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Lawyers can miss nuances costly to clients

|Written By Daryl-Lynn Carlson

A number of significant developments have impacted the courts’ interpretation of commercial leases, prompting the Ontario Bar Association to host a session summarizing hot topics in the field.

Harvey Haber says lawyers in any area of practice who occasionally facilitate leases are rarely able to keep abreast of developments.

Session chair Harvey Haber, partner at Goldman Sloan Nash & Haber LLP, notes that lawyers in any area of practice who occasionally facilitate leases are rarely able to keep abreast of developments, nor can they afford to commit the time to pore over the increasingly voluminous paperwork involved.

“You look at 40-to-50-page printed leases today and a lot of lawyers can’t charge their clients the time” to interpret the nuances, Haber says. “They’ll look through the lease very quickly and pick out a dozen issues and see what they can do negotiating those.”

Yet if there’s a dispute, going to court or even arbitration “is very expensive,” Haber says.

The OBA session, hosted last month, covered topics ranging from practical tips, to contentious issues in insurance, to unusual case law. “The courts are always being asked for clarification in terms of commercial leasing.”

Haber, a commercial leasing authority who is currently authoring his 12th book on the topic, kicked off the session with a series of “hints” to expedite the assessment of a lease.

There’s a difference between an option to renew and an extension of term, he points out in an interview with Law Times summarizing the session.

Tenants “always ask for a right to renew, hopefully on same terms and conditions. But the law distinguishes between an option and an extension,” he says.

“Under an option, there’s a split second between when the lease ends and the new term begins, and in that split second, all the personal rights that the tenant and the landlord had fall away. In other words, it’s a new lease.”

He says once the lease ends, a landlord can take the position that the lease is akin to a personal covenant “and in that split second when that lease ends, that personal covenant falls away.

“But if it’s an extension of terms, then everything flows. In other words, nothing changes,” he explains.

“So when I lecture I say to everybody, whether you’re a landlord or tenant, the best way to handle it is to say you don’t have a right to renew, you have a right to extend it.”

He advises that lawyers representing landlords consider an indemnity rather than a guarantor if the lease requires additional backing.

“If a third party gives a guarantee, the landlord, in the event of a default by a tenant, has to exercise all of their rights against the tenant before they can exercise against the guarantor,” Haber says.

“So if you’ve got a situation where the original tenant was a shell company, then the landlord has got to spend a fortune getting a judgment against the shell company, and only then can they claim over against the guarantor.”

Whereas an indemnity is a primary liability, so “if there is a default by the tenant, the landlord can claim directly against the guarantor.”

Restrictive covenants, often limiting business activities by potential competitors in a shopping centre or plaza, can be tricky and open to future challenge.

“I always say the landlord should never give it and the tenant should always ask for it,” Haber says with a laugh.” You might have a non-compete for instance, that the landlord won’t lease to another gift shop . . . but anything could be a gift.

“So you have to be very, very careful, especially if you’re a landlord, not only in the wording but also in the exclusions to the wording.”

He also says that the commonly used term “net” to infer in a lease that the rate includes costs, such as taxes and insurance, is inadequate. “You’ve got to be specific; you can’t say it’s ‘net,’ or ‘net-net.’ What you want to say is, ‘All of my costs,’” and specify them, he clarifies.

Haber also emphasizes a commercial lease for existing building space should include an architect’s certificate to “save all kinds of problems” in setting terms and payments.

Sheldon Disenhouse, a partner at Fraser Milner Casgrain LLP specializing in commercial leasing and franchises, outlined noteworthy case law for lawyers at the session.

In the case 473807 Ontario Ltd. v. TDL Group Ltd., the Court of Appeal determined that a postponement and non-disturbance agreement (PNDA) entered into between a mortgagee and tenant was equivalent to a contract.

In that case, the landlord had defaulted on the mortgage and the mortgagee stepped in to collect monies directly from the tenant, which in this case was Tim Hortons.

Tim Hortons had earlier won a lawsuit against the landlord, with $700,000 in damages awarded.

“The mortgagee wanted a declaration that the tenant had to pay rent to the mortgagee and that the tenant had no right of set-off,” explains Disenhouse in an interview.

“So the question is, ‘What are the rights of that mortgagee and the tenant?’”

Overturning the trial court decision, the Ontario Court of Appeal noted that the PNDA entered into by the mortgagee and tenant did not specifically address the tenant’s right to set-off and should have if the mortgagee desired to address it.

The tenant won its bid to set-off the $700,000 judgment in its favor against rent owing to the landlord under the lease, with the mortgagee “stuck with the set-off.”

In Fitkid (York) Inc. v. 1277633 Ontario Ltd., the court found it could take into account the conduct of the landlord when considering a waiver.

The tenant, Fitkid, had disputed a rent increase and had also withheld rent following the landlord’s unresponsiveness to repair the roof.

The dispute escalated, with the landlord finally terminating the lease and changing the locks on the tenant.

The court, however, agreed with the tenant that the landlord’s previous acceptance of rent, negotiation of payment of repairs, and “otherwise treating the tenant as a tenant was a waiver of its right to forfeit the lease,” even though the lease in place had stipulated that any such waiver be in writing, observes Disenhouse.

He includes in his materials a summary of several other noteworthy cases, including Crystalline Investments Ltd. v. Domgroup Ltd., Country Style Food Services Inc. v. 1304271 Ontario Ltd., and Highway Properties Limited v. Kelly Douglas and Company.

The latter case, which Disenhouse acknowledges is an older case, is “the most important leasing case ever” affirming a commercial lease is not just a conveyance, but also a contract that provides landlords with “all kinds of remedies they’re entitled to under a contract.”

Materials from the session are available to order through The Lawyers Edge web site.

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