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ICSC
Canadian Shopping Centre
Law Conference
Toronto March 3-4, 2005
Practical Workshops
TENANTS IN MOTION - Tenant Considerations
Prepared by: David V. Westwood
Barrister and Solicitor
4 King Street West
Suite 920
Toronto, Ontario, M5H 1B6
Telephone:
416.640.4212
Fax:
416.640.4218
Email:
dvwestwood@ileaselawyer.com
Web:
www.ileaselawyer.com
During the course of its tenancy, a tenant may face the redevelopment of the centre. The
Landlord will want to keep its options as flexible as possible while minimizing its costs, while the
Tenant wants to prevent the interference with its business.
Today’s commercial leases are primarily landlord oriented documents. Therefore, the Tenant
should be aware of the following clauses and attempt to negotiate a more ‘tenant friendly’
provision. As with most clauses the ability to modify these provisions depends on the negotiating
strength of the Tenant, or the desperation of the Landlord.
RELOCATION:
Most leases will require the Tenant to relocate upon notice from the Landlord. With smaller tenants
it is reasonable for a landlord to have this right, whereas larger tenants may have made their
decision to locate in a centre for a specific location. In that event relocation may not be acceptable.
The Tenant should consider and attempt to include the following matters:
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There should be a reasonable notice period in advance of the intended relocation.
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The Landlord should specify the intended date of relocation.
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The location of the relocated premises should be clearly identified on a site plan. The site
plan should reflect the layout of the centre after the re-development and show the
Relocated Premises therein. If the relocation is part of a major development, the Tenant
would want to see how the proposed premises relate to the balance of the revised centre,
i.e. to major tenants, entrances, parking, etc.
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If the Tenant does not approve of the Relocated Premises, it should have the right to
terminate the Lease. As the Tenant would want to re-establish its business elsewhere, the
Tenant should have the option to terminate as of the proposed relocation date, or earlier
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[upon reasonable notice] as the other space may only be available during a specified
period.
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The Relocated Premises should contain approximately the same floor area, width and
frontage as the Leased Premises and should be in a comparable location having regard to
such factors as customer flow, anchors and /or entrances.
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The Relocated Premises should be on the same mall level.
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The Landlord should pay all costs of such relocation including:
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The cost of constructing and completing the Relocated Premises including new
leasehold improvements, signage and trade fixtures to a standard similar to that of
the Leased Premises as of the date of the receipt by the Tenant of the Relocation
Notice;
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The cost of relocating telephone and fax lines, and any security system,
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The cost of moving the Tenant’s possessions to the Relocated Premises, and
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Incidental office costs such as business cards or letterhead.
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If they are in a good condition, it is reasonable for the Landlord to use the Tenant’s trade
fixtures and chattels from the Leased Premises in the Relocated Premises. However this
raises the issue of timing. Since the Tenant does not want to be out of business during
relocation, this move would have to be coordinated during the evening, or over a weekend.
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Save as noted above, the Tenant should not be required to close the Leased Premises until
the Relocated Premises are ready to open for business.
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If the Tenant relies on certain periods of the year for a larger portion of its business,
(Christmas, Easter, Mothers Day, back to school) , the Tenant shall not be obligated to
relocate in the months or weeks prior to such event.
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The Minimum Rent rate for the Relocated Premises for the balance of the Term should be at
the same rate on a per square foot basis.
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It is reasonable for a Landlord to require the Tenant to execute an agreement documentaing
the relocation.
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All other terms and condtiions of the Lease should apply to the Relocated Premises.
DEMOLITION:
Many leases for older centres will contain a demolition clause permitting the Landlord to terminate
the Lease in the event of the redevelopment of the Shopping Centre. In my opinion this clause is
anathema for the Tenant. While the Tenant may think it has a [i.e.] five year lease, with a demolition
clause, the term is only as long as the notice period of the demolition clause, but which term
continuously renews. As the Tenant is usually making a significant investment in the Leased
Premises this type of clause should be removed, but if the Landlord will not agree, the Tenant should
consider the following:
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Many leases draft this clause such that it applies in the event the Landlord:
“desires to substantially reconstruct, renovate, sell and/or redevelop the
Development to the extent that vacant possession of the Leased
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Premises is required, or if the Landlord desires to demolish the portion of
the Development in which the Leased Premises are in.”
I would not agree to the inclusion of ‘sale’. A sale has no relevance to the continuation of the
development.
I would not agree to the reference of; ‘that portion of the Development in which the Leased
Premises are in”. Instead, I would argue that the relocation provision should apply in that
circumstance. Alternatively, ‘the portion’ should be clearly established.
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The demolition provision should not apply until at least the end of the initial term, or after a
specified date.
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The Landlord should specify the intended date of demolition.
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There should be a reasonable notice period in advance of the intended demolition.
However, the Landlord should not be able to terminate the Lease until it is ready to
commence its redevelopment. Redevelopment can be delayed for a myriad of reasons.
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The Landlord should be obligated to terminate the leases of a significant portion of the
other leases of the development concurrent with the termination of the Tenant’s lease.
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The Tenant should have the right to terminate the Lease earlier than the date specified by
the Landlord, as it has to make alternative arrangements for its business.
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The Landlord should pay for the following costs as a result of this termination:
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Moving costs;
The unamortized cost of those leasehold improvements and trade fixtures installed
by the Tenant in the Leased Premises. The amortization period must be agreed
upon. The Tenant should keep receipts and records of these costs as the Landlord
will ask for proof of such costs when it comes time to pay. The Tenant should also
keep track of the costs of any renovation it undertakes during the Term.
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The Landlord may want to deduct any salvage value from any payment. I would
suggest that the Tenant leave the trade fixtures for the Landlord and let the
Landlord obtain whatever salvage value it can for these items. The Tenant can
always subsequently agree to pay something to the Landlord for them if they have
value to the Tenant.
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The timing for payment should be agreed upon. The Landlord will only want to pay after
the Tenant has vacated, while the Tenant will want to be paid in advance to ensure that is
receives payment, or at least the opportunity to set off such amount against Rent next
falling due.
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Ensure that the radius restriction or any other restrictive covenant in the Lease does not
survive the termination of the Lease.
INTERFERENCE WITH THE TENANT’S BUSINESS
The redevelopment of the centre will probably cause disruption to the Tenant’s business. Traffic
flow to the centre and/or within the centre could be impeded. A major tenant could be out of
business for a period of time. Therefore the Tenant should consider a material interference
provision. This would require consideration of the following:
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For how long must there be interference before this provision applies?
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How do you determine the extent of interference? Is it triggered by; (a) the closing of
certain tenants or a portion of the development, (b) the Tenant’s business being ‘materially
adversely’ affected, or (c) a decline in sales.
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If it is triggered by a decline in sales, what is the base line measurement for such decline, is
it the same period of the interference but during the immediately preceding year?
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How much must sales decline before the remedy is triggered?
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What is the Tenant’s remedy? Is it an abatement of Minimum Rent or all Rent? If the
Tenant can still operate in my opinion it is reasonable for the Tenant to continue to pay
Additional Rent. However, Minimum Rent should abate in its entirety and in lieu thereof,
the Tenant should pay a percentage rent, on a cumulative basis over the period of the
interference.
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If the Tenant was previously obligated to pay Percentage Rent, then there must be a
distinction made between the Percentage Rent payable if there was no interference, and
the Percentage Rent payable as a result of interference. Practically, the interference should
trigger a year end for the purpose of calculating the initial Percentage Rent, and the period
of interference should constitute a separate period for calculating Percentage Rent.
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If the interference continues for an extended period of time, or if sales decline to an
established threshold, can the Tenant terminate the Lease?
IS THE INTERFERENCE A BREACH OF QUIET ENJOYMENT?
This is a question of fact. While the earlier decisions required direct physical interference with the
Tenant’s lease or property, the trend is that it would now include an act or omission which interferes
with the intended use of the premises. However, it must be significant interference, incidental
interference is not sufficient. Interference can be established regardless of the efforts made by the
Landlord to mitigate such damage.