DEALING WITH THE LEASE:
Legal Principles and Litigation
Perils!
LEXPERT Conference
Toronto, Ontario
November 21, 2013
Everything You Need to Know
is in the Lease: NOT!
Important Relevant Considerations Which
Impact the Lease
1. Environmental – Holes in
Lease?
• Both landlords and tenants must be concerned
with environmental obligations when entering
into a lease.
• Be clear regarding apportionment of
environmental liability, including contamination
and remediation.
1. Environmental – Holes in
Lease?
•
Ambiguity in leases leads to disputes. To
avoid uncertainty and disputes, commercial
leases should clearly deal with:
1. Due Diligence: benchmark regarding
condition of premises, building, soil and
groundwater (Phase I or Phase II ESA);
1. Environmental – Holes in
Lease?
2. Covenants: allocation of responsibility
(i.e., who is responsible for what?)
3. Indemnity: allocation of environmental
liability (including applicable standard at
end of term)
1. Environmental – Holes in
Lease?
Lease should address the CONDITION of the
Premises:
 as of the date of the Lease? the Possession
Date? the Commencement Date?
 during the Term
 at expiry / termination of Lease
1. Environmental – Holes in
Lease?
What kind of obligations are captured by the
generic “compliance with environmental laws”
covenant in the Lease? Here are some
examples (but this list is not exhaustive).
•
•
•
•
Environmental Protection Act (Ontario) (EPA);
Ontario Water Resources Act (OWRA);
Waste Management Act;
Canadian Environmental Protections Act
(CEPA);
1. Environmental – Holes in
Lease?
• O. Reg. 278/05 (Designated Substance –
Asbestos on Construction Projects and in
Buildings and Repair Operations).
• Clean-up standards and rules have been
codified under the EPA and the Record of Site
Condition regulation (O. Reg. 153/04).
• Ontario’s Brownfields regulatory regime
regulates the clean-up and redevelopment of
contaminated sites. The latest elements were
proclaimed in force effective July 1, 2011.
1. Environmental – Holes in
Lease?
For Landlord’s protection, the Lease should deal
with:
• prohibited uses should include hazardous
substances (broadly defined)
• Tenant covenant to COMPLY with all
environmental laws
• Energy conservation - Tenant covenant to
comply with practices or procedures that
Landlord may introduce
1. Environmental – Holes in
Lease?
• Tenant to NOTIFY Landlord regarding new
contamination and/or spills, leaks, etc.
• Landlord’s right to INSPECT and demand Tenant
clean-up/remediation
• Tenant’s INDEMNITY – for anything not released
by Landlord
• Landlord’s RELEASE – for anything not released
by Landlord
1. Environmental – Holes
in Lease?
• Tenant to obtain environmental liability INSURANCE
• Where Premises contains ASBESTOS (e.g., drywall
joint compound), Lease should include Tenant
acknowledgement of receipt of report disclosing
suspected locations and covenant that if any
removal, containment or skimming is required within
the Premises to commence and/or complete any
Tenant’s Work, same shall be performed as part of
Tenant’s Work in compliance with laws (including all
occupational health and safety laws) and Landlord
shall have a right to inspect and supervise.
1. Environmental – Holes in
Lease?
For Tenant’s protection, the Lease should deal
with:
• Landlord representations and warranties
• Release of Tenant for pre-existing contamination
• Landlord covenants to clean up pre-existing
contamination and subsequent contamination
not caused by Tenant….and Landlord indemnity
1. Environmental – Holes in
Lease?
• ***3RD Party Contamination: Landlord covenant to
remediate and/or Landlord indemnity
• Landlord to NOTIFY Tenant regarding discovery,
spill, leak, etc. and government action
2. Planning Act (Ontario)
• Under Ontario’s Planning Act, Section 50(3)
prevents one from entering into an agreement
granting the right in land, directly or by
entitlement to renewal, for a period of 21 years or
more unless it falls into one of the statutory
exceptions (s. 50(3) (a) to (g)).
2. Planning Act
Statutory exceptions to Section 50(3):
• 50(3)(a): where leased land is described in
accordance and is within a registered plan of
subdivision
• 50(3)(b): where the Landlord does not own
any land which abuts the leased land
2. Planning Act
• 50(3)(c): where Her Majesty in Right of
Canada, Her Majesty in Right of Ontario or
any municipality is either landlord or tenant
• 50(3)(f): a transaction that has received
Consent
2. Planning Act
Another important exception  Section 50(9)
– Part of building or structure:
“Nothing in [Section 50(3)] prohibits the
entering into of an agreement that has the
effect of granting the use of or right in a part
of a building or structure for any period of
years.”
2. Planning Act
Beware of Non-Compliance with the Planning
Act!....
An agreement in contravention of s. 50(3)
does NOT create or convey interest in land
unless the Lease clearly states that if the
Planning Act consent is required then the
term is deemed to be 21 years less a day
until Planning Act consent is obtained.
3. Occupational Health and
Safety Act (Ontario)
• Joint Occupancy:
sample clause: “If the Landlord’s Work is not
complete on the Scheduled Delivery Date
then the Landlord may have access to the
Premises to perform the Landlord’s Work.
The Tenant acknowledges that if the
contractors of the Tenant and the Landlord…
3. Occupational Health and
Safety Act
… are working in the Premises concurrently,
such contractors must adhere to the OHS Act
and the rules of joint occupancy associated
with maintaining time and space separation
between them.”
3. Occupational Health and
Safety Act
• Facilities:
sample clause: “Fully equipped washroom
facilities for male and female employees of
the Tenant in accordance with the
requirements established by the
Occupational Health and Safety Act, R.S.O.,
1990, c.0.1, as amended and the regulations
made thereunder or any successor act…”
3. Occupational Health and
Safety Act
• “designated substances” means a biological,
chemical or physical agent or combination
thereof prescribed as a designated
substance to which the exposure of a worker
is prohibited, restricted, limited or controlled.
• For example: asbestos, lead, mercury,
arsenic
3. Occupational Health and
Safety Act
sample clause: “Landlord covenants with
Tenant that on the Possession Date, there
shall be no “designated substances” within
the Premises as defined in the Occupational
Health and Safety Act (Ontario) beyond legal
limits and Landlord shall provide a current
building condition report which confirms
such…”
4. Short Forms of Leases
Act (Ontario)
• Where a lease is made pursuant to the Short
Forms of Leases Act, and it contains the forms of
words set out in Column One of Schedule B of
the Act the lease will have the same effect as if it
contained the form of words set out in Column
Two of Schedule B.
• Any express exceptions from or express
qualifications of the language in Column One will
be taken to be made from or in the
corresponding form in the second column.
4. Short Forms of Leases
Act
4. Short Forms of Leases
Act
4. Short Forms of Leases
Act
4. Short Forms of Leases
Act
4. Short Forms of Leases
Act
4. Short Forms of Leases
Act
4. Short Forms of Leases
Act
4. Short Forms of Leases
Act
5. Commercial Tenancies
Act (Ontario)
Section 18 (Rights of re-entry)
Every lease deemed to include an agreement that:
• (i) if any RENT remains unpaid 15 days after due,
although no formal demand thereof has been
made, it is lawful for the landlord at any time
thereafter to re-enter the leased premises and
repossess it; and
5. Commercial Tenancies
Act
• (ii) if the tenant or any other person is convicted of
keeping a disorderly house under the Criminal Code
or carries on a business without a license, which
is required to be licensed under either the Municipal
Act or the City of Toronto Act, the landlord may reenter the leased premises and repossess it.
5. Commercial Tenancies
Act
Section 19(2) (Restrictions on and relief
against forfeiture of leases)
If a tenant breaches a covenant or condition of
the Lease (other than one regarding the
payment of rent), before the landlord may reenter, the landlord must serve on the tenant a
NOTICE:
5. Commercial Tenancies
Act
1. specifying the nature of the breach;
2. requiring the tenant to remedy the breach;
and
3. requiring the tenant to make monetary
compensation for the breach.
5. Commercial Tenancies
Act
• After providing such NOTICE,…if the breach is
capable of remedy and the tenant fails to
remedy the breach “within a reasonable time”,
and fails to make reasonable compensation in
money,….then the landlord may avail itself of a
right of re-entry or forfeiture.
• Landlord must strictly comply with the notice
requirements of 19(2) even if the alleged breach
cannot be remedied (e.g., insolvency of tenant
and appointment of receiver), otherwise its
termination notice will be INVALID.
5. Commercial Tenancies
Act
• Section 20(1) (Relief against forfeiture):
Where a landlord is proceeding to enforce a right
of re-entry or forfeiture, the tenant may apply to
the court for relief.
• The court may grant relief as it sees fit as to
payment of rent, costs, expenses, damages,
compensation, penalty or otherwise.
5. Commercial Tenancies
Act
• However, this does not apply:
(i) to a covenant or condition against assigning,
underletting, parting with possession or disposing of
the land leased (i.e., an unauthorized transfer);
(ii) to a condition for forfeiture on the bankruptcy of
the tenant;
(iii) on the tenant making an assignment for the
benefit of creditors; or
(iv) on the taking in execution of the tenant’s interest.
5. Commercial Tenancies
Act
SUBTENANTS
• Certain statutory rights are provided in Sections 17,
21 and 39(2) of the CTA.
• Most common law provinces have similar legislation,
although in British Columbia, Newfoundland and
Nova Scotia (and in some cases, Alberta) the
applicable legislation provides alternate rights or no
similar rights at all.
• In Quebec, the civil law does not provide any similar
rights for subtenants.
5. Commercial Tenancies
Act
Section 17 -- the heading reads: “Effect of
surrender or merger of reversion
expectant in certain cases”
• the clause reads “Where the reversion
expectant on a lease of land merges or is
surrendered, the estate which for the time
being confers as against the tenant under the
lease the next vested right to the land shall,
to the extent of and for preserving such
incidents to and obligations…
5. Commercial Tenancies
Act
• … on the reversion as but for the surrender
or merger thereof would have subsisted, be
deemed the reversion expectant on the
lease.”
• What does this mean???
5. Commercial Tenancies
Act
Section 17 (Surrender of Lease)
• has been interpreted to mean that if the lease is
surrendered, the subtenant becomes the tenant of
the landlord under the terms of the sublease.
• In other words, neither the subtenant nor the
landlord can unilaterally treat the sublease at an end
simply because of the surrender of the lease. The
landlord steps into the shoes of the sublandlord (the
tenant) and accepts the sublease as if it had entered
into it directly with the subtenant.
5. Commercial Tenancies
Act
Section 21 (Termination of Lease and Relief from
Forfeiture)
provides subtenants with an avenue for relief where
the lease is terminated following a TENANT
DEFAULT. The subtenant has a right to apply to a
Court to return the subleased property to the
subtenant on terms to be determined by the Court
(except that the subtenant is not entitled to any
longer term than it was entitled to under the
sublease).
5. Commercial Tenancies
Act
Section 39(2) (Bankruptcy of Tenant)
applies if: (a) there is a sublease, (b) the tenant goes
bankrupt, and (c) the trustee in the bankruptcy
assigns or disclaims the lease. In this scenario, if
the subtenant ELECTS within 3 months of the
bankruptcy, the subtenant may "stand in the same
position with the landlord as though [it] were a
direct [tenant] from the landlord".
5. Commercial Tenancies
Act
• Pursuant to s.39(2) of CTA, the subtenant's
tenancy is on the terms of the lease except for
the rent, which (per case law) is the GREATER
of the rent under the lease and the rent under
the sublease.
• Section 39(2) may not be an attractive solution
for the subtenant because they may have to
assume responsibility for the ENTIRE leased
premises.
• Sections 17 versus 39(2)
5. Commercial Tenancies
Act
•
In summary, in the absence of a non-disturbance
agreement (NDA) directly with a landlord (or NDA
comfort in the consent to sublease), if a lease is:
–
–
terminated (due to the tenant’s default) or
surrendered, then the subtenant loses its rights to
remain in possession of the subleased premises,
subject to its rights under Sections 17 and 21 of the
CTA; or
disclaimed by a trustee in bankruptcy, then the
sublease is gone and the subtenant’s tenancy is
subject to Section 39(2) of the CTA.
5. Commercial Tenancies
Act
Subtenants Beware:
Most landlords demand (pursuant to express
language in the lease, or in the landlord’s
standard consent to sublease) that a subtenant
WAIVE its relief from forfeiture and any statutory
rights to become the direct tenant of the landlord
or to require the landlord to enter into a new
lease of the sublet premises in the event that the
lease is terminated or surrendered.
5. Commercial Tenancies
Act
• DISTRESS  the right of distress allows the landlord,
without any judicial process, to seize, take into
possession and sell the goods and chattels of the tenant
to satisfy any arrears of rent. This remedy arises at
common law.
• Generally, ALL goods, chattels and inventory found on
the premises may be distrained for rental arrears, with
certain common law and statutory exceptions.
• Per Section 31(2) of CTA: the landlord may not distrain
on the goods and chattels of any person except the
tenant or person (i.e., a guarantor) liable for the rent.
Thus, goods on the premises on consignment or goods
that are leased are not subject to distress.
6. Retail Sales Act (Ontario)
• Distraining landlords should also be aware of potential
personal liability associated with selling distrained goods.
• The Province of Ontario may impose a penalty on
creditors who seize assets of a debtor who is liable to
remit taxes under the Retail Sales Act (RSA).
• Section 22 of the RSA provides that if the seizing
creditor does not obtain a tax clearance certificate from
the Ontario Ministry of Finance prior to selling the goods
seized, the seizing creditor becomes personally liable
for all unpaid taxes, interest and penalties owing by the
debtor.
6. Retail Sales Tax
7. Land Titles Act
• The Planning Act stipulates that everyone is
deemed to have notice of any Lease
restrictive covenant or other agreement
registered on title to the property.
6. Retail Sales Tax
• This means that an existing tenant who has
registered and exclusive or restrictive
covenant could in theory take steps to
enforce that covenant against the new
tenant, notwithstanding (i) the fact that there
is no privity of contract, and; (ii) the fact that
the new tenant has no restrictive covenant or
exclusive stipulated in its lease.