

maintain and repair its premises will often remain an obligation for the vendor, as tenant under the

lease, its obligations with respect to the more costly capital repairs, such as, by way of example,

those costs associated with the repair and replacement of structural components of a building (i.e.

roof, foundations) or key operating systems (i.e. HVAC, plumbing, electrical), will often shift to

the purchaser, as landlord. In many instances, the purchaser, as landlord, is prohibited from

flowing these costs down to the vendor, as tenant, thereby helping the vendor to reduce its overall

“investment” in the property. By reinvesting the cash flow generated from the sale of their

property, the vendor will hopefully help to make its company more profitable and, as a corollary

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effect, more enticing to institutional investors.

The desire to enter into a sale-leaseback transaction is often driven by tax implications.

Simply put, if, for example, a corporation owns real estate holdings that are encumbered by

mortgage debt, the corporate owner may be entitled to deduct from its taxable income those

portions of the mortgage payments allocated to interest. However, in certain circumstances where,

for instance, the lease is deemed to be an “operational” lease, a corporate tenant may be able to

deduct all or a portion of the rental payments paid by the company, as tenant, against its taxable

income. In recent years, there has been a significant amount of jurisprudence and legal

commentary generated in the United States on the tax and other financial consequences associated

with the use of the sale-leaseback in the real estate context1. However, there is little if any case

law on the subject in Canada, likely given the fact that the upsurge in the use of the sale-leaseback

in this country has been a recent phenomenon. There have been recent decisions handed down by

the Courts in Canada with respect to the tax implications arising from the sale and leaseback of

equipment where the Courts have been asked to look at, and comment upon, the ramifications of

the increased scrutiny placed by the Canada Revenue Agency on the tax consequences generated

by sale-leasebacks for the purpose of equipment financing.2

One of the important aspects to consider when contemplating the creation of a sale and

leaseback transaction is the form of lease itself. Often times, attempts will be made to use the

landlord’s standard form of net retail lease without taking into consideration the nuances associated

with this type of transaction. While the form of lease to be used in a sale-leaseback should be

well-vetted before the drafting begins, the following is a non-exhaustive list of some key concepts

which are normally addressed in a certain fashion in the standard commercial net lease scenario,

but which may need to be reconsidered when structuring the terms of a sale-leaseback transaction:

(i) the condition of the premises that forms the subject of the leaseback; (ii) maintenance and repair

obligations as between the landlord and the tenant; (iii) operating costs recovery provisions; and

(iv) the rights of tenants with respect to signage.

The parties to a sale-leaseback transaction should consider the state of the premises on the

1 Including, for instance, an interesting paper by Professor Marshall E. Tracht of New York Law School which compares the sale-leaseback with mortgage financing. See: Tracht, M.E. (2013) Leasehold Recharacterization in Bankruptcy: A Review and Critique. 2 See, for example, C.A.E. Inc. v. The Queen, 2013 FCA 92 (FCA), where the Federal Court of Appeal considered the tax implications associated with the sale and leaseback of certain equipment.

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date of closing (i.e. the commencement date for the term of the leaseback). Mutual agreement

between the parties as to the nature of the allocation of risk associated with the condition of the

premises at the commencement of the leaseback is an important factor to consider when setting

out the terms and conditions in a leaseback document itself. In most instances, the purchaser of a

commercial property has had a period of time to carry out its due diligence of the property being

acquired. This due diligence should include, among other things, a thorough examination and

review of the environmental condition of the property. Once the purchaser has completed its due

diligence and decided to waive its due diligence condition, depending on the terms of the

agreement of purchase and sale, the purchaser will have agreed to purchase the property in its “as

is, where is” state, and unless agreed otherwise in the agreement of purchase and sale, it will likely

assume all of the environmental issues associated with the property. Consider the implications of

this strategy in a leaseback when the vendor/tenant – the party who may be at the root of the

condition of a property on closing – is going to remain in occupation after closing as a tenant. In

most instances, a tenant will want to secure the acknowledgment and agreement of the landlord

that the tenant will not be responsible for pre-existing contamination; nevertheless, what if the

tenant was the cause of the contamination? In circumstances such as this, the purchaser should

consider whether to allocate back to the vendor some or all of the liability associated with pre-

existing environmental contamination (for example, by way of an environmental indemnity

obtained from the vendor on closing). This re-allocation of liability with respect to pre-existing

environmental contamination should be adequately reflected in the leaseback (where, typically, a

tenant is absolved of any liability associated with any environmental contamination that existed

on the date that the tenant took possession of the premises).

In a standard commercial net lease transaction, the parties’ assumption of obligations with

respect to the repair and maintenance of the property follows this typical fashion: the tenant

assumes the responsibility for the maintenance and repair of all aspects of the premises which are

being leased by the tenant, while the landlord assumes responsibility for maintenance and repair

of the common areas. In addition, if any portion of the property requires replacement, the landlord

would typically undertake to carry out the replacement, and the tenant, if occupying premises

within a multi-tenanted property, would be responsible for its share of costs associated with the

replacement, with such costs being amortized over the useful life of the item in question. This

“typical” allocation of responsibility for the repair and maintenance of a property may not be

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appropriate for the parties in a long-term sale-leaseback scenario. Often, the tenant is considered

to in the better position than the landlord to assume a greater responsibility for the overall repair

and maintenance of the property, particularly where the vendor/tenant is leasing the entire

property. While this may seem counterintuitive to the notion that the desire for a vendor to enter

into a leaseback is to divest itself of the day-to-day financial obligations of owning and operating

a property, the vendor/tenant will often understand the property from having owned it for several

years, and will likely have a contingent of well-versed contractors and other professionals who

have been involved in the ongoing maintenance of the property and understand the nuances

associated with the maintenance and operation of same. In essence, the retention by the

vendor/tenant of a greater responsibility in this regard will help ensure a better control on the part

of the tenant with respect to the costs that would otherwise be flowed down by the landlord to the

tenant. Once the parties have reached mutual agreement as to the allocation of responsibility for

the maintenance, repair and replacement of the components of the property, the provisions in the

leaseback that relate to the ability of the landlord to recover operating costs and tax will need to

be adjusted accordingly.

As previously noted, one of the attractions for a vendor to decide to sell and leaseback its

property is that it enables the vendor, as tenant, to maintain the status quo as it relates to the

vendor’s ability to continue to occupy its existing premises with little impact or interruption to its

day-to-day operations. In a standard commercial lease, however, the rights of the tenant with

respect to, by way of example only: (i) operating hours; (ii) signage; and (iii) its intended use of

the property, are usually controlled or restricted, in some fashion, by the landlord. In a leaseback,

the vendor/tenant will usually want to ensure that its existing rights with respect to its method and

style of operations, its current signage, and the broad scope of its use of the property prior to the

completion of the sale and leaseback transaction, are all addressed and, more importantly,

acknowledged and/or agreed to in advance by the purchaser/landlord.

CONCLUSION This paper, and the presentation that has accompanied it, were intended to provide the

reader/attendee with a very basic, high level exposure to some of the key issues and concepts

associated with the sale-leaseback transaction. While somewhat new in the Canadian context, the

concept of the sale-leaseback has proven itself of late to be an appealing, and oftentimes, lucrative,

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way to realign the value and costs associated with the ownership and occupation of real estate.

The shift away from ownership of real property has, in many instances, helped companies to

reallocate funds that would otherwise have been applied towards the upkeep of their property in a

myriad of different ways: (i) to their operation of their core business; (ii) as a means of providing

greater return to their investors through the release of higher dividends; and (iii) paying down debt.

If the purchaser/landlord is experienced in the ownership, operation and management of

commercial real estate, this, in turn, would help alleviate some of the day-to-day challenges that

often face companies whose commercial interests do not necessarily involve a thorough

knowledge or understanding of the nuances of owning and operating commercial real estate.

Given the exponential increase in the use of the sale and leaseback transaction in this country, it is

clear that the sale-leaseback transaction will continue to be considered and scrutinized in the

Canadian market in the years to come.

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TAB 17

Non-Disturbance Agreements

Mervyn Allen

McMillan LLP

February 22, 2017

THE SIX-MINUTE


NON-DISTURBANCE AGREEMENTS

Mervyn Allen

McMillan LLP Your lemonade stand has for some time seen a constant flow of traffic in front of your mother’s

house. Clearly Aunt Mae wasn’t relaying “alternative facts” when she told you her recipe for

lemonade was the best in the world! You’ve decided to move to premises that can help you

consolidate your business and expand your growth. You negotiate a lease of space from Mr.

Landlord and borrow some money from Mom to construct your leasehold improvements and

install your fixtures and furnishings. You hire your sister and throw open your doors to the

public. As you suspected, business takes off immediately and visions of sugarplums begin

dancing in your head. Maybe in time you’ll buy Mr. Landlord’s building and expand onto the

TSX Composite!

What about Mr. Landlord’s building, though? It’s a nice airy structure; you suspect that he must

have borrowed some money to buy it, but you’re not sure whether he’s yet paid it off. Well, in

fact, Mr. Landlord has not paid it off, and, notwithstanding your timely payment of rent, is

experiencing considerable difficulty in doing so. In due course, his long-suffering lender, Mr.

Mortgagee, realizes on the mortgage and takes possession of the building. Not to worry, though;

you’ve registered a notice of your lease on title to the building, so anyone registering after you

has notice of your leasehold interest and has to live with it! Unfortunately, Mr. Mortgagee’s

mortgage was registered before your notice of lease, and he, therefore, has priority. Can Mr.

Mortgagee kick you out of the building, notwithstanding all of Mom’s money that you’ve sunk

into the place? Disappoint your sister? Transform the sweet sugar plums into rancid prunes?

The answer is YES, HE CAN! Since the mortgage was registered before your lease, Mr.

Mortgagee’s interest attaches to all of Mr. Landlord’s freehold interest in the building, and by the

time you came along to sign the lease and register your interest, the only thing to which your

interest could attach was Mr. Landlord’s equity of redemption: that is to say, his right to recover

his freehold interest in the building by paying off his mortgage loan. Which, of course, he

hasn’t. Mr. Landlord’s interest is foreclosed. So, yes, Mr. Mortgagee can kick you out, but will

he? Perhaps not, if your rents are providing him with a steady income stream. On the other

hand, he might if you’re not the kind of tenant a prospective purchaser of the building sees as

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desirable and, come on: it’s a lemonade stand! In any event, Mr. Mortgagee is rude and difficult

to get hold of, and you’re not sure you want to stay. Do you have to stay in the premises and

become his tenant? The case law seems to suggest that, (a) where your lease is subordinate to

the mortgage, if, without further agreement, you pay rent to Mr. Mortgagee, your tenancy will be

transformed to a tenancy from year to year, terminable by you on six months notice1, and (b) no

privity is established between you and Mr. Mortgagee solely as a result his foreclosure and

taking possession of the building2. In short, it would have been prudent if there had been some

agreement entered into by you and Mr. Mortgagee that would, for his benefit, compel you to stay

in the leased premises and, for your benefit, force Mr. Mortgagee to honour your tenancy. That

“some agreement” is a non-disturbance agreement or NDA.

An NDA is an agreement between a tenant and the landlord’s lender which provides that, in the

event that the lender should come into possession of the leased premises, so long as the tenant

continues to pay the rent and perform its obligations under the lease, the tenant’s enjoyment and

occupation of the leased premises will not be disturbed by the lender or anyone claiming by,

through or under the lender, which includes, of course, a subsequent purchaser. A provision

requiring such an agreement to be obtained from the landlord’s lender is negotiated as part of

many commercial leases. Some tenants (those, needless to say, with strong bargaining power)

insist that such an agreement be obtained by the landlord from its existing lender within a fixed

period of time – say, thirty days or sixty days – from the date of execution of the lease or the

tenant will have the right to terminate the lease. In fact, a termination right will be difficult for

most landlords to accept, so another option might be a rent credit – an abatement of rent perhaps

on a day for day basis – if the landlord fails to provide the required NDA. However, even this

accommodation would be something only a tenant with a strong bargaining position might be

able to get. At any rate, the Lease provision requiring the obtaining of the NDA might go on to

require that a similar agreement be obtained by the landlord from any subsequent lender from

time to time. A typical provision in a lease might read as follows:

“The Landlord shall obtain from any mortgagee, debenture holder or other secured creditor in respect of the building who has or may in the future have priority over the

1 Corbett v. Plowden (1884), 25 Ch. D. 678 2 Goodyear Canada Inc. v. Burnhamthorpe Square Inc. (1998) 41 O.R. (3d) 321 (CA)

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Tenant’s leasehold interest in the building (herein, a “Mortgagee”), such Mortgagee’s written consent to this lease in the form of a non-disturbance agreement providing that the Mortgagee will not disturb the Tenant’s rights of occupancy so long as the Tenant is not in default under this lease.”

The Mortgagee may agree not to disturb the tenant provided that the tenant agrees for her part to

subordinate, if necessary, its lease to the mortgage (obviously not a requirement if the mortgage

is registered prior to the lease) and attorn to the Mortgagee which, in this context, merely means

that the tenant will agree to recognize the mortgagee – if it ever realizes on its security and

becomes owner of the building – as the landlord. A typical provision might read:

“At the option of the Landlord, this Lease and the Tenant’s rights hereunder are and shall be subject and subordinate to any and all mortgages, trust deeds and charges (each, herein, a “Mortgage”) on or in any way affecting the leased premises or the building now or in the future, including all renewals, extensions, modifications and replacements of any Mortgages from time to time. The Tenant shall at any time on notice from the Landlord or the holder of a Mortgage attorn to and become a tenant of the holder of any of such Mortgages upon the same terms and conditions as set forth in this Lease, and shall execute promptly on request by the Landlord any certificates, agreements, instruments, etc. of postponement or attornment …”

And, perhaps, a savvy tenant would add “but only provided that the Tenant is in receipt of a

Non-Disturbance Agreement from such Mortgagee.”

As the case law also seems to suggest, however, all of this verbiage in the lease may be entirely

moot unless the parties ACTUALLY execute and deliver the NDA3. In that way (and, perhaps,

in no other way), the required privity of contract between the mortgagee and the tenant will be

achieved.

So, what are some typical provisions in an NDA? If you’re the tenant, you would want it to

include, at a minimum:

an agreement by the mortgagee that your tenancy will not be disturbed so long as you pay

rent and perform your obligations under the lease; and

an acknowledgment from the mortgagee that, upon taking possession of the building, it will be bound, as landlord, by all of the obligations of the landlord under the lease (including, without limitation, any extension, renewal or expansion rights of the tenant).

The mortgagee will, for its part, will require the tenant’s agreement:

to attorn to the mortgagee as a tenant under the lease;

3 Goodyear, supra

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that the mortgagee will not be subject to any off-sets or defences which the tenant may have against the landlord (see, incidentally, the pitfalls that not including this provision in an NDA can lead to by reading the TDL case: 473807 Ontario Ltd. v. TDL Group Ltd.4);

that the mortgagee not be responsible for any uncompleted landlord’s work or any unpaid allowances or other inducements;

that the mortgagee will not be liable for any pre-existing defaults of the landlords;

that the mortgagee will not be bound by any prepayments of rent made to the landlord; and

that the lease will not be amended by the landlord and the tenant without the consent of the mortgagee to amended terms. Be aware that this requirement can severely restrict or retard the operation of the tenant’s business. A step down for the tenant might be that any amendment made without the mortgagee’s consent is not minding on the mortgagee. Such a step-down would not protect the tenant in the event of the mortgagee realizing on its security, but at least the amendment would be effective against the landlord.

Often, landlords will try to limit their obligations to obtain the NDAs to the use of reasonable

efforts. Unless you are a tenant with some clout, you will likely be required to use the lender’s

form of NDA and pay any associated costs. There are often other provisions to consider as well,

and a sample NDA has been attached to this paper as Exhibit “A”.

So, to return to you and your lemonade stand, resolve next time to provide in your lease for the

obtaining of an NDA from Mr. Mortgagee, and make the receipt of it, in a form satisfactory to

you, a condition of your tenancy.

4 (2006) 271 DLR (4th) 636 (ONCA)

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EXHIBIT “A”

NON-DISTURBANCE AND ATTORNMENT AGREEMENT

This Agreement is made as of , 20, between

as Chargee

and

as Tenant

RECITALS A. WHEREAS (the “Landlord”) is the owner of the lands municipally known as , , Ontario and more particularly described on Schedule A hereto (the “Lands”) and has charged them in favour of the Chargee pursuant to a Charge which was registered in the Land Registry Office for the [Registry/Land Titles] Division of as Instrument No. (the “Charge”);

B. AND WHEREAS the Landlord has leased to the Tenant certain premises in the building on the Lands (the “Premises”) pursuant to a lease dated as of , 20 (the “Lease”), a copy of which Lease has been delivered by the Tenant to the Chargee and notice of which Lease was registered in the said Land Registry Office as Instrument No. ;

C. AND WHEREAS the Tenant has requested this Agreement to further its security of tenure and the parties, for their mutual benefit, have agreed to enter into this Agreement;

NOW THEREFORE in consideration of the covenants and agreements hereinafter set forth and other good and valuable consideration and the sum of $2.00 paid by each party to each other (the receipt and sufficiency of which are hereby acknowledged by each party), the parties covenant and agree as follows:

SECTION 1 – RECOGNITION OF LEASE BY CHARGEE

The Chargee recognizes the Lease and agrees that, so long as the Lease is in effect and so long as the Tenant is complying with, and is not in default under, the Lease and this Agreement, the Tenant’s possession of the Premises and the Tenant’s rights under the Lease (including all rights of renewal, if any, contained therein) shall not be interfered with by the Chargee and the Chargee will not join the Tenant as a party defendant in any proceeding by the Chargee to terminate the Tenant’s interest under the Lease because of any default by the Landlord under the Charge.

SECTION 2 – NON-DISTURBANCE OF TENANT BY CHARGEE

The Chargee agrees that, if the Chargee succeeds to the interest of the Landlord under the Lease (whether as a consequence of foreclosure or any other circumstance) and if the Lease is then in effect and if the Tenant is not in default thereunder, then from and after the Chargee’s succession and so long as the Tenant continues to comply with its obligations under the Lease, the Chargee will permit the Tenant to remain in possession of the Premises without interference by the Chargee on all of the terms of the Lease and without the execution of any further assurances.

SECTION 3 – WHEN CHARGEE BOUND

If the Chargee succeeds to the interest of the Landlord under the Lease, the Chargee shall be bound to the Tenant under all the terms, covenants and conditions of the Lease, except that the Tenant shall neither make, nor be entitled to make, any claim against the Chargee with

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respect to any take-over or sub-leased space. The Tenant shall, from and after the Chargee’s succession to the interest of the Landlord under the Lease, have the same remedies for the breach of any term, covenant or condition contained in the Lease that it might have had under the Lease against the Landlord if the Chargee had not succeeded to the interest of the Landlord, except that the Chargee shall not be:

(1) liable for any act or omission of any prior landlord (including the Landlord);

(2) subject to any set-offs or defences that the Tenant might have against any prior landlord (including the Landlord);

(3) bound by any rent or additional rent which the Tenant might have paid for more than the current month to any prior landlord (including the Landlord);

(4) bound by any amendment or modification of the Lease made without its consent;

(5) personally or corporately liable, in any circumstances, for any default in the performance of the obligations of the Landlord under the Lease, and the remedies of the Tenant for any default shall be limited to set-off against the rent payable under the Lease and other remedies permitted by the Lease or by law which do not involve personal or corporate liability on the part of the Chargee.

The Chargee agrees that it shall not assign or otherwise dispose of the Charge or any interest therein unless the person so acquiring such Charge or interest, as the case may be, agrees to be bound by the provisions hereof.

SECTION 4 – TENANT CERTIFICATES

The Tenant certifies that:

(1) no rent under the Lease has been paid more than thirty (30) days in advance of its due date; and

(2) the Tenant, as of this date, has no charge, lien or claim of set-off under the Lease or otherwise against the rents or other charges due or to become due thereunder;

SECTION 5 – FURTHER DEALINGS BETWEEN LANDLORD AND TENANT

This Agreement shall not prevent or inhibit dealings between the Tenant and the Landlord concerning the Lease including any amendments, waivers, assignments, sublets or agreements affecting the Lease. However, notwithstanding the foregoing, the Chargee shall not be bound or prejudiced by:

(1) any amendment, waiver or agreement which alters any material term of the Lease or reduces the obligations of the Tenant under the Lease, or any assignment or subletting, or any prepayment of rent or other monies payable by the Tenant under the Lease; or

(2) any claims, demands, defences, rights of set-off, or abatement of rent which the Tenant may have as against the Landlord,

unless in each case, the Chargee has consented thereto.

SECTION 6 – NOTICES BY TENANT UNDER THE LEASE

The Tenant agrees to deliver to the Chargee, simultaneously with delivery to the Landlord, a copy of any notice delivered by the Tenant to the Landlord to the effect that the Landlord has breached the Lease in a material way and that the Tenant proposes to exercise a remedy under the Lease.

SECTION 7 – NOTICES UNDER THIS AGREEMENT

Any notice or other communication required or permitted to be given pursuant to this Agreement shall be in writing and shall be delivered or mailed by prepaid, registered mail to the following applicable address:

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to the Chargee at:

Attention:

to the Tenant at:

Attention:

The date of receipt of any such notice or other communication shall be deemed to be the date of delivery if delivered as aforesaid or the fourth business day after mailing if mailed as aforesaid. If at the date of any proposed notice or other communication there is an interruption or threatened interruption in the operation of the postal service of Canada, such notice or other communication shall be delivered as aforesaid. A party may change its address for service at any time by giving four business days’ notice to the other pursuant to this Section.

SECTION 8 – SUCCESSORS AND ASSIGNS

Except as otherwise provided herein, the rights and obligations of the parties herein shall be binding upon and enure to the benefit of their respective successors and assigns including, but not limited to, any purchasers of the interest of the Landlord at a foreclosure or other sale of the Premises by the Chargee.

Upon any sale of the Premises by the Chargee, the Chargee shall be relieved of its obligations hereunder to the extent that they have been assumed by the Purchaser.

SECTION 9 – FURTHER ASSURANCES

Each party agrees to execute such further assurances as may be reasonably required from time to time by the other to more fully effect the true intent of this Agreement.

The parties have executed this Agreement.

By: Name: Title: By: Name: Title: I/We have authority to bind the Corporation.

By: Name: Title: By: Name: Title: I/We have authority to bind the Corporation.

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Schedule A – Description of Lands

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TAB 18

Anticipating the Needs of Future Players and other Third Parties

Faruk Gafic

Aird & Berlis LLP

February 22, 2017

THE SIX-MINUTE


SIX MINUTE COMMERCIAL LEASING LAWYER

February 22, 2017

Anticipating the Needs of Future Players and Other Third Parties

By: Faruk Gafic1

Introduction

In the world of commercial leasing, at the time of negotiating offers, leases, licenses or other

similar documents, both landlords and tenants (as well as their respective leasing brokers, lawyers

and insurance agents) have plenty to think about. From negotiating basic business terms to dealing

with the nuances of other typical lease provisions, parties must turn their minds to a variety of

issues that can arise from early possession, to surrender upon expiry. This includes the manner by

which rent is calculated, use of the space and operating requirements, assignments and other

transfers, insurance, damage and destruction, maintenance, repairs and alterations, deposits and

other security, default, remedies and the list goes on and on. Apart from typical lease provisions,

commonly there are also a number of special provisions to contend with, including options to

extend, options to surrender, options to terminate, allowances and other inducements, rent-free

periods, restrictive covenants and so on. Further, in some cases there may be unique “one-off”

business terms or site specific considerations that need to be kept in mind. Of course, all of this

takes place in different leasing contexts where retail, office, industrial and jurisdictional

considerations add further layers of complexity. Regardless, both sides are expected to get deals

done, often under significant time pressure. To assist both parties and their counsel with navigating

through such complexity, a great volume of articles and textbooks have been written on a variety

of commercial leasing topics.

Certainly, the issues affecting landlords and tenants are complex enough. However, these two key

players do not exist in a vacuum, and their counsel should never forget to give proper consideration

to the interests of various third parties with direct or indirect ties to the leased lands, or that which

otherwise may have an effect on the proposed or existing lease arrangement. Such third party

interests can pose a silent threat to a commercial lease, not just in terms of enforcement at the time

1 Faruk Gafic is a partner at Aird & Berlis LLP, specializing in all aspects of commercial leasing, representing bothlandlords and tenants in retail, office and industrial context. Special thanks to Amy Marcen-Gaudaur, articlingstudent at Aird & Berlis LLP for all her help with this paper.

18 - 1

of a default, but from the moment of its inception. As a result, third party interests should be

contemplated and carefully considered even before the early stages of lease negotiation.

This paper examines some of the most common third party interests that commercial landlords,

tenants and their respective counsel should consider, including the interests of lenders, suppliers,

franchisors, licensed users and other tenants.

Lenders

If not properly addressed, the interests of tenants’ lenders or other secured parties affecting the

lease, the leased premises or any collateral located therein, can create serious challenges for a

tenant trying to obtain financing, or for a landlord looking to exercise its rights and remedies in

the event of a tenant default or termination of the commercial lease. Therefore, whenever possible,

the parties and their counsel should seek to address these challenges before they have the

opportunity to arise, by agreement at the time of entering into or negotiating a new lease.

The lease is often negotiated and executed well before a tenant’s financing is secured. If the parties

do not turn their minds to this issue in advance, under a typical landlord’s form of lease the landlord

will already have certain rights relating to the tenant’s fixtures and property. Usually, such form

of lease will contain a provision that the tenant can only remove its property from the leased

premises at the end of the term and only if it is not in default under the lease. In the meantime, the

tenant is also obligated to replace any of its trade fixtures with fixtures of equal or greater value.

In addition, the tenant will commonly be required to acknowledge that the landlord shall have the

right to distrain for any arrears of rent, and that for such purpose landlord shall have the right to

enter the leased premises and to take possession of any goods and chattels located therein, to sell

the same and apply the proceeds of such sale on account of the rent. Typically, the landlord’s form

of lease will also provide that, notwithstanding anything contained in any provincial statute

concerning commercial tenancies, none of the goods and chattels of the tenant will be exempt from

levy by distress.

Normally, nothing in the lease will obligate the landlord to subordinate or waive its rights in favour

of any third party. As a condition of financing, however, a tenant’s lender will often require the

landlord to execute a lender’s form of waiver, providing that the landlord will waive and release

in favour of the lender: (i) any lien, charge or any other interest or claim it may have against the

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collateral to be used as security; and (ii) any rights granted by any laws to levy or distrain for rent

or any other charges which may be due to the landlord and against the collateral. On occasion, the

lender’s form of waiver may be quite one sided; in some cases offensively so. This waiver is then

presented to the landlord for signature without any regard to the provisions of the executed lease

or the fact that the landlord is not obligated to sign anything to begin with, let alone this one-sided

form. As a result, the landlord may refuse to sign the waiver altogether. To less sophisticated

tenants, this may come as a total surprise. The result is a panicked tenant pleading with its landlord

to sign the waiver, usually within an unrealistic time frame due to a suddenly urgent need for funds.

The tenant will argue that, without financing, it will be unable to fulfill its obligations under the

lease which will result in a breach, sometimes before the term has even commenced. On occasion,

tenants will also get the impression from their lender or counsel that the lender’s waiver is a

“formality” executed “all the time, by all of the other landlords, without any issues.” The tenant

also may not understand the distress remedies or lease provisions to which they agreed. If the

landlord refuses or requests changes to this waiver, such tenant may see their landlord as being

completely unreasonable and uncooperative, souring the relationship at the outset. Landlords are

then forced to balance their own interests, sacrificing some of their rights and remedies to preserve

a good relationship with a particular tenant. This is an awkward position for both parties; such

outcome and uncertainty can and should be avoided.

If the parties are aware at the outset that a tenant’s lender will have a role to play in the commercial

lease arrangement, the parties should settle some form of agreement governing their relationship

in advance. In some cases, the landlord and lender will seek to enter into an agreement directly

with each other. In other cases the landlord may enter into a “three party agreement” with both the

lender and the tenant. Landlord’s counsel may wish to attach a landlord’s form of such agreement

directly to the offer or standard lease. The alternative is to negotiate the lender’s form in advance.

If either option is not practical or the lender is not known at the time, the parties may simply set

out the basic terms and priorities, all of which shall be subject to the parties entering into a form

of agreement, acceptable to all parties acting reasonably.

One of the key considerations in any such agreement is defining exactly which of the tenant’s

property or interests will form part of the lender’s collateral. While the merits of the landlord’s

right of distress and likelihood of actually exercising such right are beyond the scope of this paper,

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landlords will often concede that the collateral includes the tenant’s inventory, machinery,

equipment, furniture or other assets of the tenant. If there is a particularly valuable or unique piece

of equipment, the agreement should specifically set out priorities regarding that equipment.

Typically, the landlord will want to exclude the tenant’s interest in the lease itself, any deposit, or

leasehold improvements which became the landlord’s property upon installation, as normally set

out in their form of lease. In some cases however, the lender will insist that the lease itself and/or

the leasehold improvements form part of the security and that the lender will have the right to

assume the lease. If a lender is a reputable financial institution, the landlord may easily agree to

have such entity step into the tenant’s shoes. However, the lender will often also want fairly liberal

rights to further assign the lease to a third party, while the landlord will want to remain in full

control over such further transfers. The parties will have to strike a balance and negotiate these

provisions carefully.

In addition, such agreement may set out the relative priority of each party’s respective interest in

the tenant’s business, sometimes imposing a dollar limit or other threshold mechanism. The parties

may elect to allocate security over different components of the tenant’s business assets to each of

the landlord and the tenant’s lender, respectively. This allows the landlord to secure priority over

those assets which it considers most valuable. When utilizing this approach, it is important to

recognize the relative value of certain property to the landlord as opposed to the tenant’s lender

(or other secured party). For example, in the restaurant or retail context, certain fixtures or chattels

sometimes have a unique value for a particular use or purpose in the tenant’s business and may be

of particular interest to the landlord. Such value may be largely derived by virtue of location on

the particular leased premises, and may be significantly reduced when removed or sold on a

liquidation basis. Thus, an agreement that sets out and allocates the landlord and lender’s

respective interests in the tenant’s property will avoid conflict on this point in the future.

At a minimum, the lender will want the right to enter the leased premises to inspect its collateral

as well as the right to be notified of the landlord’s intent to terminate the lease in the event of any

default by the tenant-borrower. The lender might also require a period of time to cure any default

upon receiving such notice. The landlord will need to ensure that any cure period is no longer than

the period of time that the tenant has under the lease. In any event, if such notice is delivered, then

the lender will have a period of time to enter the leased premises and remove its collateral. The

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landlord will want to obtain a direct covenant from the lender that any entry to the leased premises

as a result of any enforcement proceedings will be completed in strict accordance with the lease,

including for example, the obligation to minimize interference with other tenants and to repair any

damage caused by lender’s removal of any collateral. The landlord will want this period of time to

be as short as possible, so that the landlord can move on and re-lease the space. In many

circumstances, a few days may suffice to achieve this objective. However, if specialized equipment

is involved, this period may need to be longer and should be negotiated in a way to provide parties

with an objective and practical timeline. In either event, the landlord will require the lender to pay

all rent payable during such period, but in turn the lender will want a clarification that it is not

liable to pay any accelerated rent and that it is not responsible for any of the tenant’s obligations

or liabilities that arose or are in existence prior to the lender enforcing its rights under its security

agreement. The landlord will also want to make it very clear that it only consents to the granting

of such security in favour of the lender, and does not acknowledge or approve the terms of any

loan agreement or any other document signed as between the lender and the tenant. Finally, from

the landlord’s perspective, it may be prudent to seek an acknowledgment that it will not incur any

liability for failure to deliver notice of termination and that its liability in respect of breach shall

be limited to the value of the collateral or property received by the landlord in contravention of

such agreement with the lender.

It is necessary for landlords and their counsel to keep careful records and remain aware of all such

agreements that they have previously entered into with tenants and their lenders, as these

agreements will directly affect the landlord looking to enforce its rights down the road in the event

of tenant default.

Suppliers

Suppliers also represent a significant third party interest in commercial leasing arrangements,

which landlords and their counsel should be mindful of throughout the term of the lease. It is

common for tenants, especially in retail context, to be party to conditional sales arrangements for

a variety of goods. Pursuant to such an arrangement, the tenant obtains goods from a supplier but

title to those goods does not pass to the tenant until the applicable conditions are fulfilled.

Typically, title will not pass until the supplier receives payment in full of the purchase price, which

is paid over time.

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The landlord’s right to distrain against goods sold under a conditional sales contract is therefore

limited to the extent that the conditions have been satisfied. For example, if at time of default the

tenant has only paid 25% of the total purchase price to the supplier under the conditional sales

agreement, the landlord’s right to distrain will be limited to 25% of the value of the goods subject

to that contract. The landlord does, however, have the option to pay the balance owed to the

supplier in order to exercise the full extent of its rights of distress. If the landlord decides to take

this course of action, they will be entitled to add the amount of the balance paid to the suppliers to

its claim for rent arrears. Regardless, the landlord should be fully aware of the exact extent of its

rights in the goods prior to enforcing those rights. Failing to do so could result in an unnecessary

legal conflict with the supplier.

Landlords in commercial leasing scenarios should also be aware of the third party interests of

equipment lessors. In retail and office settings alike, tenants commonly enter into leases for

equipment kept and utilized on the leased premises. Common examples include printers,

photocopiers, computers and other office equipment. Depending on the nature of the equipment

and the terms of the lease, the lessor of the equipment may or may not have registered a security

interest in the equipment. If, for example, the equipment lease provides the tenant with an option

to purchase at the end of a fixed term, it is likely that the lessor has registered a security interest in

the leased equipment under the Personal Property Security Act2 (the “PPSA”). Such a third party

interest in the tenant’s equipment would be readily identified through a public search of the PPSA

personal property register.

However, some equipment leases do not provide the lessee with the option to purchase at the end

of the lease term. In such a scenario, the lessor would not need to register a security interest under

the PPSA regime in order to preserve their interest in the equipment. In such a case, it will be

difficult for the landlord to ascertain ownership of the equipment from a typical due diligence

search of public registers and it may be difficult for the landlord to fully assess their rights in

respect of such equipment.

In order to avoid potential conflict or disputes with tenant’s suppliers, in certain circumstances

landlords may need to conduct a more thorough due diligence review or obtain certain necessary

2 RSO 1990, c P 10.

18 - 6

representations or warranties before entering into a new commercial lease. Landlords should be

aware of the third party suppliers involved in the tenant’s business, and be mindful of the exact

nature of interest in the tenant’s business and how this might affect the landlord’s rights under the

commercial lease.

Franchisors

A franchise represents a long-term cooperative relationship between two entities, based on an

agreement pursuant to which the franchisor provides a licensed privilege to the franchisee to carry

on a certain type of business. In shopping centres and other retail contexts, tenants are often

franchisee parties to franchise agreements with major franchisors. Franchisors therefore represent

a significant third party interest in commercial leasing arrangements, which landlords need to take

into consideration from the moment a lease is first negotiated.

A franchise agreement grants a franchisee certain rights to carry on and operate a specific type of

business. Therefore, the existence of such an agreement will directly affect a franchisee tenant’s

ability to lawfully carry on business in the leased premises. If a franchise agreement is terminated,

for example, the tenant may have no legal right to continue carrying on business in the leased

premises. Further, they may have no way to meet their obligations under their lease in the absence

of some other source of revenue. It is therefore imperative for landlords to make enquiries and be

aware of the existence of such a franchise agreement before entering into a lease with a new tenant.

Where such an agreement exists, it is further advisable that the landlord seek to include in the

commercial lease, as an event of default, the termination of the franchise agreement.

Landlords should also be wary of the role that the franchisor plays in a particular commercial

leasing arrangement. In some cases, where the tenant’s financial position or business judgment is

in question, the landlord may want to ask the franchisor to provide a guarantee and indemnity in

respect of the lease. In other cases, the franchisor may have entered into a head lease directly with

the landlord, being the head tenant with the franchisee as subtenant. In any case, the landlord needs

to have a clear understanding of the respective roles of the franchisor and franchisee and its

obligations to each of them. For example, a franchisor in the role of head tenant, guarantor or

indemnifier will likely be entitled to notice in the event of the default under the lease. Many of the

issues here are similar to those that arise when a tenant’s lender has negotiated a right to receive a

18 - 7

notice, cure defaults or enter into a direct agreement with the landlord, as discussed earlier in this

paper. For example, the landlord will want to ensure that the cure period granted to the franchisor

is no longer than that granted to the tenant.

From the landlord’s perspective, it is also important to keep in mind that some of the most

successful franchises have very complex corporate structures. The entity that will be signing the

offer to lease or lease may be a special purpose vehicle, perhaps incorporated solely for negotiating

leases or holding only certain assets or interests. Franchisors may resist having the “original parent

entity” holding the major assets of the franchise indemnify all landlords (at times across hundreds

of locations), and instead may only offer indemnities by certain affiliates or limit those indemnities

to a certain time period or to a certain dollar amount. At the end of the day, these are simply

business considerations particular to each deal, all of which can usually be resolved by negotiation.

Regardless, it is important for landlords to understand the nature of these relationships, the strength

of covenants given and the true value of any indemnity or guarantee provided. This will ensure

that the protection the landlord thought it was getting matches what they actually receive.

There are variety of other issues specific to a commercial lease transaction where franchisors are

involved. For example, the parties may wish to proactively address signage or the exterior

appearance of the premises, often requiring the landlord’s pre-approval upfront. They may also

wish to set out the procedures involved in de-branding the leased premises at the end of the lease

term. The landlord will also need to be wary of any agreements entered into directly with the

franchisor or franchisee when attempting to exercise its rights and remedies in respect of same.

Such agreement might provide that the franchisor is required (or entitled) to step into the tenant or

subtenant’s obligations under the lease in the event of default. In some cases, the franchisor will

have also negotiated a right to bring a new franchisee into the leasing arrangement, usually within

a certain prescribed time period. The franchisor will want the ability to simply transfer the lease to

the new franchisee, without the landlord’s consent. On the other hand, the landlord will want to

retain tight control over any new tenant or occupant, and will likely insist on a clause that the

landlord’s consent is still required, and shall be provided so long as the tenant is a specified

franchisor (making this right personal to them) and certain conditions have been met or satisfied.

Such conditions may include: (i) the lease being in good standing; (ii) delivery of an executed

sublease, franchise agreement or other transfer documentation; (iii) the franchisee providing a

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direct covenant to the landlord agreeing to observe and perform each of the covenants and

obligations of the tenant-franchisor; (iv) confirmation that the leased premises will continue to be

used for the same purpose, under the same trade name; (v) delivery of the certificate of the

franchisor that the franchisee is bona-fide and duly qualified franchisee; (vi) acknowledgment that

the landlord does not approve any of the terms of the franchise agreement or any other agreement

between the franchisor and the franchisee; and (vii) the landlord’s consent will be automatically

revoked if the franchise agreement is terminated, requiring the franchisor to resume the operations

in the leased premises. The parties may wish to pre-negotiate and attach a form of sublease or other

transfer documentation to the lease.

Licensed Users

Commercial landlords often license areas of their building or property for certain uses. The media

was the first industry to begin actively pursuing such licensing arrangements, generally outdoor or

rooftop space for advertising purposes. Commercial landlords also frequently license the use of

rooftop space to telecommunications companies, for the placement of antennae and other

equipment used to set up networks. Recently, rooftops have also become prime space for

generating renewable energy through solar panel technology. Landlords also may end up licensing

their rooftops for more innovative uses, from event venues to full-sized hockey rinks. Other

portions of the property can also end up being licensed for the placement of generators,

transformers, parking, storage, access and a variety of other uses.

Landlords need to be mindful of the interests of these various licensed users when negotiating and

entering into a new lease with a prospective tenant. To ensure they remain onside all contractual

obligations, landlords should carefully consider the ways by which the various licensing and

leasing agreements intersect and impact the rights of the various parties involved. A landlord

should not end up in a situation where they have licensed to one party the exclusive use of a certain

area of their building, while also having promised this space to a tenant under a separate lease. For

example, if the landlord wishes to lease an entire building and lands to a single tenant, it cannot

overlook the fact that the rooftop was already licensed to a third party. As obvious as this may

seem, this oversight has happened in the past.

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While licensing may not be a significant source of income to a landlord or may not appear to have

any effect on the interior of a building that is to be leased, landlords must keep track of all rights

granted to such third party licensed users. To eliminate future headaches or limitations, prior to

granting such licenses landlords should consider the impact on existing tenants and should

anticipate the needs of future tenants, as well as other potential uses of its property.

Other Tenants

It is common for landlords in the context of retail shopping centres to covenant with a tenant that

it will not lease other premises in the same centre to businesses carrying on a certain specified use.

Such a restrictive covenant is one which runs with the land, and will bind assignees of the landlord

without having to be expressly mentioned in the assignment. Therefore, it is absolutely necessary

for landlords (and tenants alike) to be fully aware of terms of all lease agreements with current

tenants when looking to enter into a new lease with a prospective tenant. Typically, landlords will

list all of the existing restrictive covenants in a schedule attached to a lease and require the new

tenant to specifically acknowledge all such restrictions. If the parties fail to do so, then costs

already expended negotiating with the prospective tenant can be completely wasted. The damage

done may be even greater where the new tenant has already entered into the lease.

Restrictions granted in the context of large shopping centres can be extremely complex. For

example, a landlord may grant a restrictive covenant affecting one area of the shopping centre

only. Further, the applicability of such restriction to that area may be limited to a specified period

of time, but may apply to a larger or smaller portion during a subsequent period. It is especially

important for landlords to keep this in mind if there is a potential for the shopping centre to expand

onto adjoining lands. One way to preserve clarity is to outline or otherwise identify the exact

portion of the centre where the restriction in favour of the proposed new tenant will apply. The

various considerations in drafting and enforcing restrictive covenants are beyond the scope of this

paper, but obviously such provisions must be carefully negotiated. Landlords typically make such

provisions subject to a number of typical pre-conditions. For example, the restriction will apply

only so long as: (i) the tenant is not in default; (ii) the tenant is itself physically occupying the

entire premises; (iii) the tenant is actively carrying on its business operations, and so on. In

addition, the landlord will want to further limit such right by clarifying that it will not lease any

18 - 10

other space in the shopping centre for a certain principal use. The landlord will then carve out

existing tenants and any anchor or other major tenants from such restriction.

Restrictive covenants must be carefully worded to ensure that landlords are not bound beyond the

scope of their initial intent. A recent case from the Ontario Superior Court of Justice, Ezmoney

Tario Inc. v. 7724934 Canada Inc.3 serves as a reminder and provides a good example of this

unwanted outcome. In Ezmoney, a restrictive covenant was the subject of dispute between a

landlord and tenant in a commercial lease scenario. The plaintiff tenant entered into a four-year

lease agreement with the defendant landlord. The plaintiff operated a pay-day loan business in the

leased premises, and the lease agreement contained a restrictive covenant pursuant to which the

landlord agreed not to lease space in this particular retail plaza to any other tenant engaged in

operating a similar business. The landlord went ahead and leased another premises in the complex

to the co-defendant EasyFinancial Services Inc. (“EasyFinancial”), asserting that EasyFinancial

was providing “instalment loans” and the covenant did not prevent it from leasing other premises

in the complex to tenants conducting similar business on an ancillary or incidental basis. The

plaintiff was successful in bringing a motion for interlocutory relief. The Court concluded that the

tenant had established, prima facie, that the landlord had breached the lease agreement by leasing

the other space to EasyFinancial, as such use was not ancillary or ultimately different from the use

reserved by the plaintiff. Trying to “split hairs” between uses of different tenants is risky. If there

is any doubt at all, the landlords should obtain a waiver from the tenant benefiting from an existing

restrictive covenant, by which such tenant will specifically acknowledge that a proposed use by

the prospective tenant will not breach the existing restriction.

While exclusive use restrictions are the most common, the landlords must also keep track of any

other restrictions that they may have granted in favour of other parties, which may or may not end

up being registered on title. For example, the landlords may agree to have certain “no build areas”

or other restrictions regulating height or size of any other buildings that may be constructed, which

may affect access to or visibility of existing structures.

3 2016 ONSC 7177.

18 - 11

Conclusion

While much has been written regarding various clauses and aspects of a commercial leasing

transaction, landlords, tenants and their counsel must also be aware of the interests of third parties.

The interests of third parties to a commercial lease can have a significant impact at various stages

throughout the term of the lease, not only at the time of default or potential termination. Therefore,

such interests should be contemplated and carefully considered from the earliest stage of lease

negotiation, identified through proper due diligence, and mitigated through a properly drafted

agreement.

28401733.1

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TAB 19

Are You Afraid of the Dark? Tenant “Go Dark” Rights

Melissa McBain Daoust Vukovich LLP

Jenna Morley

Daoust Vukovich LLP

February 22, 2017

THE SIX-MINUTE


Are You Afraid of the Dark? Tenant ‘Go Dark’ Rights

Melissa McBain and Jenna Morley

Daoust Vukovich LLP

Introduction

Most shopping centre leases contain a provision that requires the tenant to continually operate its business

in the premises. From the landlord’s point of view, a continuous operating covenant is of great importance

because it protects the landlord’s rental stream and fosters the success of the shopping centre as a whole.

A tenant, on the other hand, will seek to restrict any covenant that hinders its ability to adapt to changing

market conditions.

In some cases, tenants with superior bargaining power will negotiate a ‘go dark’ right, which permits the

tenant to cease operating its business in the premises without repercussion from the landlord, provided the

tenant continues to pay rent and otherwise perform its obligations under the lease. Most landlords are

loathe to grant ‘go dark’ rights due to the adverse effects of vacant space on the image and profitability of

the shopping centre. However, in today’s uncertain economy, the negotiation of ‘go dark’ provisions has

become increasingly common.

The purpose of this paper is to address some of the key issues with respect to ‘go dark’ rights and to offer

practical drafting considerations when negotiating these types of clauses.

‘Go Dark’ Rights

Generally

As indicated above, a continuous operating covenant is critical for shopping centre landlords. In the

absence of an express operating covenant in the lease, a tenant may cease operations in its premises at any

time, jeopardizing the landlord’s rental stream (particularly where the tenant is required to pay percentage

rent under the lease) and detracting from the overall success of the shopping centre1. Of particular

concern to landlords is the risk of the domino effect, as vacant space often results in the subsequent loss

of other current or future tenants. In addition, a particular store closure could trigger co-tenancy rights and

remedies in other tenants’ leases, resulting in reduced rent or additional closures.

1 However, see “A Note on Operating Covenants” below for a brief overview of the difficulties in enforcing operating covenants.

19 - 1

Conversely, commercial tenants seek flexibility and will often oppose any requirement to continuously

operate their business in the premises. There are a number of reasons why a tenant may seek a right to ‘go

dark’. In some circumstances, tenants facing financial strain may determine that it is more profitable to

close the business and continue paying rent than to continue operating. In other cases, a tenant with

additional locations in the vicinity of the shopping centre may wish to maintain a possessory interest in

dark space to keep competitors from opening in the neighbourhood (pejoratively referred to as

‘poisoning’ the landlord’s real estate)2.

As a compromise, the parties will often temper the ‘go dark’ provision by granting the landlord the right

to ‘recapture’ the premises if the tenant ceases to operate. In essence, a ‘recapture’ right allows the

landlord to terminate the lease and regain control of the premises if the tenant goes dark. The ‘recapture’

right is critical to the landlord in mitigating the adverse consequences of dark space in the shopping

centre.

The following summarizes some of the hot-button issues that are negotiated within a ‘go dark and

recapture’ clause.

Notice Requirement

A landlord faced with a ‘go dark’ right should require the tenant to give advance notice of any closure.

The landlord will want as much notice as possible in order to find a suitable replacement tenant for the

premises with minimal downtime, and to notify its insurer of an impending vacancy. In contrast, tenants

will often resist any advance notice requirement, citing confidentiality and staffing concerns3. The tenant

may also argue that a lengthy notice requirement adds to the amount of time that the tenant is required to

be open and operating (for example, if the tenant only has a one day opening covenant, but must give 180

days’ notice before going dark, the tenant is, in effect, required to continuously operate for 181 days).

Triggering Events

From the tenant’s standpoint, the landlord’s ‘recapture’ right should not be triggered in connection with

every closure of the premises. For example, the tenant should specify that the termination right will not

apply if the tenant closes for business in connection with any renovations, repairs, inventory taking, etc.

2 Michael Notaro, “Shedding Light when Anchor Tenants Go Dark” [unpublished].

3 Deborah Watkins & Joseph Grignano, “A Few Operating Issues: Relocation and Go Dark Rights” (Paper presented at “Casting the Net Commercial

Lease” delivered at the Law Society of Upper Canada, June 22, 2001) at 6.

19 - 2

permitted under the lease. Further, the tenant will not want the ‘recapture’ right to be triggered by any

closure due to force majeure events or damage and destruction of the premises.

Waiting Period

In drafting ‘go dark and recapture’ provisions, the parties should consider how much time must elapse

before the landlord can exercise its ‘recapture’ right. In an effort to minimize damage to the shopping

centre, the prudent landlord will seek to limit any waiting period, and may insist that the ‘recapture’ right

is exercisable immediately upon the tenant’s cessation of business. In some cases, the tenant will request a

protracted waiting period to give the tenant sufficient time to negotiate a transfer of the lease, or to reopen

for business in the premises if market conditions improve. In other cases, the tenant may be willing to

accept (or may even demand) a short waiting period in order to avoid competing with the landlord to

secure a suitable replacement tenant, or to expedite the tenant’s release of its obligations under the lease.

Nature of the ‘Recapture’ Right

The ‘go dark and recapture’ clause should clearly specify whether the landlord’s right to terminate is a

one-time right only, or whether it is a continuous right. In other words, is the landlord required to exercise

its ‘recapture’ right within a specified period of time after the tenant goes dark (e.g. within six months), or

is the right continuous, meaning the landlord can exercise the right at any time if the tenant is not

operating? Most landlords will insist on a continuous ‘recapture’ right in order to preserve the landlord’s

options for the premises.

As indicated above, some tenants will demand that the landlord exercise its termination right within a

specified period of time following the closure. In those circumstances, the landlord is faced with the

decision to either terminate (and potentially lose its rental stream from the current tenant without having a

replacement tenant lined up) or keep the lease alive and suffer the consequences of dark space for an

indeterminate amount of time4.

Staving off Termination

A central consideration in drafting the ‘go dark and recapture’ provision is whether the tenant will be

permitted to stave off the landlord’s termination by re-opening for business in the premises within a

specified period of time (e.g. within 30 days after receipt of the landlord’s termination notice). A related

4 Scott Grossfeld, “Top 10 Issues in Negotiating Go Dark Provisions in Retail Leases” (Fall 2013), online: <http://www.coxcastle.com/news-and-

publications/2013/fall-2013-retail-perspectives-newsletter/top-10-issues-in-negotiating-go-dark-provisions-in-retail-leases>.

19 - 3

consideration is whether the tenant must then agree to continuously operate its business in the premises

for the balance of the term (or for a specified period of time after re-opening). Some landlords may be

reluctant to grant the tenant a right to nullify the termination, as prospective replacement tenants may be

deterred from negotiating with the landlord if the premises are still tied up by the existing tenant.

Reimbursement of Costs

If the tenant has invested a considerable amount into leasehold improvements for the premises, it may

seek reimbursement of the unamortized cost of those leasehold improvements from the landlord if the

‘recapture’ right is exercised. Many landlords will disagree on principle, maintaining that the landlord is

not required to fund the tenant’s exit strategy5. Landlords will also contend that most leasehold

improvements are not re-usable, and as such, the landlord derives no benefit from those improvements.

To the extent that any reimbursement of unamortized costs is agreed to by the parties, the lease should

clearly specify what costs are recoverable (e.g. hard vs. soft construction costs), the evidence necessary to

substantiate those costs (e.g. paid third party invoices), as well as the method and length of amortization.

On the other hand, if the landlord exercises its ‘recapture’ right, it may seek compensation from the tenant

in the form of unamortized tenant improvement allowances and/or commissions. The landlord will

maintain that the full benefit of these expenditures to the landlord was not realized as a result of the early

termination of the lease, and that the landlord should be compensated accordingly. The tenant’s counter

position is that it was the landlord, not the tenant, that made the decision to terminate the lease early.

Ultimately, the outcome of these negotiations will depend on each party’s relative bargaining power.

Competing Uses

Sophisticated tenants may want to impose certain restrictions on the landlord’s ability to re-lease the

premises following the ‘recapture’. For example, the tenant may agree to a ‘recapture’ right, so long as

the landlord does not re-lease the premises to one of the tenant’s competitors, or so long as the landlord

agrees to limit the use of the premises following the ‘recapture’. Most landlords will vehemently oppose

any attempt to limit the landlord’s re-leasing efforts; however, if the landlord must concede to certain use

restrictions, the following conditions should be considered: (1) the use restriction should not apply unless

the tenant opens a new store within a specified radius of the shopping centre by a particular date; (2) the

5 Supra note 2 at 8.

19 - 4

definition of “competitor” should be clearly and narrowly defined in the lease; and (3) any restrictions on

use should cease to apply after a set number of years6.

Opening Covenant

In circumstances where the lease contains a ‘go dark’ provision, the landlord may nonetheless insist on an

initial opening covenant. An opening covenant requires the tenant to open for business in its premises by

a specified date.

The typical opening covenant obliges the tenant to initially open for business in the whole of the

premises, fully fixtured, stocked and staffed, on the commencement date. The practical expectation is that

if the tenant expends considerable sums to satisfy the opening covenant, the tenant is more likely to

continue operating in the premises for a reasonable period of time.

Tenants with strong bargaining power will qualify the requirement to open for business with one or more

of the following conditions7:

(1) Blackout Periods: The tenant may specify certain periods during which it is not required to open

for business. For example, many retailers will insist on a blackout period between December and

January in any calendar year to avoid an opening date that falls in the middle of the busy holiday

season. Similarly, certain tenants will decline to open during slow retail seasons, such as the

month of July. As such, the opening covenant may be qualified to state that if the commencement

date falls within a designated blackout period, the tenant may defer the commencement date until

the expiry of the blackout period. From the landlord’s perspective, the well-drafted blackout

provision will state that if the tenant elects to open for business during the blackout period, the

tenant will commence paying rent as of the date the tenant opens for business in any part of the

premises.

(2) Co-Tenancy Requirements: In some cases, an opening covenant is conditioned upon the landlord

achieving a certain threshold of occupancy at the shopping centre. For instance, a tenant may

refuse to open unless a particular anchor tenant in the shopping centre is open, or until a specified

percentage of other tenants are open and operating their stores. The prudent landlord will impose

a ‘sunset’ date on any initial co-tenancy requirement, to the effect that if the co-tenancy

6 Ibid. 7 Natalie Vukovich, “Operating Covenants, Carrying on Business Clauses and Co-Tenancy Clauses” in Harvey Haber, ed., Shopping Centre Leases

(Canada: The Cartwright Group Ltd., 2008) 337 at 341-342.

19 - 5

requirement has not been satisfied within a specified period of time (e.g. within 12 months after

the expiry of the fixturing period), the tenant must elect to either (a) terminate the lease, or (b)

elect to open for business and commence paying full rent notwithstanding that the co-tenancy

requirement has not been satisfied.

(3) Force Majeure Events: From the tenant’s perspective, an opening covenant should be subject to

force majeure events, which are typically characterized as unforeseeable circumstances beyond

the control of the delayed party (such as strikes, unavailability of materials, power failure, etc.)

Since the concept of force majeure is not fully recognized at common law, tenants seeking

protection due to force majeure delays should expressly include language to that effect in the

lease, as well as a definition of “force majeure”.

Impact on Special Tenant Rights

The tenant’s right to ‘go dark’ must be analyzed in conjunction with other special tenant rights in the

lease. If the tenant has been granted certain rights that restrict the landlord’s control or use of its property,

such as a no-build provision, exclusive covenant or pylon sign rights, arguably these rights should only

apply if the tenant is in physical occupation of the premises and actively carrying on business. With that

in mind, landlords should ensure that any special tenant rights that hinder the landlord’s control or use of

the property are pre-conditioned on the tenant being open for business, with the intent that these rights

will fall away if the tenant exercises its right to ‘go dark’.

Impact on Co-Tenancy Provisions

As indicated above, the landlord must consider the impact of any ‘go dark’ right on the co-tenancy

provisions contained in other tenants’ leases. In some cases, the landlord may have covenanted with other

tenants to maintain certain occupancy levels in the shopping centre, or that a particular anchor tenant will

remain open for business, failing which the tenant will be entitled to pay reduced rent or terminate its

lease if the critical occupancy level is not restored8. As such, landlords must be wary of the potential

ripple effect that ‘go dark’ rights may have on other tenants’ leases in the shopping centre.

Financing & Insurance Considerations

Before granting a tenant the right to ‘go dark’, the landlord must ensure that this right is permitted by the

landlord’s lender (if applicable). In some cases, a continuous operating covenant may be required by the

8 Supra note 7 at 352.

19 - 6

landlord’s lender as a condition of financing. From the lender’s perspective, a ‘go dark’ provision

threatens cash flow consistency and undercuts the stability of the shopping centre9. As such, some lenders

will object to the inclusion of a ‘go dark’ provision.

Similarly, if the tenant seeking the ‘go dark’ right occupies the whole or substantially the whole of a

building, the tenant’s decision to close for business may constitute a material change in circumstances

under the landlord’s insurance policies. Accordingly, the landlord may be legally obliged to notify its

insurer of any closure. Further, vacant space in the shopping centre may drastically increase the landlord’s

insurance premiums on the property. In considering whether to grant a tenant the right to ‘go dark’, the

landlord must determine whether the increased insurance costs will be passed on to the tenant, and

whether the tenant has the financial wherewithal to bear such costs10

.

‘Go Dim’ Rights

If a landlord is unwilling (or unable) to agree to a ‘go dark’ provision in the lease, one alternative to

consider is a ‘go dim’ provision. A ‘go dim’ provision allows the tenant to modify/reduce its business

operations in the premises without closing its store completely. For example, the ‘go dim’ provision may

permit the tenant to reduce its operating hours, trim its product lines or limit the services being offered in

the premises. In some cases, the ‘go dim’ provision will also permit the tenant to temporarily reduce the

size of its sales area in order to cut costs. Overall, the ‘go dim’ provision gives the tenant the flexibility it

needs to restructure during times of economic hardship, without jeopardizing the viability of the shopping

centre in the way that vacant space might11

.

A Note on Operating Covenants

As indicated above, most retail landlords will insist on a continuous operating covenant at the outset, and

will only concede to a ‘go dark and recapture’ right as a fallback position. From the landlord’s

perspective, the continuous operating covenant is vital because it promotes the overall success of the

shopping centre and increases the landlord’s likelihood of receiving percentage rent from the tenant.

However, we would be remiss if we did not acknowledge that continuous operating covenants are riddled

with enforceability issues. Due to the general unwillingness of the common law courts to grant

injunctions compelling tenants to open/operate, as well as the difficulty of proving the landlord’s damages

9 Joshua Stein, “How a Lender Looks at a Lease” The Practical Real Estate Lawyer (November 2014), online: < http://real-estate-

law.com/PDF/How_Lender_s_Counsel__Reviews_a_Lease_100021.pdf>. 10

Laurie Sanderson, “When Office Tenants Go Dark” (March 31, 2011), online:< http://www.lexology.com/library/detail.aspx?g=a9ff8933-dc6a-409c-aa8e-18a454ff9a87>. 11

Keith H. Raker, “Are you Afraid of the Dark? Select Issues Regarding “Go Dark” Provisions in Retail Leases” (January 2006), online:

<http://www.tuckerellis.com/news_publications/publications-61>.

19 - 7

where a tenant fails to open/operate, a continuous operating covenant is an inherently weak obligation.

Consequently, while the presence of a continuous operating covenant may dissuade some tenants from

going dark, landlords are cautioned that the continuous operating covenant is not an impervious

obligation12

.

12

For a more comprehensive analysis of the enforceability issues surrounding continuous operating covenants, see Natalie Vukovich’s chapter “Operating

Covenants, Carrying on Business Clauses and Co-Tenancy Clauses” in Harvey Haber, ed., Shopping Centre Leases (Canada: The Cartwright Group Ltd.,

2008) 337.

19 - 8

TAB 20

Go Big or Go Home Expansion Rights – An Overview

Yael Bogler

Owens Wright LLP

February 22, 2017

THE SIX-MINUTE


Go Big or Go Home

Expansion Rights – An Overview

Yael Bogler, Owens Wright LLP

February 22, 2017

INTRODUCTION

Expansion rights (also known as expansion options) are great tools for tenants with

growing businesses who desire the flexibility to expand their business with additional space in

various properties, including office buildings, power centres, industrial parks and shopping

centres. Tenants who request expansion options may not yet be ready to commit to taking on

larger spaces, cannot predict the amount of space they might need or perhaps are limited by

what the landlord has to offer at the property but are eager to get into that property and are

willing to take a chance that additional space will open up in the future. Although more

commonly requested or negotiated in the office or industrial lease context, there are certainly

situations where this is found in the retail leasing context. Expansion rights are great

inducements for certain tenants and may be integral in a tenant’s decision to lease space at a

given property. Expansion rights, however, impose restrictions on the landlord’s flexibility to

deal with its property as it sees fit and also impose constraints on a landlord’s ability to manage

its relationships with other tenants or occupants of its property.

This paper will review the key drafting and practical considerations when negotiating

various tenant expansion rights. For ease of reference, the space that is subject to an expansion

right will be referred to in this paper as the “Additional Space”. Both parties should give

sufficient attention to the details of the clause being drafted, whether at the offer or lease

negotiation stage. It should be clear from the outset how the right is to be exercised, when the

right is triggered, what space is subject to the right, how the parties will determine the rental

20 - 1

rates and other terms and what pre-conditions will need to be satisfied in order for the tenant

to exercise its right. Too often, particularly at the offer stage, the parties have not set their

minds to what the parameters of the right will look like and this could cause issues both at the

lease negotiation stage and in the future when a tenant seeks to exercise or enforce its right.

TYPES OF RIGHTS

There are generally three types of expansion rights: (1) rights of first offer, (2) rights of

first refusal, and (3) fixed expansion options (also referred to as options to lease).

Rights of First Offer

A right of first offer (“ROFO”) typically requires a landlord to first offer the Additional

Space to the tenant before it can go to market and offer the Additional Space to third parties.

Certain tenants prefer ROFOs since, depending on how the ROFO is drafted, it enables the

tenant to negotiate terms for the Additional Space before the market might drive up the rental

rate for that particular space. Moreover, as the title of this right suggests, a tenant is getting the

first look at the Additional Space and it has the opportunity to seize the Additional Space before

the landlord can offer it to anyone else. On the other hand, one of the drawbacks of a ROFO for

a tenant is with respect to the rental rate (which will be discussed in further detail below),

which may not be reflective of market conditions and there is a risk that the tenant might

overpay for the Additional Space. Another drawback for a tenant is that ROFO’s are more often

than not drafted as agreements to negotiate so, once the time period for negotiation has

expired, the tenant has potentially lost its opportunity for the Additional Space if no such

agreement is reached within the requisite timeframe – there is no real security for the tenant

that it will be able to lease the Additional Space. From the landlord’s perspective, a ROFO is less

burdensome than the other two types of options to expand which are discussed below and

involves the least amount of effort from the landlord. If done early enough in the leasing

process, the landlord may not lose momentum on leasing the Additional Space to another party

in the event that the tenant waives or declines its expansion right on the Additional Space.

Granting a ROFO provides landlords with minimal disruption to their leasing process, does not

require landlords to commit a large amount of time or resources compared to a right of first

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refusal and will not encumber the Additional Space in the same manner as a right of first refusal

or fixed expansion option as further discussed below.

Right of First Refusal

Unlike a ROFO, a right of first refusal (“ROFR”) requires that once the Additional Space is

available to lease, the landlord must first go to market, source and obtain a third party offer for

the Additional Space and then submit the offer to the tenant for the tenant to match. From a

landlord’s perspective, this may be less than ideal, given that it has to utilize time, money and

resources to market the Additional Space and secure a third party offer. If the tenant decides to

match the third party offer, then the landlord may be tarnishing a future relationship with a

potential new tenant. Additional Space that is subject to a ROFR is also less marketable to

potential tenants, since third parties will likely be wary of investing the time to negotiate with a

landlord for space that is encumbered by a ROFR. From a tenant’s perspective, this may be

preferred as it does not have to put much effort or time into preparing or negotiating an offer

with the landlord and just needs to wait and see what the landlord will bring forward.

Fixed Expansion Option

In a fixed expansion option (or an option to lease space), a tenant typically has the

exclusive right during a defined period of time in which the tenant must exercise the option on

a defined space. This is more common in situations where both the landlord and the tenant are

aware that Additional Space will become available shortly after the term of the lease

commences but the tenant is not yet ready to commit to the Additional Space or wants to get

into the building as soon as possible and will take the Additional Space once it becomes

available. With a fixed expansion option the rent will usually mirror the rent payable under the

terms of the lease or the rate will be fixed at a rate set out in the option itself. Having this

option is attractive to a tenant since it knows that it will have the ability but not the obligation

to lease the Additional Space and will likely only do so if its financial and business situation

predicts growth by the time the option must be exercised. Landlords will want to limit the time

that this option is available to a tenant since it will restrict a landlord’s ability to lease the

Additional Space until the tenant either exercises its option or waives it.

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KEY DRAFTING AND PRACTICAL CONSIDERATIONS FOR EXPANSION RIGHTS

1. Identifying the “Additional Space”

Both landlords and tenants should have a clear idea as to what space will be subject to

the expansion right. This can be done by either outlining the Additional Space on a plan or

specifying and describing the Additional Space in very clear detail in the clause itself (i.e. any

available space on a particular floor of the building or wing of a shopping centre or the whole of

a floor in the building). If the clause is going to state that the tenant will have the right to any

adjacent space to the existing premises, it should be made clear whether it is only intended to

include space that is adjacent horizontally on the same floor or whether it includes space that is

adjacent vertically on the floors below and above the tenant’s existing space.

Another consideration with respect to the Additional Space is whether the Tenant is

required to take the whole of the Additional Space or whether it will be permitted to take a

part of it. If the landlord will permit the tenant to take less than the whole of the Additional

Space, the landlord may want to consider including a ceiling and floor on the square footage

that the tenant is permitted to lease. Further, the landlord should specify that if the tenant is

taking less than the whole of the Additional Space, then the tenant will only be permitted to

take a portion of the Additional Space that has a configuration that enables the remainder of

such space to be properly leasable or alternatively that the landlord will have approval rights

over the remaining space for marketability purposes and to also ensure building and zoning

compliance. If it is the landlord’s intention that the Tenant is obligated to take the whole of the

Additional Space then this should be made clear in the option.

To avoid arguments down the road, it must be crystal clear in the lease as to which space the

expansion right affects.

2. Defining whether the Additional Space is “available to lease”

An important drafting consideration is to determine when the Additional Space

becomes “available to lease”. The triggering event for a ROFO is when Additional Space

becomes “available to lease”. With a ROFR, if the Additional Space becomes “available to

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lease” it may trigger the Landlord’s obligation to source third party offers for a ROFR

(depending on how the ROFR is drafted).

Landlords will want “available to lease” defined as broadly as possible to ensure

maximum flexibility for the existing occupant of the Additional Space and to know for certainty

that the existing occupant is going to be permanently vacating the Additional Space. Tenants

will of course want the definition of “available for lease” be defined as narrowly as possible –

the tenant’s view is that unless the existing occupant of the Additional Space has rights to

extend or renew that are in existence prior to the landlord’s granting of the ROFO or ROFR,

then any subsequent arrangements the landlord attempts to make with the existing tenant

should be subordinate to the tenant’s expansion option. This can put a landlord in a precarious

position with the existing tenant of the Additional Space and could potentially damage the

landlord’s relationship with that existing tenant if the existing tenant is precluded from being

able to remain in the Additional Space due to the Landlord’s granting of an expansion right over

the Additional Space. Landlords will want to include language that permits a landlord to enter

into a new lease, renewal or extension agreements (whether the existing tenant has options to

extend or not) or even an overholding arrangement with the existing tenant of the Additional

Space. It should be made clear by the landlord that the lease or other agreement with the

existing tenant in the Additional Space must be expired or is otherwise terminated and the

existing tenant has permanently vacated the Additional Space before the Additional Space is

“available to lease”.

Further, the landlord needs to consider other types of occupants in the Additional Space

other than the existing tenant (for example subtenants) as well as situations that could

inadvertently or on a technicality trigger the tenant’s ROFO or ROFR. Landlords would be

prudent to further qualify that that the expansion right or option does not apply to a situation

where the existing occupant assigns, subleases or undergoes some other type of transfer and

that the landlord is free to enter into any such agreement with a trustee in bankruptcy or

receiver of the existing tenant without triggering the tenant’s ROFO or ROFR. Landlords may

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also want to ensure that the language is expansive enough to allow the landlord to enter into

direct agreements or arrangements with subtenants of the Additional Space.

Landlords should ensure that in the drafting of the definition of “available to lease” that

they also include a caveat that the tenant’s expansion right is subject to pre-existing rights for

the Additional Space. There could be a few other tenants in the building that have already been

granted rights over that space and it is critical that the landlord make the tenant aware of these

rights before granting the right to the tenant. The last thing that a landlord would want is to

grant competing rights to tenants over the same Additional Space. A prudent tenant should try

to clarify with the landlord exactly which tenants (and how many) have rights that are in

priority to theirs. Having this knowledge will give the tenant a realistic assessment of whether

or not it will have the opportunity to lease the Additional Space at some point during the term

of its lease.

3. Timeline and Process for Exercising the Expansion Right

Any expansion option needs to properly set out the time frame and process in which the

parties must notify and respond to the other.

For a fixed expansion option, it is likely that the clause will stipulate that the tenant has

a fixed time frame in which it must give notice by in order to exercise the option on the

Additional Space. If for some reason, the rental rates have not been set for a fixed expansion

option, then the fixed expansion option should include a timeline (similar to those found in

extension options) for the parties to negotiate rent and submit to arbitration if they cannot

agree on the rate or specify that the option becomes null and void

In the case of a ROFO, once the Additional Space has become “available to lease”, the

landlord is obligated to notify the tenant and either present an offer to tenant or request that

the tenant make an offer (depending on how the clause is drafted). The tenant will then have a

period of time in which it will need to respond to landlord’s offer or alternatively make its own

offer for the Additional Space. There is typically not a significant amount of time for the parties

to negotiate back and forth (if a negotiation period is even contemplated by the clause at all).

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Although a landlord will want to free up the Additional Space so that it can market the

Additional Space as soon as possible, if the tenant has leverage it should be able to obtain a

lengthier time period in which to consider a landlord’s offer or propose its own offer. From the

tenant’s perspective it needs sufficient time to do its own due diligence and market research so

that it can assess what the potential market rent is for the Additional Space and whether the

Additional Space meets the tenant’s current business needs.

If the expansion option is a ROFR, the landlord is typically required to notify the tenant

once it receives a third party offer to lease the Additional Space. Additional considerations will

need to be thought of to address the process and timing with respect to expansion rights that

are ROFRs. Is the landlord obligated to provide the tenant with a copy of the offer or just key

terms of the third party offer? A tenant will want to see the exact offer itself so that it knows

precisely what it is required to match. In terms of timing, unlike a ROFO, a landlord has a third

party potential tenant waiting in the wings and it will want the tenant to make a decision as

quickly as possible so as not to lose the third party offer in the event that the tenant declines

the landlord’s offer. In these situations landlords should keep the tenant’s response period as

short as possible. A five day response period is unlikely to kill a third party offer but anything

longer than that may have a negative impact. Time is truly of the essence here for a landlord

and tenants will need to be mindful of this.

4. Rental Rates and Other Terms

Rental rates are at the heart of any expansion right and will likely be the determinative

factor in whether or not the tenant exercises its expansion option. Any expansion option must

clearly set out how rent will be determined.

As mentioned earlier in this paper, if the expansion option is a fixed option to expand,

then the rental rate will likely be fixed at the time the option is negotiated and will either

match the rates set out in the lease for the tenant’s existing space or will be another fixed rate

agreed to by the parties at the time of negotiation of the expansion right. If for some reason

the rate is not fixed, the parties will want to ensure that the clause has been drafted so that

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there are parameters for determining rent and a mechanism for settling the rent if the parties

cannot agree (i.e. arbitration).

ROFRs will generally stipulate that the tenant must match the rental rate and other

terms being offered in the third party offer that the landlord has brought to the tenant. From a

tenant’s perspective, this can be advantageous since it has the last look on a third party deal

and it can take some comfort that the rates and terms are reflective of market conditions or in

fact are even more favourable to the tenant. Since a third party is negotiating for space

encumbered by a ROFR, the third party is in a much stronger negotiating position with the

landlord and the terms ultimately negotiated for the Additional Space may be less favourable to

the landlord than that which landlord would have otherwise been able to negotiate with that

third party absent the ROFR.

For ROFOs, depending on when the right is to be exercised, landlords may be amenable

to agreeing to the same rental rate as the tenant is then currently paying for the tenant’s

existing space and may even consider offering similar inducements as were granted to the

tenant for the lease for its existing space. This is more likely to happen if the tenant exercises

the ROFO within the first year or two of the term of its lease. A tenant could try to argue that

setting the rates at the current rates under the tenant’s lease is the quickest and least painful

way to arrive at the rental rates for the Additional Space but a landlord should be reticent to

accept this argument given that if market conditions permit, it could probably attract a higher

rent for the Additional Space at the time it becomes available for lease then what the tenant is

currently paying under its lease.

If the ROFO is exercised later in the term of the tenant’s existing lease, there are a

variety of ways that the option can be drafted, and all will depend on the respective bargaining

strength of the parties. Some landlords may structure the ROFO so that the landlord will put

forward an offer to the tenant setting out the terms and conditions on which it would be

prepared to lease the Additional Space to the tenant (no stipulation of whether the rates need

to be market) and the tenant will need to determine whether or not it is prepared to accept the

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landlord’s terms. This is most ideal from a landlord’s perspective as it has full control over the

parameters and terms on which it is prepared to lease the Additional Space to the tenant.

Alternatively, some landlords prefer that the tenant must present an offer to the

landlord outlining the terms and conditions on which the tenant will be prepared to lease the

Additional Space for the landlord’s consideration. While this option gives more flexibility to the

tenant to set forth parameters and terms that are best suited to them, generally the tenant

only has one shot at making the offer and the time period for negotiations is quite limited with

no guarantee that the landlord will accept the tenant’s terms. There is a risk that once the

negotiation period is over the landlord will not accept the terms and the tenant will have lost its

opportunity for the Additional Space. This situation is perhaps the riskiest for a tenant since it

offers little certainty that the tenant will be able to secure the Additional Space.

For tenants with sufficient bargaining power, the landlord may agree that rent will be

based on a definition of fair market rent. If the parties agree that the rent to apply to the

Additional Space will be based on some form of definition of fair market rent, then the landlord

may seek to limit this further by including language that provides that in no event shall the per-

square-foot fair market rent for the offer space be less than the per-square-foot rent that the

tenant is then paying for its existing space. If the landlord is amenable to using a fair market

definition for setting rent, then the parties might also agree (or the landlord may require) that

the tenant be bound upon the exercise of its option and if the parties cannot agree on rent then

they will submit to arbitration. Depending on the circumstances, this could be an ideal

situation for both the landlord and tenant, as it provides the tenant with certainty that it will be

able to obtain the Additional Space and provides both parties with some level of comfort that

the rent payable will be comparable to market rent (provided of course that the parties can

reach an agreement on rent).

Other terms that may be presented in the offers set forth by the landlord or the tenant

may include how the Additional Space is to be delivered (i.e. in an “as is” condition), any

inducements, allowances or rent free periods, fixturing periods and timing for same, and the

date the Additional Space will be available. Some landlords and tenants will negotiate these

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provisions up front in the clause, while others will consider this to be part of the package that is

offered for the Additional Space at the time the option is to be exercised.

Generally speaking, the term of the lease for the Additional Space will be co-terminus

with the term for the tenant’s existing lease and although this might seem obvious, it should be

stated as such in the clause so that both parties are aware that term length will not be subject

to negotiation at the time that the tenant is exercising its option.

5. Pre-Conditions to Exercising an Expansion Right

As with many special tenant rights in leases, it is critical for landlords to set out what

pre-conditions or conditions precedent (also often referred to as “required conditions”) are

necessary to be complied with or fulfilled by the tenant before the tenant will be entitled to

exercise its expansion right.

Typically, landlords will want to include a condition that the tenant has not been in

default under the lease and is not at the time of exercising its expansion option in default under

the terms of the lease (or similar language to that effect). Depending on the sophistication and

negotiating strength of the tenant, this pre-condition is often modified and negotiated so that it

is only applicable to material defaults or defaults existing at the time the option is to be

exercised and specifies that the tenant has its applicable notice and cure periods provided for

under the lease.

Another pre-condition that will likely be attached to any expansion option is that the

tenant has not assigned the lease. Landlords will want to ensure that the right remains personal

to the tenant and does not get assigned to a third party assignee on the basis this right is

unique to the tenant’s business and growth trajectory. Typically a landlord will agree to allow

the tenant to assign the lease to an affiliated company without nullifying the tenant’s expansion

right. Whether the tenant can further include other types of transferees such as purchasers of

its business or other types of permitted transferees will depend on the negotiating strength of

the tenant. Similar to options to extend and other special tenant rights, many tenants prefer

that expansion options be assignable as they increase the value of the lease.

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Aside from the more general pre-conditions noted above, of particular importance is the

timeline within which the tenant will be entitled to exercise its option during the term of the

lease. For a fixed expansion option, the clause will set out a date or time period by which the

tenant must exercise its right by, failing which the right becomes null and void. It is typical for a

ROFO or ROFR to include a condition that there are a certain number of years remaining in the

term in order for the tenant to exercise the ROFO or ROFR, as the case may be. From the

landlord’s perspective, if there are one to two years left in the term of a tenant’s lease, the

landlord will not want to tie up the Additional Space for a short term lease. However, if a

tenant has also been granted extension options under the lease, the parties may agree that

although there is less than one or two years remaining on the term under the lease (or some

other amount of time), if the tenant exercises one of its options to extend then the tenant will

be permitted to exercise its ROFO or ROFR.

A landlord will also want to ensure that the tenant is continuously operating in its

existing premises (particularly if there is no continuous occupancy requirement in the lease

itself) as a condition to the tenant exercising its option. Further, a landlord would also be wise

to condition the expansion option on the tenant not having sublet its existing space or not

having downsized or surrendered any portion of the existing space. The rationale behind these

conditions from the landlord’s perspective is that the landlord is granting an expansion option

to the tenant on the basis that the tenant’s business is growing. If at the time the expansion

option is triggered the tenant is not utilizing its existing space to the fullest extent or is not even

operating in the space, then it would be reasonable to question why such tenant requires an

expansion option. As a tenant it would be difficult to completely remove these two conditions,

however, depending on the bargaining strength of the tenant or the type of business the tenant

is operating, the landlord may be amenable to allowing the tenant to sublet a certain

percentage of its existing space without having an impact on the tenant’s ability to exercise its

expansion option.

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6. Considerations for After the Expiry, Termination or Waiver of an Expansion Right

If a tenant does not exercise its option, fails to respond to a landlord’s notice or offer or

alternatively declines the landlord’s offer, there are a few issues to consider.

If the tenant declines the landlord’s offer, fails to respond to the Landlord’s notice/offer

within the time period stipulated in the provision or waives its right to the Additional Space, is

the landlord off the hook forever? If so, it should be specified that the tenant’s right is

extinguished and moreover that this is a “once only” right. If not, it should be specified that the

right shall apply again with respect to any portion of the Additional Space which is available for

leasing or when the Additional Space again becomes available for leasing. Many landlords will

want the right to be a one-time right only and will want to extinguish the tenant’s option after

the first time the Additional Space becomes available for lease, otherwise the tenant’s

expansion option is potentially a never ending restriction on the landlord’s ability to deal with

its property. The challenge for a tenant is that it is unable to control when the Additional Space

becomes available for lease and the timing may not work for the tenant when the Additional

Space becomes available to lease the first time. There is a valid argument for a tenant wanting

to have a continuing expansion option so that it can enjoy the flexibility that expansion rights

provide and exercise the option at a time when the tenant has the need to utilize the Additional

Space. In this regard, most tenants will try and argue that the expansion option should be a

continuing right throughout the term and that they be granted the opportunity to exercise the

ROFO or ROFR each time the Additional Space becomes available for lease again. Whether a

landlord agrees to this will depend on the parties’ respective bargaining strength.

For a landlord it is prudent to include language that expressly permits the landlord to

subsequently offer the Additional Space for lease to any other person at whatever terms and on

whatever conditions it deems appropriate or acceptable if a tenant does not exercise its option,

declines the landlord’s offer or the conditions for exercising the option are not met. As a

tenant, you may want to try to negotiate that the landlord cannot lease the space on terms that

are less favourable than the ones that were in the landlord’s offer or than those set out in the

tenant’s offer. From a tenant’s perspective, it is inherently unfair for the landlord to turn

20 - 12

around and lease the Additional Space to a third party on worse terms than those proposed by

the tenant.

Another important, although often overlooked, consideration for landlords to obtain

written confirmation or a waiver from the tenant that it is not accepting the offer, it is waiving

its right to the Additional Space or it is confirming that the expansion option is not applicable

under the particular circumstances. This will avoid any future disputes as to whether the

landlord in fact sent notice or an offer and will specify that the tenant received the offer or

notice of the availability of the Additional Space and nevertheless waived its right to the

Additional Space or rejected the landlord’s offer. It will also enable the landlord to comfortably

market or lease the Additional Space free of any encumbrances.

Conclusion

Both tenants and landlords need to be thoughtful in negotiating tenant expansion

rights. As discussed above, expansion rights can be an excellent tool for a tenant with a growing

business as well as a great inducement for a landlord to grant to a tenant that it is trying to

attract to its property. At the same time, a landlord must carefully weigh the benefits of

granting expansion rights to a new tenant against the risk of potentially overburdening its

property while managing its relationships with existing tenants. With proper drafting and

carefully negotiated provisions, landlords and tenants should be able find a solution where both

parties are satisfied with the terms of a tenant’s expansion right.

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TAB 21

Do You See What I See? Vistas and No Builds

Celia Hitch, Director, Retail Legal Services,

Oxford Properties Group Inc.

February 22, 2017

THE SIX-MINUTE


Do You See What I See?

Vistas and No Builds

Celia C. Hitch

Law Society of Upper Canada

February, 2017

Introduction

Typically, provisions protecting the vista to a tenant’s premises is a concept only seen in retail

leases

Inherently, tenants and landlords will have competing objectives when considering these issues

Tenants will want to ensure that people can find them and that they can use their presence as a

form of advertising for their products so being highly visible is important to them

Landlords see many of these limitations as hindering their ability to fully capture value from

their assets by restricting what the landlords can do with certain parts of the assets

No Kiosk Provisions and Interior Vista Protections

A typical landlord “no kiosk” stepdown is a fairly soft statement that the landlord will not allow a

kiosk within 10 feet of the tenant’s storefront

Landlords will write these stepdowns so that the no kiosk area is built as a rectangular box, the

short sides of which project straight out 10 feet into the common areas from the demising lines

for the sides of the tenant’s store and the long sides of which are the storefront of the store and

a parallel line 10 feet away from the storefront

Tenants may want the 10 feet to run parallel with the storefront but also project in a quadrant

at each edge of its storefront so that it is visible not just to someone standing directly in front of

the store but also to someone approaching it down a common area aisle

Tenants may want to refine the no kiosk provision further by seeking a zone which projects

further than 10 feet into the common area corridors or even by seeking to have a zone which

stretches across all the common area in front of the tenant’s store to the wall of the opposite-

facing tenant

The major reason that landlords are comfortable giving a 10 foot no kiosk zone is that most fire

codes restrict what can be placed within 10 feet of a storefront and it is highly unlikely a

landlord could place a kiosk there anyway

For tenants wanting their vista to be protected, consider if full kiosk prohibition is necessary or if

it is sufficient to agree to height limits on any kiosk placed in front of the store

If, for example, a kiosk were limited to 48 inches in height, it would not likely block many

people’s view of the tenant’s sign

Where landlords and tenants will start to polarize is when tenants want more than that 10 foot

zone since it affects not just what the landlord can do with the common area in front of the

21 - 1

store but also potential income the landlord can realize from putting a cart or kiosk in front of

the store

Tenants should expect landlords to resist a request for kiosk protection is there is an existing

kiosk

Possible compromises include landlord agreeing to relocate kiosk before commencement date

of tenant’s term or landlord agreeing not to renew kiosk at the end of its term

Landlords should consider issues regarding possible future changes in identity of kiosk tenant

when drafting any provision grandfathering an existing kiosk so that there is no future

misunderstanding if the lease for the kiosk is assigned to a tenant trading under a different

banner

As well, landlords will want to accommodate a redesign and rebuild of existing kiosk if kiosk

tenant has that right, as well as any unexercised options to renew kiosk tenant may have

Tenants should expect landlords to reserve for garbage containers, benches, interior

landscaping and the like, as these are amenities that most landlords provide at regular intervals

throughout the shopping centre

Tenants of “centre court” type of space should be aware that a landlord may want to reserve for

its seasonal displays since Santa displays and the like are typically located in centre courts

As well, tenants in corner units should expect to see a reservation which would allow a landlord

to put a directory in front of their store since the intersection of two common area corridors is a

logical place for landlord to want to put directional signage

All of these factors need to be considered when approaching a no kiosk type of provision

Tenants who are located in certain parts of a shopping centre, for instance, exit aisles, may also

want to have rights to place blade signs on their storefront so that people walking down the

main aisle will have some awareness that they are there

Some landlords are open to these signs; others are not

Although one or two may be helpful to tenants on exit aisles, a proliferation of blade signs on a

main aisle can clutter up the feeling of the shopping centre and create a result where one

tenant’s blade sign is blocking all the others so that the benefit of using them is lost

A landlord who is prepared to give this right needs to ensure that it is not violating covenants

given to tenants in the immediate vicinity of the store in question

Exterior Vista Protections

Tenants who have signs on the exterior of a shopping centre often want to ensure that their

store – and, in particular, their sign – is visible from the abutting roadway

Landlords will normally resist this, as it may hamper their ability to change the use of land which

is currently unused or used as surface parking and therefore currently generates no revenue for

the landlords

Consideration needs to be given to the possible types of construction or improvement the

landlord may want to add to the shopping centre

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These may range from exterior landscaping (trees, lampposts, fountains) to structures (parking

decks, expansions to the shopping centre, new outparcel buildings ranging from small pad sites

to independent office or residential/hotel buildings)

Consider the true interest each party is trying to protect when drafting. For instance, if a

landlord has a 25 year master plan which shows that, in year 20, it will construct an office

building in front of tenant’s store, is it possible to make some time-limited concessions? In turn,

if tenant just wants people to be able to see its sign from the street, does it need a broadly

defined no build area or will a protected view corridor – measured by projecting the side

demising walls of the premises to the applicable roadway – suffice?

When drawing a view corridor, consider where the viewer should be standing when creating the

corridor

Because the parties’ needs will inherently be competing in this situation, tenants will need a

strong position to be able to get significant concessions from landlords

Typically, only very large, anchor-type tenants will have enough leverage to even get the

landlord to engage in a discussion about a full-blown no-build zone, as to do so is to limit

landlord’s ability to capture new value from an existing asset; for the landlord there has to be a

sufficient upside in giving the no build to balance that lost income

A possible compromise is to limit any right to a set period of time, for instance, if a landlord

knows it will not be constructing any structures in front of the tenant’s store for at least 10

years, it may be possible to agree to an outright prohibition for that period

For the tenant, this may be an acceptable concession since, after 10 years, their presence in the

shopping centre will already be established in the minds of their customers and the advertising

nature of the exterior sign may be less important

Consider requiring the landlord to trigger a relocation to another area in the shopping centre

which has an unobstructed vista if the landlord proposes to construct something which will

obstruct the tenant’s exterior storefront

Alternatively, if the landlord is willing to accept the risk of losing the tenant, the landlord could

consider giving the tenant a termination right if landlord wants to build in the no-build zone

Conclusion

Rights to protect the vista to a tenant’s store can range from fairly soft rights to very strong

rights

In considering asking for or giving such rights, tenants and landlords need to listen well to each

other’s needs, in order to be able to work together to achieve the right solution

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TAB 22

Exclusive and Naming Rights in Office Buildings

Abraham Costin

McCarthy Tétrault LLP

February 22, 2017

THE SIX-MINUTE


Abraham Costin McCarthy Tétrault LLP

EXCLUSIVE AND NAMING RIGHTS IN OFFICE BUILDINGS

Introduction

We are all accustomed to retail tenants in shopping centres demanding and often getting

“exclusives” - the right to be the only store in the mall selling a particular product. We are all

also tuned into the many issues arising from exclusives in the retail setting.

Increasingly, office tenants--especially lead office tenants in new towers--are demanding similar

exclusives to those being sought in shopping centres and the corresponding control sought by

those office tenants in the naming of the building. The rationale for granting these rights,

however, cannot be the same. Office tenants do not pay percentage rent nor is a wide-range of

office tenant uses vital for a thriving office building.

There appear to be two real reasons:

1. senior executives don’t “like” having competing businesses in the same office building;

and

2. office tenants don’t want their clients who visit them to know there are alternative service

providers.

In addition, exclusiveness leads almost always to predominant signage and building naming

rights.

The issues relating to reasonableness and whether exclusives can be restraints on trade and

against public policy are essentially the same as in the retail setting. Much has been written on

those and there seems little point in repeating it (see, for example, Exclusive Rights and Non-

Competition Clauses by Stephen Messinger and Christina Kobi, in Shopping Centre Leases, 2nd

edition, Harvey Haber, ed. (2008)). It is worth noting, however, that many of the cases which

find restrictive covenants in shopping centres reasonable (and, therefore, not an unreasonable

restraint on trade) do so on the basis that a varied tenant mix in the shopping centre is required

for the centre to thrive. It is not clear to me that the same analysis applies to an office building

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where there is no requirement to attract customers to the building in the same way as there is

for a shopping centre.

Exclusives

Unlike retail tenants it is often difficult for a landlord to know exactly what it is prohibiting when it

grants an office tenant an exclusive--especially when the exclusive is described in overly

general terms. For example, if an office tenant’s exclusive prohibits another bank in the

building, does that include insurance companies owned by banks or stock brokers owned by

banks?

Better, in my view, is to restrict the exclusive to a defined list of named entities who compete

with the tenant. The tenant can change the list annually but is limited to a prescribed number of

names.

The landlord needs the following protection:

(a) the exclusive can’t apply to existing tenants (including expansion by existing

tenants) or to assignments or subleases by existing tenants;

(b) the exclusive needs to be “baked into” the standard form lease to protect the

landlord in respect of future tenants;

(c) the exclusive can’t apply to any tenant if it is bought by or amalgamated with a

competitor;

(d) the exclusive should end if the tenant is not leasing and occupying a certain

threshold area. The occupation test is important--any rationale for office

exclusives disappears if the tenant has sublet a significant part of its premises. If

the tenant assigns the lease does the exclusive disappear--especially if the

assignment is to a different business? Unless the assignment is to the same

type of business, the exclusive will probably have to be re-negotiated; and

(e) a change in the list cannot affect a deal the landlord is then negotiating with the

newly listed competitor.

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Naming Rights

Giving a tenant the right to name the building is a very big concession by a landlord and can

seriously affect the marketability of the balance of the building. If a senior executive doesn’t

want to lease space in a building where competitors occupy space he or she definitely doesn’t

want to lease space in a building named by a competitor.

However, if a landlord has agreed to grant naming rights, consider the following issues:

1. Does the landlord have to use the name? Does it have to require all other tenants to

use the name?

2. How much out of premises signage is associated with the naming rights and are the

signage rights exclusive?

3. What if the tenant assigns the lease or changes its name, does the building name

change as well?

4. The same requirement for a minimum leasing and occupation threshold is needed--it is

pointless to have a building named after a tenant either no longer in occupation or

occupying a relatively small premises (regardless of how much that tenant is actually

leasing).

Default by Tenant

Leases often provide that special rights like naming rights and exclusives only subsist if the

tenant is not in default. While I understand that kind of condition on rights such as renewals,

partial surrender rights or expansion rights, I have more difficulty understanding the effect of a

no default condition on naming rights and exclusives. Does the building stop having the

prescribed name while the tenant is in default and then reverts to that name if the default is

cured? If a tenant goes into default can the landlord go on a spree leasing to named

competitors?

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Conclusion

A few conclusions reached after considering these issues:

1. Granting an office tenant an exclusive and building naming rights will almost certainly

affect the marketability of the rest of the space in the building.

2. Exclusives need to be narrow and, more importantly, understandable by the landlord’s

leasing representatives--better to have a list of prohibited names than a category

defining the exclusive.

3. Exclusives shouldn’t prohibit something the landlord cannot prevent.

4. Naming rights should be limited to a defined name.

5. Special rights like exclusives and naming rights should require the benefitting tenant be

leasing and in occupation of a threshold amount of space in the building.

6. Consider whether special rights should be conditioned on tenant not being in default. If

so, is it all default? What happens if the default is cured?

I have attached a couple of sample provisions – I don’t claim they are perfect but i think they

highlight the issues.

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Building Naming Rights. Provided that the Tenant is at all times during the Term leasing at least 250,000 rentable square feet and occupying at least 200,000 rentable square feet in the Building and is not in default under Sections ● of this Lease [bankruptcy, etc.], all references to the Building will be named “● Tower” or, at the Tenant’s option, “● Tower” (the “Building Name”), or following an assignment or sublease of all of the Leased Premises, such other name designated by Tenant, subject, other than in the case of a sublease or an assignment to a Related Party, to Landlord’s approval, in its sole discretion. The Tenant will hold registration of the name “● Tower” or any other renaming of the Building as agreed to by the Landlord as hereafter provided and will license same to the Landlord at no charge for the Term. The Tenant reserves the right to change the Building Name to such name as it may be publicly known from time to time, with Landlord’s consent, not to be unreasonably withheld.

Restrictive Covenants. Provided that the Tenant is at all times during the Term leasing at least 250,000 rentable square feet and occupying at least 200,000 rentable square feet in the Building and is not in default under Sections ● of this Lease [bankruptcy, etc.], Landlord is prohibited (to the extent allowable by law) on leasing, subleasing, assigning or permitting occupation by the Landlord or by other Building tenants to the following companies (or their affiliates or related parties) carrying on business as ●:

●

●

Hereinafter referred to as the “Competitors”.

This restrictive covenant shall enure to the benefit of the Tenant, its successors and assigns, and shall run with and burden the Lands. The Tenant may from time to time, by written notice to the Landlord, no more often than once per calendar year commencing on the date hereof and during the Term or any extension term, amend the above list of Competitors by adding or deleting names (which additions will be subject to (i) prior tenant’s rights or expansion requirements at the time of such addition and (ii) deals which are, at the time of such addition, being bona fide negotiated with one or more Competitors then added to this list) provided the total number of Competitors does not exceed [eight]. The Tenant shall have the right to register the benefit of this covenant as a restrictive covenant against the Lands in a form acceptable to the Landlord (as part of the Notice of Lease to be registered by the Tenant), acting reasonably.

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