commercial leases - The Law Society of Saskatchewan
COMMERCIAL LEASES
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ACKNOWLEDGMENT
This paper was originally prepared and delivered in 1990 at the Bar Admission Course by L. J. D. (Dick) Batten of McKercher McKercher & Whitmore.
From 1991 to 1994, the paper was updated periodically by Caroline M. Gorsalitz
(formerly of McKercher McKercher & Whitemore) who delivered the lecture at the Bar Admission Course during that time.
In 1995 and 1996 R. Neil MacKay of McPherson Leslie & Tyerman lectured on the topic.
From 1997 to 2001, Patrical A. Miquelon of Federated Co-operatives Limited revised and updated the paper and delivered the lecture at the Bar Admission Course
In 2002, James Russell of McDougall Gauley lectured on the topic.
In 2003, Stephanie L. Tynan of McDougall Gauley revised and updated the paper and delivered the lecture at the Bar Admission Course.
In 2004, L. J. D. (Dick) Batten of McKercher McKercher & Whitmore revised and updated the paper and delivered the lecture at the Bar Admission Program.
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TABLE OF CONTENTS i
B. PROPERTY LAW AND CONTRACT LAW: THEIR INTERFACE IN THE LEASE .......... 4
5. Landlord’s Remedies for Tenant’s Breach and Landlord’s Duty to Mitigate .......................15
7. Lease: Conveyance or Contract ............................................................................................18
II. COMMENTS ON SCHEDULE A - SAMPLE FORM OF LEASE............................................20
B.
RENT AND GOODS AND SERVICES TAX (“GST”)...........................................................25
C.
D. INSURANCE AND THE REPAIR, MAINTENANCE AND RECONSTRUCTION
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4. Landlord’s Option to Terminate in the Event of Tenant’s Assignment or Subletting...........45
F. THE DEMISE OF COMMON LAW SUBDIVISION RIGHTS ..............................................47
B. WHEN LANDLORDS USE AGREEMENTS TO LEASE......................................................54
SCHEDULES:
Schedule A - Sample Form of Lease ........................................................................................ A - 1
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1
I. INTRODUCTION
Commercial leasing is an interesting and challenging topic. However, even this long paper covers only some topics and is silent on other equally important issues. The focus of this paper is on drafting and negotiating commercial leases. It is not a substitute for a law school course on leasing. This paper is a start. It is intended to give you directions to some of the issues.
Commercial leasing covers many different business situations: the lease of office premises in a tower, lease of a warehouse, lease of a stand-alone building used for commercial purposes, lease of a gas bar and lease of space in a shopping centre. Of the many kinds of commercial leases, the only type that anyone has written books on is the shopping centre lease. Therefore, frequently one learns commercial leasing in a shopping centre context although office leases and industrial leases are quite different.
Before 1990, there was only a two volume work on commercial leasing, Shopping Centre Leases: A
Collection of Articles and Precedents
.
This two-volume work is still a valuable resource for the
Canadian practitioner even though it is slanted to Ontario law and in need of updating by the addition of, for example, GST and environmental provisions. The articles in Shopping Centre
Leases , Volumes 1 and 2 are very helpful and the precedent lease at the back of Volume 1 is frequently encountered in use in Canada.
In the 1990s Mr. Haber has produced three more books that are invaluable: The
Commercial Lease: A Practical Guide
, Understanding the Commercial Agreement To
Lease
and Landlord’s Rights and Remedies in a Commercial Lease: A Practical Guide.
1
H.M. Haber Editior-in-Chief, Vol. 1 (Agincourt: Canada Law Book, 1976) and Vol. 2 (Aurora: Canada Law Book, 1982).
2
H.M. Haber, Q.C., 2nd ed. (Agincourt: Canada Law Book, 1994).
3
H.M. Haber, Q.C. (Aurora: Canada Law Book, 1990).
4
H.M. Haber, Q.C. (Aurora: Canada Law Book, 1996).
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But the first book that a lawyer intending to do commercial leases should read is The
Leasing Process: A Guide for the Commercial Tenant
by a lawyer, Walter H. Posner. It explains the business of leasing. Lawyers’ lack of this knowledge limits us enormously.
These books are referred to from time to time in this paper. They set out the business and legal considerations behind the drafting choices that we must make. In effect, these books teach the leasing business and law to lawyers. We cannot do the job without them. These are the texts for your self-taught course on commercial leasing. This paper will, in some cases, bring the Saskatchewan law into focus. In other cases it brings out points that are not dealt with in these texts. The texts and articles referred to in the paper are a source for further development of the topics discussed in this paper.
The history of the lease is not an elective. Without it, we will never understand the commercial lease. An article in Shopping Centre Leases , “The Double Nature of a Lease - A Hybrid Document” by Arthur H. Zaldin sets out some lease law that is still the law today:
. . . the very words landlord and tenant as they apply to most leases stand as monuments to the unique feudal relationship that existed between the parties. The feudal concept stood for the proposition that the tenant was for all intents and purposes obtaining real estate or a piece of land (usually farm land) whereby the lord conveyed the property outright to the tenant for a certain term of years with a reversion to the grantor lord. The document . . . still contains an habendum clause which plainly states that the property is being conveyed to the tenant for the term stated. Once parting with possession the landlord had, till the time of expiry of the term, really passed out of sight; he had done his share, the rest was up to the tenant. . . . So one-sided and rigid in fact were the conveyancing aspects of a landlord and tenant relationship that . . . there was actually no law against a landlord renting to the tenant a completely tumbledown house. . . . Ironically, however, this blind and sacred adherence to property law concepts worked against the landlord so far as any rights of repossession were concerned.
If the tenant did not pay his rent or breached some other covenant, the landlord having transferred to the tenant exclusive possession of his interest for a designated period of time, had in fact divested himself of any possessory rights he had, until the time in the agreement for reversion. The only legal remedy available to the landlord was to sue on a separate cause of action for breach of covenant or for non-payment of rent. Any covenants which had been added to the lease by the parties were at all times looked upon as being absolutely independent of each other. So detached were the obligations of each party, in fact, that even if the premises were destroyed by fire the tenant still had to continue to pay the rent.
. . .
5
(North York: Captus Press, 1990).
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However, this unrealistic approach to leases based upon feudal tenure became more and more anachronistic and obsolete as leasing became more a matter of renting the commodity of space, rather than a landlord parting with a chunk of realty. . . .
Another statement of the uniqueness of the lease is found in the case Goldhar v. Universal Sections
3 and Mouldings Ltd.:
While the modern lease contains numerous contractual provisions it operates primarily to convey possessory title. As a consequence the effect given by the law to promises by way of covenants in a lease has always received different treatment from that given to similar promises in an ordinary bilateral contract. In the latter where the covenants may be considered to be mutually dependent a substantial breach by one party will excuse the other party from further performance and permit recovery in damages for the breach. In leases, however, the covenants are assumed to be independent.
. . . Under concepts of property law a lease is primarily a conveyance to which the covenants are incidental.
It was not until 1971 the Supreme Court started to redress the balance between conveyancing law and contract law in the interpretation of commercial leases. The case is famous: Highway
Properties Ltd.
v. Kelly, Douglas & Co. Ltd.
Laskin, J. stated at page 721:
It is no longer sensible to pretend that a commercial lease, such as the one before this Court is simply a conveyance and not also a contract. It is equally untenable to persist in denying resort to the full armoury of remedies ordinarily available to redress repudiation of covenants, merely because the covenants may be associated with an estate in land.
Articles have been written on whether the breakthrough that the Highway Properties case presaged has actually happened.
The inherent difficulty in reconciling conveyancing law and contract law in the lease was recognized by Mr. Zaldin:
To break all connections with traditions that have been embedded in its roots for over 500 years is not a simple thing to do. In understanding the true nature of a lease we must always remember that in essence a lease...is in a class all by itself, a hybrid mutation of an unstable marriage between property law and contract law.
6
A.H. Zaldin, “The Double Nature of a Lease - A Hybrid Document”, Shopping Centre Leases, H.M. Haber, ed. 1976,
Vol 1, at 15 through 17.
7
(1962), 36 D.L.R. (2d) 450.
8
(1969), 1 D.L.R. (3rd) 626, rev'd (1971), 17 D.L.R. (3rd) 710 (S.C.C). Laskin, J. stated at page 721.
9
G. Sustrik, “Highway Properties - Look Both Ways Before Crossing” (1986) 24 Alta. L. Rev . 477 and other articles referred to in this article.
10
Zaldin, Double Nature, at p. 20.
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Conveyancing law principles that remain pertinent to commercial leases are discussed below. Keep on the lookout throughout your career for the treatment by the courts of each one of these principles to see to what extent the lease remains “primarily a conveyance to which the covenants are incidental”.
B. PROPERTY LAW AND CONTRACT LAW: THEIR INTERFACE IN THE LEASE
“Interface” is a term from chemistry which describes the mutual irritation that arises when two or more chemicals interact. There are a number of areas where conveyancing law and contract law interact to produce sufficient irritation that judges are required to interpret their interaction. Six of them are discussed below. These are not “academic” issues. They cause problems that lawyers wrestle with every day and that frequently end up in the courts.
1. Privity of Estate and Privity of Contract
You have studied “privity of contract”, and in first year real property law, “privity of estate”. The parties to a lease are in privity of contract. They are also bound by privity of estate. Several common business transactions affect these two relationships between landlord and tenant. If the landlord sells its land and buildings it will assign its interest in the lease to the purchaser. Similarly, when a tenant sells its business, it must assign its interest in its lease to the purchaser. In some cases a tenant will sublet its premises. In all these situations the effect upon the privity of estate and contract between the original landlord and the original tenant must be considered by the lawyers.
To illustrate the point let’s examine a tenant’s assignment of the leasehold interest.
An assignment by the tenant of its interest under the lease terminates the privity of estate between the landlord and tenant but not the privity of contract (unless the original tenant is expressly freed from further contractual obligations under the lease by the terms of the assignment which is not
11
See J.S. Posen, “Assigning and Subletting” in Shopping Centre Leases , Vol. 1, at 367.
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Real Estate - Commercial Leases unusual). As counsel for the original tenant always be sure to extricate the original tenant from any
5 continuing obligations under the lease; that is, terminate the privity of contract. If you refer to
Schedule A, Article 10, you will see that the landlord provides for termination of its privity of contract with the tenant in the event the landlord assigns its reversionary interest in the lease. Try to do the same when the tenant assigns its interest in the lease.
While it is usual for a lease to provide for the release of a prior landlord on an assignment to a third party, one should appreciate that there is an additional risk to which the tenant is exposed in such a circumstance. The tenant has no control over who its new landlord is and as a result the new landlord may have different standards of maintaining or operating its properties, different financial resources available to it and conceivably radically different approaches to dealing with its tenants. If your client was attracted to a particular property in part as a result of who the landlord is, they should be appraised of the fact that this can change without them having any influence on the consequences.
As this is invariably a standard landlord lease provision, it is important to insure that the lease document specify some of the expectations of the tenant notwithstanding that these may be comfortably assumed with the existing landlord.
An assignment by the tenant of its interest under the lease creates privity of estate between the new tenant (the assignee) and the landlord. The properly drawn assignment, at the same time as it releases the tenant from the privity of contract, as discussed above, will also create privity of contract by making the new tenant (the assignee) contract directly with the landlord to be bound by the terms of the lease.
You are acting for a landlord who has agreed to a tenant’s request to assign its leasehold interest.
You neglect to have the assignee agree with the landlord to be bound by the tenant’s obligations under the lease. The landlord and the new tenant are in privity of estate but not in privity of contract.
What agreements, if any, in the lease are enforceable by the landlord? Well, privity of estate saves you to some extent. It makes certain agreements enforceable by the landlord despite the lack of a contractual relationship. The agreements that run with the land, such as the agreement
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Real Estate - Commercial Leases to pay rent, are enforceable. The larger category however, the agreements that do not run with the land, are not enforceable. An example of this type of agreement is the tenant’s obligation to remain open during certain hours. Covenants which do and do not run with the land are a further aspect of conveyancing law in commercial leases and are discussed in this paper in Section I, B.2. Covenants
Which Do and Do Not Run with the Land.
A prudent assignee should also require the landlord to agree with the tenant-assignee to perform the landlord’s obligations under the lease. The privity of contract agreement should be two-way.
Otherwise, the new tenant will not be able to enforce the landlord’s obligations which do not run with the land. For example, the courts have held that an option to purchase does not run with the land so an assignee who does not get reciprocity in the agreement and require the landlord to be bound to the assignee by the terms of the lease will not have the benefit of the option to purchase that is clearly set out in the lease. That would come as a shock to a tenant trying to exercise its black and white option to purchase and would mean a claim on your insurance.
One should note that the option to purchase ought to have been registered as an interest against the property under the Land Titles Act, 2000.
Subleasing is a tricky business.
A sublease is not an assignment. Under a sublease a tenant transfers less than the whole of the lease term; often however, it is only one day less. Neither privity of estate nor privity of contract are terminated between the landlord and the tenant when the tenant subleases a portion of its term. This means that the landlord has no contractual relationship with the subtenant in the premises. This is undesirable from the landlord’s point of view so a
12
For a helpful discussion of subletting including the effect on privity of estate and contract when the landlord assigns its reversionary interest see the article referred to in footnote 11. T here is authority to the effect that the tenant/sublandlord is not in breach of its obligation under the head lease as a result of breaches by the subtenant of its similar obligations as long as positive acts or acquiescence is not involved on the part of the sublandlord. Therefore, it is necessary to impose an obligation of enforcement on the tenant/sublandlord and to make a default by the subtenant a default by the tenant. See Berton v. Alliance Economic Investment Company, Limited (1922), 1 K.B. 742 (C.A.); Atkin v. Rosu ,
[1923] 1 Ch. 522; Barton v. Reed , [1932] 1 Ch. 362; and Advanced Car Specialties Ltd.
v. Jakobsons (1981), 131 D.L.R.
(3d) 48.
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Real Estate - Commercial Leases properly drafted lease will prohibit assignments (including by operation of law), subletting, parting
7 with possession and sharing possession without the landlord’s consent. In regard to sublettings, the lease should require that the terms of subletting at a minimum incorporate an obligation to abide by the terms as are to be found in the lease with the tenant and that any other terms of the sublease not be inconsistent with compliance with that lease, and that the proposed subtenant to enter into a direct contractual relationship with the landlord to abide by such terms so as to allow the landlord to sue on the tenant’s agreements in the head lease which the subtenant agrees to perform.
The subtenant also needs a non-disturbance agreement from the landlord to protect it if the tenant defaults.
Privity of estate is an aspect of land law that lives on in the lease contract.
2. Covenants Which Do and Do Not Run with the Land
The concept of covenants which do or do not run with the land
is only possible in an arrangement where there is a conveyance of an interest in land. This concept would be inappropriate if a commercial lease was only a contract. With any assignment of their respective interests by a landlord or tenant, some covenants (agreements) of both the landlord and the tenant “run with the land,” as we say, and some do not. Sections 3 to 8 and, in particular, sections 4 and 6 of the
Landlord and Tenant Act permit us to refer to “covenants which run with the reversion” as covenants which run with the land. Therefore, any covenant which binds the tenant’s assignees
13
See Cadillac Fairview Corp . v. Grandma Lee’s Ontario Inc ., Ont. (Gen. Div., Adams J., Oct. 6/95). The landlord was a party to the sublease. It was clear the tenant and subtenant were jointly and severally liable for the rent. Therefore, the rent was owed jointly by the subtenant and tenant to the landlord and could not be attached by a creditor of the subtenant.
14
“Running with the land” means the agreement automatically follows all transfers (assignments) of the privity of estate. The law of landlord and tenant in England is even more stuck in the “a lease is primarily a conveyance to which the covenants are incidental” mode than Canadian law. Therefore, there are more English cases on what is or is not a covenant which runs with the land. See: N. Bankes and N. Rafferty, “A Tenant’s Remedies for a Landlord’s
Breach: The Impact of Lehndorff Canadian Pension Properties Ltd.
v Davis Management Ltd.
” (1990) 24 Univ. of
Br. Col. L. Rev.
155 at 166.
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Real Estate - Commercial Leases benefits the landlord’s assignees and vice versa.
The traditional rule is that express covenants that
“touch or concern” the leased land run with the land. “Any covenant concerning the benefit, support, maintenance or general well-being” of the leased land runs with the land. Some examples are agreements to pay rent and taxes, to make repairs, to insure, not to assign or sublet without consent, renewal of the term, quiet enjoyment and not to carry on an offensive business. Covenants implied by law or statute run with the land.
The opposite of a covenant which “concerns” the land is one that is merely “collateral” to the land.
This is considered to be an agreement which is personal to the parties as it does not follow the privity of estate to an assignee. It stays with the privity of contract until brought along by particular terms in the assignment agreement. Some examples are an option to purchase the leased land, to pay accelerated rent or to forfeit the lease upon the tenant’s bankruptcy or the issuing of an execution against the tenant, to give the tenant the right of first refusal if adjoining land owned by the landlord is sold, repayment of a security deposit.
The case law has not clarified the status of every agreement by a landlord or tenant. Consider whether agreements concerning the following matters “touch or concern” the land or “have reference to the subject matter of the lease”: the use of parking spaces (if not part of the leased premises) and the agreement to prohibit competing businesses. The landlord’s agreement to not permit competing businesses may not have reference to the subject matter of the leases but are drafted (and protected pursuant to the Land Titles Act, 2000 ) as negative covenants that will run with the land in equity.
If the landlord’s proposed lease provides, and most do (see Schedule A, Article 10.01), that upon transferring its rights and obligations to an assignee the landlord will be discharged of its future
15
S.G.M. Grange, Q.C., “Remedies for Breach of Covenant,” The Law Society of Upper Canada Special Lectures,
1965, p. 151-153. See also F.W. Rhodes, Williams and Rhodes, Canadian Law of Landlord and Tenant , 5th ed.,
(Toronto: Carswell, 1983), Vol 2 p. 15-77; and P.V. Baker, Megarry’s Manual of the Law of Real Property , 4th ed.
(London: Sevenson & Sons, 1969), p. 385.
16
This information and that in the preceeding paragraph is taken from the references in the immediately preceeding footnote.
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Real Estate - Commercial Leases obligations to the tenant under the lease, the tenant’s lawyer must ensure that the tenant’s new landlord is bound by those covenants which do not run with the land. In the absence of a contract between the tenant and the new landlord, it is difficult to see how the tenant can bring action against the new landlord on such covenants. The tenant’s rights, (if they are retained and they would not be under Schedule A, Article 10.01(b)), against the original landlord may be worthless if the landlord
9 has disappeared, no longer has substantial assets or is otherwise in no position to practically ensure that the new landlord fulfills these agreements. Even if the original landlord remains subject to an action for damages, direct remedies against the new landlord such as a mandatory injunction would be more useful, but impossible without privity of contract. On the other hand, the new landlord is able to enforce against the tenant by virtue of the assignment by the landlord and the Choses in
Action Act
those tenant’s agreements which do not refer to the subject matter of the lease.
In view of the foregoing the tenant should require in its lease that, in the event of any assignment by the landlord, the landlord will obtain an agreement from its purchaser in favour of the tenant that the new landlord assumes all the obligations of the landlord pursuant to the lease. The lease should also provide that any release of the landlord’s obligations to the tenant under the lease following an assignment by the landlord would only be effective when the necessary enforceable agreements have been signed and delivered.
3. Independence of Covenants
The fact of and the theoretical foundation for the independence of the landlord and tenant's agreements in a lease have been discussed earlier in this paper (see Section I. A. Historical
Evolution). Interdependence of agreements in non-lease contracts was also mentioned. A leading
Canadian case which illustrates the continuance of the land law concept in leases and the resulting hardship on a tenant is the decision of the Nova Scotia Supreme Court in E. Parker Enterprises Ltd.
v. Dud Hut Ltd.
(1979), 35 N.S.R. (2d) 482. In Dud Hut the landlord agreed to maintain the
17
The Choses in Action Act , R.S.S. 1978, c. C-11, s. 2.
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Real Estate - Commercial Leases exterior of the premises, interior walls, ceilings and floors. It didn’t, despite requests from the tenant. The premises were in deplorable shape. The tenant left with six months left in the term claiming, in essence, a fundamental breach entitling it to repudiate the contract. In other words, the interdependence of the landlord and tenant obligations was the basis of its claim. The landlord sued for the rent for the balance of the term, and won. The court held that the tenant’s agreement to pay rent was independent of the landlord’s obligation to repair. This reiterated the standard wisdom: no breach by the landlord will entitle the tenant to repudiate.
Their agreements are independent. The tenant’s only remedy is to sue for breach of the specific agreement. Given the pace and expense of litigation, that is a remedy that is not a remedy. At last an inroad has been made in Canada on this doctrine. In the Lehndorff case discussed in this paper in Section I, B. 4. Frustration, a breach by the landlord allowed the tenant to repudiate. The law is in limbo now until courts follow and expand Lehndorff or restrict it. It is too soon to announce the demise of the doctrine of the independence of covenants in leases.
The solution is in the hands of the tenant and its lawyer when the lease is being negotiated. If the tenant has the necessary leverage and the lawyer has the necessary knowledge, they will negotiate a provision that, if the landlord breaches its agreements, the tenant will be entitled, at its option, either to remedy the landlord’s breach and set off the costs of doing so against future rent payments or to terminate the lease. This manner of provision is normal with the standard form of lease of major national tenants.
A more subtle way to do this – but not recommended manner - would be to insert the wording of the
Residential Tenancies Act, Saskatchewan, section 16 into the lease as follows:
The common law respecting the effect of a breach of a material agreement by one party to an agreement on the obligation of the other party to perform the agreements it has agreed to perform applies to this lease.
18
See discussion by R.S. Green, S.J. Messinger, and D.H. Sohmer, “An Update and Survey of Recent Case law Relating to Shopping Centre Leases”, Shopping Centre Leases, volume 2, 627 at 659. In the United States, the courts have begun to make inroads on this sacred doctrine.
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11
One would have to carefully consider the implications of this manner of inclusion given its implications for the security of tenure to the tenant of its lease. What is the impact, for example, of this manner of provision on the statutory right of the tenant to seek relief from forfeiture? From the landlord’s perspective, such a provision could have serious implications for the landlord’s mortgage and other financing.
The independence of the landlord and tenant’s obligations in a lease requires that various termination rights be considered. Know the practical aspects of your client’s business and attempt to negotiate all the termination rights the tenant needs. Termination rights are discussed in this paper in Section III, E. Contractual Rights of Termination.
4. Frustration
The only certainty about the common law doctrine of frustration
of contracts is that it is bound to induce frustration in the lawyer trying to understand it. There are five different theories on the basis of the doctrine. To supplement your education from your contract law course on the doctrine of frustration, peruse Frustration and Force Majeure by G. H. Treitel.
Despite the Highway Properties case, the common law doctrine of frustration has not been applied to commercial leases in Canada.
It is the same old story. Since land is virtually indestructible,
19
The doctrine of frustration has been defined “as the premature determination of an agreement between parties, lawfully entered into and in the course of operation at the time of its premature determination, owing to the occurrence of an intervening event or change of circumstances so fundamental as to be regarded by the law both as striking at the root of the agreement, and as entirely beyond what was contemplated by the parties when they entered into the agreement. The effect of frustration is to release both parties from further performance of their obligations under the agreement and to terminate the agreement as of the date of the frustrating event.” Cricklewood Property and Investment Trust Ltd. and
Others v. Leighton’s Investment Trust Ltd. (1945), 1 All E.R. 252 at 255 Viscount Simon, L.C.
20
(London: Sweet & Maxwell, 1994).
21
In MSM Construction Ltd . v. Deiuliis (1985), 49 O.R. (2d) 633 the court stated. . . “the conventional wisdom of the case law is that the doctrine of frustration does not apply to commercial leases”. In various provinces, including Saskatchewan, legislation has been passed making the doctrine of frustration applicable to residential tendencies. In British Columbia the doctrine is extended to commercial leases by the section 33 of the Commercial Tenancy Act which states “The
Frustrated Contracts Act and the doctrine of frustration apply to leases.” It also applies to agreements to lease. The
Frustrated Contracts Act of Saskatchewan does not apply to leases.
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Real Estate - Commercial Leases once the grant of land has been made by the landlord, full consideration has passed to the tenant so that frustration is impossible; any contractual obligations are merely incidental to the creation of the landlord and tenant relationship.
Secondly, the risk of the happening of a supervening event always passes to the tenant. This is the same law as in the sale of land where risk passed to the purchaser, at least, before environmental law.
The cases where a tenant refused to pay the rent upon the happening of a supervening event and, as a defence to a suit for the rent, tried to argue that the doctrine of frustration applied to the lease illustrate the hardships experienced by a tenant in a lease where neither the doctrine of frustration nor any contractual provision saves the tenant from having to honour its obligations under the lease.
For example, in the Cricklewood case referred to in footnote 19 the tenant leased a parcel of land for 99 years, agreed to build 14 shops and agreed with the landlord on the rent for each shop.
In other words the tenant was a developer who took a ground lease proposing to build and sublet the premises. When World War II broke out, construction was halted. In defence to an action for the rent, the tenant argued that the lease had been frustrated by the fact the demand for shops ceased, financing for building ceased and government restrictions on building and materials made building impossible.
The tenant lost: the House of Lords held the doctrine of frustration to be inapplicable to the
Cricklewood lease and split on the question whether the doctrine could ever apply to leases. Therefore, the Court of Appeal’s ruling that the doctrine was inapplicable to leases prevailed until the Panalpina case in 1981.
In the Panalpina case from the U.K.,
the tenant leased a warehouse for a 5-year term with a right of renewal for a further five years. During the term, due to the dangerous condition of a building opposite the warehouse, the authorities closed the only road to the warehouse for two years. This
22
J.T. Robertson, “Frustrated Leases: ‘No to Never - But Rarely if Ever’”, (1982), 60 Can. Bar. Rev.
619 at 622.
23
National Carriers Ltd.
v. Panalpina (Northern) Ltd.
(1981), 1 All E.R. 161.
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13 circumstances. In this case the tenant only lost the first two years out of a five year term so the doctrine of frustration was held to be inapplicable to the Panalpina lease.
Despite Highway Properties and despite Panalpina, the Canadian courts still have not applied the doctrine of frustration to a commercial lease. A step in that direction, however, has been taken. In
Lehndorff Canadian Pension Properties Ltd.
v. Davis Management Ltd.,
the British Columbia
Court of Appeal held a landlord’s failure to consent to an assignment constituted a fundamental breach of the lease contract. I believe that this is the first time in Canada that the contractual doctrine of fundamental breach has been applied to a lease. Although of no particular relevance in the Lehndorff case, Locke, J.H. stated: “I unhesitatingly adopt the view that all contractual doctrines and remedies apply to the lease.”
He must be saying that the doctrine of frustration applies to commercial leases in Canada. We await a case in which it is applied.
Even if the doctrine of frustration did apply to leases, it is so uncertain that lawyers would still need to draft clauses to try to make its operation more certain. After all, lawyers still draft termination clauses for contracts even though the doctrine of frustration applies.
In the standard lease the damage and destruction clause is an attempt to allocate the risks of loss in the event of damage.
The other standard attempt to provide relief for the effects of unexpected events is in the “ force majeure clause”. In an effort to avoid legalese this is sometimes roughly translated as “excusable delay” or “unavoidable delay”. There are a number of ironies in the standard force majeure clause:
(a) the term is derived from the civil code in France;
(b) what we generally write under that heading is not a codification of the French law of majeure
;
24
(1989) 5 W.W.R. 481.
25
Lehndorff at 511.
26
See Schedule A., Article 7.
27
Tritel, page 434.
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(c) what we generally write under that heading is not a codification of the English doctrine of
(d) unless improperly drawn the provision will not excuse financial default such as payment
The unavoidable delay clause (see Schedule A, Article 14.01) is fair as it operates to the benefit of both parties, but the protection given is delay only. There is no discharge of the contract as would result if the party suffering the effect of the supervening event could successfully argue that the doctrine of frustration applied. Most leases in Canada only have a delay clause, not a discharge clause. I do not know why we don’t additionally provide contractually that the common law doctrine of frustration applies to the lease, at least in circumstances where delay is not an appropriate solution to the risk allocation when a supervening event occurs. The wording to incorporate the concept is simple. It has been done by statute in British Columbia. It will be a rare occasion when you will see a clause that proposes discharge of the lease contract (or any other) as a result of a fundamental change in circumstances. Ignoring this issue does not protect the interests of a client entering a lease as a tenant. J.T. Robertson, in the article referred to in footnote 22 analyses the complexity of applying the doctrine in the lease situation.
Under the force majeure clause in Schedule A, Article 14.01, the tenant in the Cricklewood case would have had to pay rent throughout the war, but could have delayed building to the end of the war. In the Panalpina case the tenant would have had to pay the rent and relocate to other premises, pay the rent there as well and relocate back to the original premises when the blockade was lifted.
The standard force majeure clause falls short of the doctrine of frustration. Lawyers should make tenants aware this is an area of risk for them. Insurance may protect a tenant in certain cases.
In his text The Commercial Lease: A Practical Guide Mr. Haber makes some interesting suggestions about modifying the force majeure clause for the benefit of the tenant, especially if there is a fixturing period involved in the lease. Even so, his proposed modifications do not go so far as to discharge the lease in the event of catastrophic supervening events.
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5. Landlord’s Remedies for Tenant’s Breach and Landlord’s Duty to Mitigate
15
Until Highway Properties , a landlord had three remedies available when a tenant abandoned the leased premises: (1) continue to recognize the lease, leaving the premises vacant and periodically suing for rent as it accrues; (2) continue to recognize the lease, but serve notice upon the tenant that the landlord is taking control of the premises intending to re-let on the tenant’s account, looking to the tenant to satisfy any deficiencies in re-letting revenues and those called for under the lease; or (3) effect a termination of the lease, usually in these circumstances by acceptance of a surrender of the premises, and looking to the tenant for rental arrears, and if applicable damages, occurring to the date of termination. In Highway Properties , the Supreme Court broke new ground by granting a fourth remedy to a landlord, namely, termination of the lease with a right to claim damages for prospective loss.
Inherent in any discussion of landlords’ remedies is the issue of in what circumstances, if any, is a landlord required to mitigate its loss. In contract law, a party seeking damages for breach of contract has a duty to take all reasonable steps to mitigate the loss caused by the breach of contract. It has been stated that the duty to mitigate does not apply to the landlord under a lease. That statement is somewhat misleading.
The issue is discussed by Green, Messinger and Sohmer in “An Update and Survey of Recent Case
Law Relating to Shopping Centre Leases” in Shopping Centre Leases , Vol. 2, 627 at 653 and in the article by G. Sustrik referred to in footnote 9.
Periodically the Courts and some authors revisit the question as to the extent to which the doctrine of mitigation does or ought to apply to a lease and to the actions of a landlord in the event of default.
One should note that the first remedy of the landlord noted above, that being maintenance of the lease in existence and periodic suit for rent accruing due, is incompatible with a general duty to mitigate.
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For one author’s analysis of Highway Properties and a review of its treatment by later courts, one can refer to the article referred to in footnote 9. However be cautioned that while the article conveniently compiles the cases considering the Highway Properties decision and provides interesting commentary on the area, one should be sceptical of several of the author’s conclusions both as to the law of contract as well as leases, and in particular the author’s conclusion on the existence of any duty to mitigate. The Sustrik article concludes that “Canadian jurisprudence. . . now appears to impose a duty on the. . . landlord to mitigate its losses…. The landlord may be required to alter the tenant mix and to rent the premises to tenants that might not otherwise be considered desirable”.
This conclusion is premised on two unreported trial level decisions, and flies in the face of the Supreme Court of Canada’s decision in Apeco of Canada Ltd.
v. Windmill
Place
where not only was the duty to mitigate not imposed on a landlord but, in circumstances where the landlord had other space available to rent, revenues recovered from the defaulting tenant’s premise was not applied to reduce damages recoverable.
On the current state of the law the appropriate conclusions related to the issue of mitigation are that not general duty to mitigate exists; however, if a landlord does in fact mitigate its losses then these revenues recovered on mitigation will reduce damages recoverable for prospective rental payments to the extent of but not in excess of such rental payments.
The focus of this paper is on the drafting and interpretation of leases. We would recommend that unless the lease makes explicit provision on the applicability or non-applicability of the doctrine that one should operate on the assumption that the doctrine of mitigation has the limited application indicated above. The suggestion that a duty to mitigate should or could be included into a lease should be approached cautiously as it will have implications to a landlord in a variety of circumstances. For example, in many cases landlords have multiple premises for lease. When a tenant breaches its tenancy agreement and abandons its premises, should there be an obligation on
28
G. Sustrik, “Highway Properties - Look Both Ways Before Crossing” at 491.
29
(1978), S.C.R. 385.
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17 the landlord to first re-let the premises abandoned or could it lease other unoccupied space, and if it did so would it be in breach of a contractually accepted duty to mitigate? As indicated in the
Supreme Court of Canada decision above not only was the landlord under no obligation to first lease the abandoned premises but the revenues from doing so were not taken into consideration in the calculation of loss of prospective rents since other premises of the landlord remained vacant.
The Residential Tenancies Act in Saskatchewan statutory condition 13(1) provides “where the tenant abandons the residential premises in breach of the tenancy agreement, the landlord’s right to damages is subject to the same obligation to mitigate his damages as applies generally under the rule of law relating to breaches of contract”. It is possible to adapt this wording to the commercial lease.
6. Voluntary Surrender of a Lease
Privity of contract is ended by a termination agreement, privity of estate by a surrender agreement. The termination of a lease is discussed in this paper in Section III, E. 4. Landlord’s
Option to Terminate in Event of Tenant’s Assignment or Subletting. A termination requires a voluntary surrender agreement (as opposed to surrender by operation of law) by means of which the tenant surrenders the leasehold estate to the landlord who holds the reversionary interest.
The two estates merge as one.
In 1979, the Ontario Divisional Court relying on Halsbury’s Law of England held that a surrender of a lease must take effect at once and cannot operate in the future.
surrender agreement must be signed on the date that possession will be surrendered by the tenant.
This difficulty may be avoided if the surrender agreement includes a statement that the parties are amending the lease by reducing its term so as to expire on the intended date of surrender.
30
Re Humphrey and Ontario Housing Corporation (1979), 96 D.L.R. (3d) 567 and see 23 Halsbury’s Laws of England ,
3rd ed. para. 1413 at p. 684 and cases cited in footnote (a).
31
Suggested in R.S. Green, S.J. Messinger, D.H. Sohmer, “An Update and Survey of Recent Case Law Relating to
Shopping Centre Leases,” Shopping Centre Leases , Vol. 2, at 627 through 629.
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Real Estate - Commercial Leases lawyers adopt a procedure by which the parties execute an immediate surrender and concurrently have the landlord grant the tenant a license to occupy the former leased premises on the applicable terms and conditions contained in the lease until an agreed date.
When the landlord and the tenant merge the reversionary and possessory interests by a surrender agreement the effect of section 8 of the Landlord and Tenant Act on subleases must be kept in mind.
The landlord must ensure there are no subsisting subleases as the surrender will operate subject to the rights of the subtenants and their leases will be preserved, at least with respect to the covenants of the landlord which run with the land. If there are subleases, they should be assigned to the landlord to avoid this problem. When involved in surrender agreements also, consider the Land
Titles Act
which provides that “no lease is to be surrendered without the consent of all persons appearing by the land titles registry to have an interest registered against the lease”.
7. Lease: Conveyance or Contract
We have surveyed the interface of property law and contract law in the commercial lease. At the end of the survey we are left with the question: What is the commercial lease? G. Sustrik (see footnote 9 at page 491) lists the possibilities:
(a) a lease is a conveyance;
(b) a lease is a conveyance subject to the addition of one new remedy;
(c) a lease is a conveyance but the landlord may resort to all contractual remedies either:
(i) in addition to the traditional remedies for enforcing a lease; or
(ii) in substitution for the traditional remedies;
(d) a lease is a conveyance but is subject to all the principles of contractual law insofar as they do not conflict with the basic interest in land; or
(e) a lease is a contract.
32
The Landlord and Tenant Act , R.S.S. 1983 c. L-6, s.8.
33
The Land Titles Act, 2000, s.s. 2000, c.L5.1, s.143.
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19
Since the date of that article, 1986, we have more cases, including Lehndorff , that continue the shift in emphasis begun in Highway Properties. We would advise caution in concluding that cases such as Lehndorff reflect broad changes in attitude particularly as that decision dealt with the somewhat unique area of assignment and subletting. This area has always attracted separate considerations in the caselaw and treatment in statute which, for example, provides that a breach of a prohibition against assignment does not as would any other breach provide access to the tenant to the courts for relief from forfeiture.
It is clear that the Court of Appeal in the very unusual factual circumstances of this decision applied albeit imprecisely
the concept of fundamental breach to a leasing circumstance. It was an entirely appropriate application in the circumstances of that case; however, it would be aggressive to suggest a very broad application is warranted.
While the above list enumerates the various options, the jurisprudence to date provides strong support for the second option, that is a lease is a conveyance subject to an additional landlord’s remedy in certain circumstances, and support for a proposition that at least in special circumstances the courts will apply contractual principles. As is the case in many areas of the law, this can change but every indication is that change in this area will be very cautious. This is entirely appropriate in that the implications in these fundamental concepts that have applied to leases for centuries are not easily foreseeable. Some of the implications of the Highway Properties decision are still in the making – 33 years later.
One should note that the Manitoba Law Reform Commission recommended in 1996 that both the concept of fundamental breach and the doctrine of frustration be extended to commercial leases.
The problem for the practitioner is that there are not enough new cases in each province to resolve this uneasy marriage between property law and contract law in the lease.
34
See section 10(9)(a) of the Landlord and Tenant Act.
35
See N. Bankes and N. Rafferty, “A Tenant’s Remedies for a Landlord’s Breach: The Impact of Lehndorff Canadian
Pension Properties Ltd.
v. Davis Management Ltd.
” (1990), 24 U.B.C.L. Rev .
155.
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This situation is exacerbated by the reality that in many circumstances you as a practitioner will have limited opportunity to address some of these issues through drafting or revision of provisions to a lease.
Landlords invariably have standard form leases which are imposed upon all but those few tenants which have a real bargaining position. Of those tenants which do, few are interested in you investing the amount of time and therefore fees that is required to adequately address these conceptual but fundamental issues.
On the other hand, national retail tenants have their own form of lease that they insist upon and as a result limit the ability of the landlord’s solicitor to revise the document. Interestingly, we would note that (while it may reflect in the view of some a lack of creativity) few of these documents attempt to pre-empt the application of fundamental principles relying rather on self-help remedies for landlord failures with offsets against rent payments, rent reductions and options to terminate.
Section II introduces Schedule A, a sample form of lease; and in Section II, some of the more complex contractual provisions are discussed. The reader should refer to the sample lease where indicated.
II. COMMENTS ON SCHEDULE A - SAMPLE FORM OF LEASE
A former contributor to this paper obtained permission to present the standard form of lease used by
Princeton Developments Ltd. in its commercial leasing operations. This lease represents a thoughtful attempt to set up a commercial lease in a logical, appropriate way. It is refreshingly upfront. It tries to communicate effectively, not just to lay down the law of the relationship.
The first page of the lease in Schedule A sets up the most important information: parties, name of building, legal description, rentable area, term, rent, percentage rent, use and the schedules. This is up-front communication. It saves all readers much page-turning and hunting and pecking to find the critical information.
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Article 1 on page A - 2 of Schedule A is also unusual in dealing with some important issues often
21 found at the end of a lease. In particular, I appreciate having the “Quiet Enjoyment” clause in
Article 1.03. Next to exclusive possession for the term, it is the main thing the tenant is buying.
It is perfect logic to have it as Article 1.03 and illogical to have it stuck at the back of a lease. Note also how in Article 1.02 the concept of “covenant” is dealt with - once and for all in this lease. In many leases, you see this legalese employed a multitude of times.
The effort to communicate well is also seen in Articles 3.02, 3.03, 3.04, 5.01 and 6.01 of the sample lease in Schedule A. These refer to certain expenditures the landlord is undertaking, but in each case it is specified that the expenditure is rechargeable to the tenant by inclusion in the tenant’s proportionate share of operating costs. Without this wording, which ties together separate parts of the lease, the reader has to constantly flip back to the definition of operating costs to see who is paying for these services.
This sample lease will be referred to from time to time to illustrate various points in the paper.
A. THE STRUCTURE OF RENT
1. Terminology
The leasing industry has its own terminology which the lawyer needs to know and will probably use even though these terms are not terms of art. Some of this terminology relates to the scheme of rent terms (for example, gross lease, net lease and triple net lease) that are usually not defined in the lease and that to many lawyers and their tenant clients have no precise meaning. The business meanings which should be attributed to these terms are explained in Mr. Posner’s book mentioned
36
See Williams and Rhodes, Canadian Law of Landlord and Tenant , 5th ed., Vol. 1 at 9-1 for cases and this definition:
The covenant for quiet enjoyment is an assurance against the consequences of defective title...and against any substantive interference...with the enjoyment of the premises for all usual purposes.
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Real Estate - Commercial Leases in the introduction to this paper: The Leasing Process: A Guide for the Commercial Tenant . This book is a guide for the commercial lawyer too. Due to the set-up of a commercial lease, the various components of the rent are spread throughout the lease. The total cost of the leased premises to the tenant is derived by reading together a number of provisions dispersed throughout the lease. It’s like painting by numbers or putting a jigsaw puzzle together.
Here is a brief summary of Mr. Posner’s outline of the general meaning of some basic terms.
Please read his book to get a working knowledge of the “structure of rent” and what is involved in calculating the true cost of leasing to the tenant.
2. The Business Meaning of Rent Terminology
(a) Gross lease : the tenant’s basic rent is gross to the landlord, that is, the landlord pays all taxes and operating costs, including all increases. There are no “rechargeables”.
(b) Net lease : the tenant’s basic rent is net to the landlord, that is, the tenant pays, by means of
Additional Rent, its proportionate share of non-capital operating costs of the complex including realty taxes and escalations, called the Rechargeables. A net lease is not totally net to the landlord since some expenses will not be rechargeable to the tenant. A lease which is more net than the Net Lease is called a Triple Net Lease or an Absolutely Net Lease. In this case the Rechargeables may include capital costs or reimbursements that exceed the actual operating costs.
(c) Net and Carefree Lease: the tenant pays Basic Rent and Rechargeables, and agrees to perform repairs and maintenance on the leased premises.
(d) Semi-Gross Lease : the tenant’s Basic Rent payments are not Gross to the landlord because the tenant also pays its proportionate share of specified operating costs, usually realty taxes and utilities. It is unusual for the “pure” gross lease to be employed for anything but a short term demise as, if nothing else, we all anticipate annual increases in charges such as taxation and utilities will be realized and invariably in excess of normal rates of inflation. Frequently, gross leases will incorporate either a proportionate share of specified costs or escalators for increases from base amounts in these costs.
37
Posner, The Leasing Process , p. 6 - 13.
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23
These terms, when correctly applied, give the big picture on the rent structure. As a practical matter, most leases fall into a spectrum between these categories and the lease must be studied in detail to put the rent puzzle together.
3. What is Basic Rent?
Basic rent is always an amount which is usually the product of a rent rate formula such as “$X.00 per square foot per year.”
The issue tenants and their lawyers need to focus on is the method used for measuring the area subject of the rent rate formula. The method can seriously affect the amount of the Basic Rent. The tenant wants to pay only for useable space so wants to exclude outside walls, structural columns and any allocation to it of the common area space.
Anyone who intends to practice in this area should familiarize themselves with the BOMA (Building
Owners and Managers Association) standard method for measuring floor area in office buildings.
This measurement method has broad usage but one should understand that the actual area of space is grossed up for rent calculation purposes.
For a more detailed discussion of rent structures please refer to Mr. Posner’s book.
Please refer to Schedule A and the definition of Operating Costs in Part Two of the Project
Supplement for an interesting example of “what’s in and what’s out” of the definition of Operating
Costs in this “completely net” lease. Also see Articles 3.03, 3.04, 5.01 and 6.01 to put together the rent picture.
Please refer to Mr. Haber’s discussion of operating costs in The Commercial Lease: A Practical
Guide to learn the arguments landlords and tenants and their lawyers make to revise the definition
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Real Estate - Commercial Leases of operating costs. Note also that Schedule A, Article 2.01 provides that any cost not specifically identified in the lease (and not specifically excluded) will be the residual responsibility of the tenant.
Some tenants negotiate to have the landlord take on this residual responsibility for operating costs.
Principal areas of discussion or review of operating costs include the extent to which capital costs can be included and charged back to tenants. It is usual to preclude capital costs from being included in operating costs whether upon being incurred or on an amortized basis except in specific circumstances. In the sample lease it is no longer usual to permit the manner of inclusions contemplated by Schedule A, Project Supplement, Part Two, Operating Costs, paragraph (1)(b)(iii) which deals with structural or exterior “repairs” not charged in the year incurred - in other words, repairs of a capital nature.
Negotiation of what’s in and what’s out of operating costs only starts the discussion; the next step of the negotiation is how to allocate the operating costs in a mixed use project. In Saskatoon, think of the Scotia Centre and the Midtown Plaza. They have food courts, retail and office tenants, parking, and common areas. Various questions arise. Should the retail tenant contribute to the hydro and security costs for a lobby that serves only office tenants? Should office tenants contribute to the cost of maintaining the food court? Should office tenants contribute equally to the maintenance of the parking facility which benefits the retail operations to a much greater extent?
Refer to Schedule A, Project Supplement, Part Two for the definition of “Proportionate Share”.
You will see there an attempt to build flexibility and fairness into a standard form so that the issues can be handled. In acting for a tenant going into a centre like the Midtown Plaza or the
Scotia Centre, the lawyer for the tenant and the tenant would have to gain an understanding of the “Project Components” and evaluate the fairness of the tenant’s “Proportionate Share”. The same issues concerning the allocation of operating costs arise when a gas bar or ice cream shop operates out in the parking lot. The lawyer has to understand first the business of leasing then the law of leasing becomes understandable.
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B. RENT AND GOODS AND SERVICES TAX (“GST”)
25
1. The General Principles
Rents paid under commercial leases are subject to GST
. Commercial landlords are required to register for GST purposes and collect and remit GST on commercial rentals received from tenants.
Landlords claim input tax credits for GST paid on all related purchases of goods and services.
While tenants are liable to pay GST on commercial rents, in most cases they are also entitled to a corresponding input tax credit. As a result, the most significant effect of GST on a tenant is in respect of cash flow, that is, the delay between when the tenant is required to pay GST to the landlord and its next reporting date when the tenant is entitled to make a claim for the corresponding input tax credit. There are, however, some tenants who are not entitled to claim input tax credits or who are only entitled to receive partial rebates of GST paid with respect to some or all of their activities. Public service bodies and tenants who are making exempt supplies fall into these categories (for example, charities, dentists, doctors, universities and financial institutions). In order to remain competitive commercial landlords are compelled to minimize GST costs to these types of tenants.
2. GST on Rent, Prepayments and Deposits
Section 152 (2) of the Act rules applicable to partial payments are applicable to commercial leases.
GST is payable on the earlier of the day part or all of the consideration for the supply is paid, and the day that part or all of the consideration for the supply becomes due. If a written lease calls for periodic payments such as monthly rental payments, consideration becomes due on the date each rental payment is due according to the terms of the lease agreement, regardless of any invoice that may be issued.
In essence GST is payable by the tenant on the date rent is due under the lease unless rent is prepaid in which case GST is due at the same time as the prepayment.
38
Excise Tax Act , R.S.C. 1985, E-15, section 136(1). The discussion of rent and GST was originally written by Caroline
M. Gorsalitz now in-house counsel at Cameco.
39
Section 152(2) of the Excise Tax Act .
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As a result of the treatment of a prepayment, it is important to determine whether or not a “deposit” constitutes a prepayment of rent. A deposit is not considered consideration paid for a supply unless and until it is applied as consideration for the supply.
Therefore, the language of the lease document and the manner in which the landlord holds or treats the deposit affects when GST is payable on deposits. If the deposit provision is drafted in a manner which suggests the deposit is merely to be held by the landlord as security for the due performance of the tenant’s obligations to be applied, if not earlier forfeited to the landlord as a result of a breach, to the last month’s rent, GST is not payable until the deposit is actually forfeited to the landlord or appropriated to the last instalment of rent.
It may not always be clear when a deposit has been applied in consideration for a supply. To ensure that GST liability does not arise on the receipt of a deposit, a landlord should not record the deposit as income or as payment of an account receivable rather it should be shown as a liability in the landlord’s account. Cautious landlords could also place the deposit in a separate bank account although this is rarely done as the landlord in most circumstances prefers the use of the funds prior to application. If the deposit is forfeited to the landlord it will be treated as a GST included amount and the landlord will be required to remit 7/l07ths of the deposit as tax.
3. GST on Additional Rent and Percentage Rent
In most commercial leasing arrangements the tenant is required to pay “additional rent”. Additional rent mostly comprises the tenant’s proportionate share of the landlord’s gross costs in operating and maintaining the building, such as utilities, insurance, property taxes, maintenance, labour and administration fees. The tenant is required to pay GST on additional rent, despite the fact the landlord may have paid GST when it originally incurred some of these costs.
40
Section 168(9) of the Excise Tax Act .
41
Section 182 of the Excise Tax Act .
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From a tenant’s point of view, the landlord, in calculating additional rent, should not include the amount of GST paid by the landlord in incurring these costs and these refundable taxes
27 should be expressly excluded in the calculation of operating costs. Since the landlord is able to claim input tax credits for the GST, it is not prejudiced. If the landlord includes the GST it paid in providing these services, operating costs will be unnecessarily inflated by that amount and the landlord will receive an additional 7% benefit when it is reimbursed for that GST by the tenant and claims an input tax credit. From a landlord’s point of view, however, it might retain the right to recover as additional rent any GST deficiency it may incur (for example, where for some reason the landlord does not have the ability to flow through GST charged and claim it as a landlord's input tax credit). Under the current legislation it is unlikely that
GST will not be fully recoverable by a commercial landlord.
A tenant who uses a rental premises for the provision of exempt supplies such as public service bodies or financial institutions may not claim input tax credits with respect to GST paid. In order to minimize the GST paid by these types of organizations, the parties should arrange wherever possible for the direct supply of certain types of exempt goods and services to the tenant rather than having the landlord make such supplies and charge back the cost as additional rent. For instance, certain municipal water and sewer services are exempt supplies.
If a tenant incurs these costs directly, no
GST is payable. However, when the landlord pays these costs and passes them on to the tenant,
GST becomes payable by the tenant. As a result, when the savings warrant it, the parties should arrange for separate metering to the premises.
GST is also payable with respect to percentage rent which is usually calculated as a percentage of the tenant’s gross retail sales or sales in excess of a threshold level. Under the previous federal sales tax system, federal sales tax (“FST”) was included in the cost of goods purchased by the retailer and recovered in the price of goods sold. However, under the GST system, the retailer becomes the collector of the tax. Before the arrival of GST on January 1, 1991, in most leases,
42
Schedule V, Part VI, Para. 22 & 23 of the Excise Tax Act .
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Real Estate - Commercial Leases sales taxes were specifically excluded from the calculation of gross sales for the purpose of determining the percentage rent owing. Theoretically, this reduction in the taxes imbedded in supplies should have produced as reduction in retail sales prices, and as a result, pursuant to the percentage rent calculation provisions of these pre-GST leases, the same volume of sales by a retailer will generate less percentage rent under the GST system despite the fact that from the retailer’s point of view it is in essentially the same position. It has been argued that this provides a rationale for landlords either including the GST in calculation of sales or increasing the percentages formerly expected. We would suggest that it would be wholly inappropriate to permit the inclusion of the tax. For one thing, each time the rate of GST increases the tenant pays greater percentage rent without any corresponding increase in financial well-being.
Another issue concerning the calculation of GST payable on rent is the manner in which rent itself is defined under the lease. Many commercial leases define rent as including all types of payments or monetary obligations of the tenant under the lease for instance, mall merchant association fees and the landlord’s costs in repairing damage to the building caused by the tenant. See Schedule A,
Article 2.01(c). This practice gives the landlord the full range of rights, remedies, and priorities for these other payments as are available for what is traditionally seen as rent. The problem with this all-inclusive definition is that it creates a cumulative effect whereby GST is required to be paid on
GST. To avoid this outcome, a tenant’s lawyer should make it a practice to indicate that GST is not considered rent but the tenant is contractually obligated to remit GST to the landlord and the landlord retains all rights and remedies of recovery for GST as are available for the recovery of rent under the lease.
These provisions are important to a landlord because the landlords obligation to remit GST arises whether or not the tenant in fact pays the rent and the GST payable on it to the landlord. While the landlord has a statutory right to sue a tenant for GST remitted to the Canada Revenue Agency
(“CRA”) by the landlord but not collected from the tenant,
these provisions attempt to provide the
43
Section 224 of the Excise Tax Act .
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29 landlord with all the remedies and priorities a landlord has for the collection of rent. If the rent turns out to be uncollectible, the landlord will be able to claim a “bad debt” input tax credit equal to
7/lO7ths of the amount written off.
4. GST on Tenant Inducements
Commercial landlords often offer inducements to entice tenants to enter into leases of commercial space. There are many forms of inducement including cash inducements, improvement allowances, installation of improvements to tenant’s specifications, rent reduction and rent-free periods.
Where an inducement takes the form of a cash payment made by the landlord to the tenant,
CRA characterizes the payment as consideration for a supply by the tenant to the landlord (that is, the tenant’s agreement to enter into the lease becomes a supply to the landlord). As a result, the tenant will be required to collect and remit GST from the landlord; the landlord will be entitled to claim a corresponding input tax credit.
In a situation involving an exempt tenant (for example, a financial institution) the manner in which the inducement is made will result in different GST implications for the tenant. For example, if the landlord provides a cash improvement allowance to the tenant to permit it to effect the improvements to the premises, the tenant in conducting the work will be charged GST which it absorbs as an absolute cost as no input tax credits are available to it. However, because the landlord is in the position to claim input tax credits, it would be more advantageous to the tenant for the landlord to effect the improvements and provide the improved premises to the tenant.
CRA at first treated rent-free or rent reduction inducements as a “payment in kind” for a supply made by the tenant to the landlord (that is, for the tenant’s agreement to enter into the lease). This interpretation requires the landlord to pay GST on the fair market value of the rent-free portion of the lease. CRA now considers that if an inducement takes the form of a rent reduction or rent-free
44
Section 231(1) of the Excise Tax Act .
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Real Estate - Commercial Leases period, which is provided for in the lease, in a supplemental agreement or by the issuance of a credit note, it will not be considered to be a separate supply but rather a reduction in rent charges with no
GST implications. If the rent-free period is not provided for in writing as required, the landlord will have the duty to remit GST.
5. GST on Lease Cancellation Payments
It is not uncommon for a tenant to make a payment to the landlord to cancel or modify a lease usually in connection with a relocation of leased premises or as settlement of a tenant’s obligations under the lease in connection with an early termination. Landlords also may make payments to a tenant to secure a tenant’s agreement to cancel or modify a lease (for example, when the landlord wishes to provide vacant possession of a building to a purchaser or offer additional space to other tenants). In either situation, provided the lease payments are subject to
GST, the recipient of a lease cancellation payment will be deemed to have collected and be required to remit 7/l07ths of the payment as tax.
6. GST Drafting Issues
A trend has developed to set out the tenant’s liability for GST in the section in the lease on taxes.
See Schedule A, Articles 5.03 (d) and (e). This works much better than adding “plus GST” wherever monetary payments are mentioned in the lease. Mr. Haber has a discussion of GST and draft wording in The Commercial Lease: A Practical Guide , cited earlier in this paper.
C. ABATEMENT OF RENT
Unless the lease provides for abatement of rent, a tenant must pay its rent in all situations even though, for example, the leased premises are destroyed by fire or become unfit for use or habitation.
This is also true if the landlord is in breach of its obligations under the lease (for example, its obligation to repair and maintain the structure).
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Section 182 of the Excise Tax Act.
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31
The continuation of this obligation is a result of both the fact that the doctrine of frustration does not apply to leases and, in the case of landlord wrongdoing, the independence of covenants.
In consideration of the issue of abatement of rent, it is important to consider both the business of the tenant and the physical location of the proposed premises. If the tenant is an office user in an office tower, it is of some significance if access by elevators and stairs are disrupted. On the other hand, a retailer will have a problem with the landlord obstructing access or the view of the frontage of their store with kiosks, signage or other obstructions.
1. Abatement in the Case of Damage or Destruction
In light of the foregoing a tenant’s lawyer should negotiate for the abatement of rent if the leased premises are damaged or destroyed or otherwise rendered uninhabitable and leases invariably provide for this contingency. The concept of damage and destruction should include more than damage from fire and probably should specifically refer to smoke and water damage. What the standard form of abatement usually does not address adequately is the adverse impact on a tenant of damage or destruction to the complex in which the premises are situated or the common areas, including parking areas which might prevent or discourage client visitation.
The type of rent to be abated must be identified (that is, fixed rent, percentage rent and the tenant’s contributions to operating costs and other payments). Please refer to Article 7.03 of Schedule A, the
Rent Abatement clause. Note that rent does not abate if access to the leased premises is cut-off or reduced. Rent is defined to include all forms of rent under the lease. (See Schedule A, Project
Supplement, Part One - Definitions, the definition of rent.)
One should note that there is no abatement of rent if the tenant causes the damage, which in many leases is a standard provision. However intuitively appropriate this might appear, in many leases the tenant is contributing to the landlord’s business interruption insurance and as a result one can persuasively argue that this exclusion for culpability in effect denies the tenant the benefit (through the reduction of rental payments) of the insurance it paid for.
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2. Abatement of Rent in Other Circumstances
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The right to abate rent is desirable when:
(a) particularly in respect of an office tenancy in a multi-level complex, access for any period of time is materially affected (for example, elevator service is terminated);
(b) a landlord fails to maintain a stipulated amount of parking facilities;
(c) certain vistas and site lines benefiting retail leased premises are infringed by the landlord as a result of the subsequent building, introduction of new tenants or kiosks;
(d) certain major tenants (anchor tenants) either terminate their leases or are not open for business to the public or when a certain percentage of the leaseable space in a retail centre is not leased by tenants who are open for business to the public;
(e) the landlord fails for a period of time stipulated in the lease to supply utilities and heating, ventilation and air-conditioning to the leased premises or the complex in which it is located; or
(f) the landlord interferes for a period of time (stipulated in the lease) with the conduct of business at the leased premises in order to carry out the landlord’s obligations respecting repair and maintenance.
Certain of these concessions will only be recognized for major tenants, however, some may be of crucial significance to the circumstances and business of even the smallest tenant and are appropriate for discussion with a landlord.
3. Deductions from Rent
Section 145(a) of the Land Titles Act, 2000 of Saskatchewan provides that there is implied in every lease, unless a contrary intention appears, a requirement that the tenant will pay the rent at the times mentioned in the lease. It does not stipulate that the tenant’s obligation to pay rent is without any right of deduction or setoff but most leases provide rent shall be paid without any deduction, setoff or abatement whatever. (See Schedule A, Article 2.01(c).) Without express provisions allowing it to do so, it is doubtful the tenant is entitled to make any deductions from rent.
While unauthorized but justified withholdings from rent are unlikely to result in termination as a consequence of the tenant’s access to the courts for relief from forfeiture, you should note that such
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33 conditional to some degree on prior compliance by the tenant with the terms of the lease and if this condition is breached rights of renewal are not exercisable.
Pursuant to the section 285 of the Cities Act, S.S. 2002, c.C-11.1, a tenant may be required to pay the landlord’s taxes by paying its rent to the municipal treasurer. When collection efforts are exhausted a city serves a Rent Order on the tenants who are protected vis-a-vis the landlord by a statutory right of setoff. When a landlord distrains for rent, section 27 of the Landlord and Tenant Act , allows the tenant to setoff against rent due a debt, but not damages, owing to that tenant by the landlord.
The tenant must negotiate specific lease provisions for setoff in other circumstances. If the tenant is entitled to perform the landlord’s work when the landlord fails to do it and to be reimbursed by the landlord, no right to deduct the costs incurred from rent will automatically accrue in favour of the tenant. This right has to be expressly provided.
If the tenant engages in a self-help remedy and makes unauthorized deductions from rent of costs it incurs because of the landlord’s failure to perform the landlord’s obligations and the landlord terminates the lease, the court is likely to grant relief against forfeiture and the landlord would be required to pay its debts. In situations where deductions from rent are clearly appropriate, relevant provision should be made in the lease.
D. INSURANCE AND THE REPAIR, MAINTENANCE AND RECONSTRUCTION
OBLIGATIONS
One of the most technically challenging areas of a lease is that dealing with the allocation of responsibilities between the landlord and the tenant for repair and reconstruction and the property insurance provisions. These provisions are all related and this relationship as well as factual complexity complicates analysis. Clearly prudency dictates that both the landlord and the tenant
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Real Estate - Commercial Leases take out insurance for their own protection. However, as a matter of risk allocation, landlord’s leases generally require the tenant to obtain and maintain certain minimum property insurance coverages and for a couple of reasons the tenant’s lawyer should insist on the landlord insuring its property and obligations to reconstruct.
The lease in these areas should reflect that there is a community of interest between the landlord and the tenant in ensuring that the lease facilitates the appropriate operation and maintenance of the complex, whether an office building or shopping mall, and that in the event of damage each party knows their respective obligations such that reconstruction occurs quickly and in the most cost efficient manner including with regard to ensuring the availability of insurance proceeds.
A further complication that should be recognized is that the indemnity and exclusion from liability provisions in the lease are affected by and have to be reviewed against the repair, replacement and both the property and liability insurance provisions.
1. Insuring the Obligations to Repair, Maintain and Reconstruct
To address the appropriateness of the insurance provisions in a lease, an understanding of the structure of the lease, particularly with respect to leasehold improvements, and to repair, maintenance and the obligation to reconstruct, is critical. In many leases this structure is so complex that it is difficult to map out its application to the various possible circumstances that may arise, and unfortunately in some leases the drafter exhibits a certain lack of understanding such that the provisions produce inappropriate results. In many cases the “damage and destruction” clause is not adapted to the type or age of the building, winter building conditions and the real circumstances of the parties.
The role of property insurance in the lease not only provides some assurance that the other party will be able to access the financial resources necessary to meet their defined repair and reconstruction obligations but also, as a result of the terms of the insurance required to be obtained, provides assurance that the other party will not be held financially responsible for those obligations through liability claims.
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The reconstruction, repair and maintenance obligations depend on the circumstances of the lease
35 arrangements, and for example, there are a variety of options for the lease of a standalone building leased by a single tenant from imposing obligations of reconstruction entirely on the tenant to imposing these entirely on the landlord, excluding only interior tenant works. Rent and insurance obligations are imposed to reflect the option selected.
However, most leases are of single premises forming party of a multi-tenant complex. In this circumstance most leases conceptualise the situation as if the tenant were leasing a box, the boundaries of which are the walls, the ceiling and the floor of the premises. Inside the shell, the tenant is in control and has responsibility for construction, repair and maintenance of improvements
– with the exception being building systems and the like that affect premises other than the particular individual tenant. The landlord assumes responsibility for construction, repair and maintenance outside of the shell including structural components and common areas, and for building systems.
Even on this construct you will find that landlords supply improvements to the premises as part of the leasing arrangement but that after construction these will frequently become the responsibility of the tenant to maintain, repair and replace. Sometimes landlords also assume some of the responsibilities for maintenance of improvements they constructed in the premises and the rent rate reflects these additional responsibilities. The repair and maintenance provision should oblige the landlord to repair,
maintain and, when necessary, reconstruct (including in a damage and destruction situation) the shell of the leased premises and the building in which the leased premises are located and the common areas (the corridors, the heating plant and so on). The lease should obligate the tenant to repair and reconstruct all other portions of the leased premises, that is, its leasehold improvements, including finishings.
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There must be an express agreement by the landlord to rebuild, reconstruct or repair; otherwise the tenant cannot compel the landlord to do so. In Schedule A, Article 7.05 the landlord obligates itself to repair if neither party has exercised its right to terminate.
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It should be made clear who is responsible to rebuild and reconstruct the leasehold improvements if destroyed during the term of the lease. A damage and destruction clause that is drafted to require the tenant to reconstruct those portions of the leased premises that it is obliged to repair and maintain throughout the term and imposes a similar obligation on the landlord respecting those items it maintains during the term is only adequate so long as the lease clearly defines somewhere else what the responsibilities of the landlord and the tenant are in this respect.
Repair and maintenance clauses usually specify that the tenant has the responsibility for the repair and maintenance (including in the damage and destruction situation) of the leasehold improvements forming part of the leased premises. In part this is a reflection of the fact that often it is only the tenant who is aware of what these constitute. The tenant should be satisfied, and is invariably committed to insure, that its property insurance coverage is to full replacement value so as to allow it to fulfill these obligations under the lease. If the damage or destruction was so extensive that the landlord (or the tenant) is entitled to terminate the lease, the tenant may not only lose a valuable lease but also a substantial investment in leasehold improvements. Recovery from insurance proceeds may be less than what is needed. Usually the tenant’s insurance provides that the amount of its recovery will be based on the depreciated value of the leasehold improvements and will be reduced to reflect the balance remaining in the life of the lease. This may well prove inadequate to fully reimburse the tenant for the costs to be incurred by it in complying with its obligations to replace.
In regard to leasehold improvements it should be noted that two separate insurable interests are involved: the landlord as owner of leasehold improvements (and entitled to their use at the expiration of the term) and the tenant as the one who has the use of them for the life of the lease. In light of this and despite duplication of coverage with the tenant’s insurance, the landlord should
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See Schedule A which is drafted in this manner. To understand the respective rebuilding obligations in Article 7, one must understand the respective repair obligations in Article 3. These obligations to repair and reconstruct should be excluded in the event either party exercises its contractual rights of termination in the event of damage or destruction.
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37 consider extending its insurance coverage to leasehold improvements used by the tenant in case the lease is terminated. The reason most landlords do not do this is that in usual circumstances the cost of renovation as opposed to new construction means that the former tenant’s leasehold improvements are not particularly valuable to the successive tenant.
The tenant wants the landlord to be obliged to carry sufficient insurance to keep the building in which the leased premises are located operating as a whole especially since the tenant will usually contribute to the cost of that insurance.
With regard to minimum property insurance requirements in leases, landlords should be prepared to accept some modifications. Some tenants are prepared and financially able to self-insure some risks
(that is, rather than carry insurance at the full insurable value of their fixtures, goods and improvements they are prepared to carry 80% of full replacement cost or some tenants feel they can adequately self-insure or that it is more economical to self-insure especially with regard to plate glass). If the landlord is prepared to accept a degree of self-insurance, it should require that its position is the same as if the tenant had insured as originally required (including waivers of subrogation) and recovers insurance proceeds which protects the landlord’s liability position.
Finally, after establishing responsibility for repair, maintenance and reconstruction, and identifying the insurance (property and liability) which each of the landlord and tenant are to maintain, it is necessary to review the exculpatory waiver (including waiver of subrogation) and release of liability and indemnification clauses contained in the lease to determine the impact of each on the parties’ insurance requirements and on the liabilities and obligations of the parties to each other. We will consider some of these matters now.
2. Subrogation
If a tenant’s negligence causes a fire that destroys the building in which the leased premises are located, the insurance company that compensates the landlord for its loss would normally have the right (pursuant to its contractual or common law subrogation rights) to claim against the tenant for
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Real Estate - Commercial Leases reimbursement of the total amount paid to the landlord. Unless this circumstance is addressed in one of the manners described below, the tenant must maintain liability insurance in an inordinate amount against such an eventuality or expose themselves to financial risk that affects not only the tenant but the landlord who may lose a revenue generating tenant.
If, however, the landlord has committed in the lease to the tenant to maintain property insurance on the building, usually in conjunction with the tenant paying its proportionate share of the landlord's insurance premiums, the landlord’s insurers may be precluded from subrogating against the negligent tenant.
The exposure to the landlord in this manner of commitment is to what extent is there a commitment made to a particular level of insurance and is availability of such insurance assured throughout the term of the lease.
More usual is a requirement that insurance be obtained on terms that expressly deny subrogation by insurers against either party. This avoids unnecessary duplication of insurance and to the extent of the insurance recoveries ensures in the event of disaster that a tenant is not placed in financial jeopardy thus also adversely affecting the landlord. In light of the attitude of the courts in the area, it is the traditional experience of most insureds that the cost to obtain the waiver in the policy is nominal. However, we have experienced circumstances where insurers are increasingly reluctant to provide such waivers in regard to property insurance and it is important that this be canvassed by the landlord before providing the commitment. If a landlord agrees to obtain waiver of subrogation and does not do so or is unable to do so, it is in breach of its obligation and may find itself defending a suit from a tenant for the amount the tenant has been required to indemnify the landlord’s insurer which was the amount the landlord’s insurer paid the landlord in the first place.
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Agnew Surpass Shoe Stores Ltd.
v. Cummer-Young Investments Ltd.
(1975), 55 D.L.R. (3d) 676; Russ Southward Tire
Ltd.
v. Tyrotec Products Ltd.
(1975), 57 D.L.R. (3d) 248; The T. Eaton Company Limited v. Albert E. Smith (1977),
92 D.L.R. (3d) 425.
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An alternative to a waiver of subrogation, which is identical in this effect, is to have the other party added as an Additional Insured to the property policy. This is not the same as being added as an
Additional Named Insured, as being an Additional Named Insured in effect is the issuance of a policy to both parties with both having the right to call upon the policy in the event of damage occurring. The Named Insurer is the payee under the policy.
If a tenant is an Additional Named Insured in the landlord’s policies, a waiver of subrogation is unnecessary because the negligence, acts, errors or omissions of its tenant are insured as well those acts of the landlord. It is unusual (for good reasons which are beyond the scope of this paper) for the landlord to agree to name the tenant as an Additional Named Insured in its policies.
On the other hand, landlords frequently draft their lease provisions with respect to insurance to require the tenant to name the landlord and its mortgagees as Additional Named Insureds in the tenant’s insurance policies. The landlord, as a co-insured, is relieved from liability to the tenant’s insurance company and will be a joint payee of insurance proceeds. In the case of co-insureds, cross liability (suits by one insured against the other are covered under the policy)
and severability of interests (a separate policy is considered to have been issued to each insured) provisions are necessary. It is usually sufficient for the landlord to be an Additional Insured in these policies and we would suggest an insistence on being an Additionally Named Insured is overkill. Many tenants will find it very difficult to name the landlord and its mortgagee as insureds if they maintain insurance in one policy for numerous locations and different landlords.
The lease with the pertinent provisions highlighted should be provided to your client’s insurance broker to ensure the insurance obligations make sense and, if they do, to ensure the insurance is placed.
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Misuse of the terms “Additional Named Insured” and “Additional Insured” is common and dangerous. The
Additional Insured is a party who is insured only with respect to claims arising out of the activities of the Named
Insured, not out of acts of the Additional Insured. The Additional Insured will be provided a defence if named in a suit arising out of the act of the Named Insured.
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For an excellent discussion of insurance, see C.J. Steer, “Fire Strikes the Shopping Centre: Insurance”, Shopping
Centre Leases , Vol. 2 at 429.
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3.
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Exculpatory, Releases or Limitations of Liability Clauses
An exculpatory clause in a lease attempts to absolve one of the parties from liability to the other party for its tortious acts or other liabilities for which it would otherwise at common law be responsible. The release clause is a variant by which one of the parties to the lease releases the other from any liability for damage to its property.
Indemnification clauses attempt to impose upon one party (usually the tenant) liability which may or may not exist at common law in respect of loss or damage that may be suffered by the other, sometimes irrespective of negligence or the nature of the person causing loss (for example, the tenant may be made responsible to the landlord for the acts of the tenant’s customers). The clause may be very onerous and extend to make the indemnifier liable not only for foreseeable damages, but also for remote and unforeseeable damages. Some indemnification clauses attempt to make the tenant liable for the negligence of the landlord. A waiver of subrogation blocks action by one party’s insurer but leaves the rights of that party against the other party unimpaired. The provisions of a lease respecting indemnity and exclusion from liability affect the rights of the parties between themselves. The Agnew Surpass case should be studied carefully. It deals with the interaction of insurance and exculpatory provisions when a tenant caused a fire which damaged the leased premises and the shopping centre and the landlord’s insurer sued the tenant pursuant to the insurer’s subrogation rights.
Both the landlord and the tenant should be interested in obtaining releases of liability from each other with respect to occurrences emanating, respectively, from the tenant’s leased premises or from the building in which the leased premises are located, to the extent to which the occurrences are covered by the insurance policies required by the lease. This clause will be useful if waiver of subrogation is for some reason not available. Since the landlord may not collect in full from its insurer or the landlord may not have sufficient insurance or it may carry a relatively large deductible, landlords will resist giving a tenant a release of liability so wide that it prevents the landlord from collecting from the tenant a significant deductible or shortfall in a partly insured or
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41 perils actually insured and the amount of its recovery. Some limits, therefore, would normally be placed on such a waiver; for example, the waiver might be limited to actual proceeds recovered by the landlord or the tenant, as the case may be, from its insurers and therefore would implicitly exclude deductibles. If the landlord’s release from liability is in fact limited, the tenant should then consider whether or not its liability should be limited to the amount of liability insurance that the lease requires it to carry or if the lease does not specify an amount, to the amount actually carried.
Leases should provide (but usually do not) that the landlord and the tenant must do all things reasonably necessary to obtain recoveries under their respective policies.
Release of liability clauses or exculpatory clauses have been found by the courts to exist in the repair clause of a lease (for example, where the repair clause provided an exception to the tenant's obligation to repair with respect to damage caused by a peril against which the lessor was obliged to insure).
Repair clauses should therefore be drafted and reviewed to make certain they are not granting an unintended release or waiver of liability.
The release of liability and exculpatory clauses should, if possible, extend not only to the tenant but also to those for whom the tenant is in law responsible and the tenant’s contractors and agents and also the tenant’s affiliated corporations and directors, officers and employees. If a sufficiently broad release of liability is not obtained, the negligent party may find its employees being pursued.
Since the tenant’s employees are not parties to the lease, the Greenwood case suggests that the employees or agents cannot take advantage of the release of liability clause. One might avoid the problem by setting up an agency whereby the tenant contracts as agent on behalf of its employees and the other third parties to be protected by the release. Consider the following:
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Agnew Surpass Shoe Stores Ltd.
v. Cummer-Young Investments Ltd.
(1975), 55 D.L.R. (3d) 676.
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Greenwood Shopping Plaza Ltd.
v. Beatty (1980), 111 D.L.R. (3d) 257. For a discussion of the Greenwood case and other cases dealing with this issue see Tony and Jim’s Holdings Ltd . v. Silva, 43 O.R. (3d) 633, a 1999 decision of the
Ontario Court of Appeal.
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Every (a) exemption from liability, (b) indemnity, or (c) waiver or release from liability of any nature whatever contained in this lease that is expressed as being applicable to the tenant, or to which the tenant is entitled under the lease, is deemed to extend to, grant rights or causes of action in favour of, and protect, indemnify and hold harmless, as the case may be, any party for whom the tenant is in law responsible and its customers, invitees, employees, agents, contractors and directors and officers and its affiliated corporations and their directors and officers and for the purposes of this lease, the tenant is deemed to be acting as agent or trustee on behalf of or for the benefit of each and all of these parties.
It follows from this discussion that indemnification clauses should be reviewed for consistency with the insurance provisions of the lease and for consistency with the exculpatory and waiver of liability clauses. The indemnity clause should not result in the tenant agreeing to indemnify the landlord unreasonably or in connection with events or in respect of amounts from which the other provisions of the lease have released or excluded the tenant’s liability.
E. CONTRACTUAL RIGHTS OF TERMINATION
1. Background
Most leases today contain provisions granting the landlord, and sometimes the tenant, a right to cancel or terminate the lease in certain circumstances. It appears to be settled law that a lease for a specific term may contain a provision giving either party the right to terminate the lease prior to the expiration of that specific term.
The landlord wants to terminate the lease in the event of destruction or substantial damage to the leased premises or the complex in which the tenant is situated. However, the tenant should try to ensure that its lease does not contain other circumstances giving the landlord a right to terminate the tenant’s lease which are not so justifiable. In addition, there are situations where a tenant may legitimately require a right to terminate its obligations under the lease. The following text reviews some of the contractual termination rights either party may want and discusses some of the complexities of these provisions.
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Atkins v. Lawrence (1968), 62 W.W.R 439; P.M. Fleming v. Hadley (1984), O.W.N. 87.
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Keep in mind the effect of termination of a head lease on a sublease. Subject to the possible application of sections 8 and
11 of the Landlord and Tenant Act , the exercise of termination rights may also terminate a sublease given under the terminated lease. If the tenant’s business is operated through subletting (a franchise operation) the tenant must ensure that the sublessee franchisee is aware of and has agreed to the possible termination of the head lease.
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2. Damage and Destruction
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Certain types of termination provisions are well known (for example, the "fire clause", also called the “damage and destruction clause” which permits certain rights of termination in the event of damage or destruction either to the tenant’s leased premises or to the building in which the tenant’s leased premises are located). Termination clauses in the damage or destruction situation are so common that they are sometimes not carefully reviewed by the tenant and its lawyer. Both parties usually recognize that cases can arise where the damage to the building in which the leased premises are located is so extensive and costly to repair that it may be more economically feasible for the landlord to terminate the tenant’s lease and to demolish the building than to reconstruct. A landlord may not want to continue its commercial operation if the premises of a major tenant are seriously damaged even though a large number of smaller tenants remain unaffected. In addition, physical reconstruction may not be permitted at the time of the event giving rise to the destruction or damage as a result of changes in zoning or other government controls.
Even though termination in the event of damage or destruction is generally acceptable to a tenant, the precise provisions of the clause giving rise to the landlord’s right of contractual termination all too often permit a tenant’s lease to be terminated if an immaterial portion of the building in which the tenant is located is affected. A fire occurring on a single floor of an office tower and affecting an
800 square foot premise should not give rise to the termination of any other leases in that centre. The concern is that if the going rental rate has risen higher than the rent payable under the lease at the time the right to terminate occurs the landlord might use the opportunity to effectively renegotiate the tenant’s rent. Since the tenant has invested substantial effort in conducting its business from its leased premises and invested monies in its leasehold improvements the tenant will not be happy if its lawyer did not pick up on this point in reviewing the lease. In Schedule A, Article 7.04 the landlord may terminate the tenant’s lease if the building is materially or substantially damaged to the extent it should be totally or partially demolished, whether or not the tenant’s premises are damaged.
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Similarly, the tenant may not wish to be obliged to reconstruct its premises or operate its business if a substantial portion of the building or the project has been seriously damaged or destroyed. This is particularly so if it is not going to be repaired or rebuilt in a relatively short period of time. If this is the case one should consider requesting a mutual termination right.
3. Expropriation
Expropriation provisions in leases usually permit the landlord to terminate the lease if expropriation occurs. The difficulty with this provision is that the tenant may lose its right to obtain compensation for the loss of the remainder of the term from the expropriating authority since at the time of the expropriation the landlord may have exercised its right to terminate the lease. The tenant’s right to claim compensation, upon expropriation, can be preserved and the desired result for the landlord can be achieved by drafting a provision which relieves the landlord wholly or partially from its obligations under the lease while preserving the lease itself and thereby the tenant’s right to claim compensation for loss of the remainder of the term.
On the issue of expropriation, please refer to Schedule A, Article 11 where expropriation automatically terminates the lease on the expropriation date. Note there is no compensation to the tenant for the loss of its leasehold interest but that the other heads of compensation for the tenant are clearly preserved.
Few lawyers have experience with or a course on expropriation. Our ability to imagine how an expropriation provision should be written is limited. Therefore, recourse to an article by W.T.R.
Wilson, “Expropriation”, in Shopping Centre Leases , Volume 1 is essential. In eight interesting pages Mr. Wilson orients us to the big question should the tenant have a right to compensation for the value of its leasehold interest and explains the formula for that valuation. There is enough there to permit us to explain the issue to a client and to negotiate revisions to the landlord’s clause even if the closest we have been to expropriation is reading the statute for the Bar Admission Program.
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4.
45
Landlord’s Option to Terminate in the Event of Tenant’s Assignment or Subletting
The landlord who reserves the right to terminate the lease in the event the tenant merely proposes to assign or sublet does not give the tenant adequate recognition for the goodwill that it may have built up by conducting its business in the leased premises. The landlord’s unrestricted right to terminate in these circumstances prevents the tenant from selling its business as a going concern and destroys a substantial amount of goodwill the business may have generated. For this reason, the inclusion of this provision in the lease should be unacceptable to the tenant.
5. Sale and Development
Albeit unusual, sometimes leases contain termination provisions which will take effect when the landlord intends to sell or redevelop the building in which the leased premises are located. The negative impact of these provisions on the tenant is obvious. If accepted, the operation of the clause should be limited to a properly documented sale to a bona fide third party purchaser dealing with the landlord at arm’s length. The length of notice of termination must permit the orderly relocation of the tenant’s business and a method must be determined to compensate the tenant for the loss of its investment in respect of goodwill, relocation expenses, differential costs of similar premises and leasehold improvements. The landlord will want to ensure that any sum to be paid to the tenant will not be paid until the time the tenant actually vacates the leased premises.
A tenant presented with a lease containing this manner of provision should carefully consider whether this is a location that it desires to make an investment in leaseholds and establish a business location.
6. Termination by Tenant
The tenant should consider negotiating for termination rights if, due to specified circumstances beyond its control, continued operation of its business is seriously jeopardized or prohibited by changes in laws. There may be circumstances unrelated to restrictions on the use of the leased
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Real Estate - Commercial Leases premises which might affect the tenant’s business. For example, governmental restrictions placed on the importation of products available only outside the country might effectively prevent the acquisition by a tenant of the unique stock fundamental to its business.
The tenant may want to include a termination provision which protects the tenant if specific criteria for the shopping centre in which it is located are not met by the landlord. A smaller tenant usually relies on the drawing power of major tenants and may wish to consider provisions allowing it to terminate its lease unless a specified number of “anchor tenants” are or will be open before the tenant is required to open its premises for business.
A tenant may want to negotiate termination rights if a specified percentage of the leaseable area of the shopping centre is not occupied by tenants that are open for business when it is required to open and operate its business or if the percentage of tenants open for business falls below a particular level during the term of its lease. These considerations became very real in the last decade in many areas of the country when shopping centres lost tenants or did not lease sizable areas in the centre and, as a result, lost much if not substantially all of their customer drawing power.
The following are some circumstances in which a tenant may want to have a termination right:
(a) substantial physical alteration to the shopping centre by reason of expropriation;
(b) demolition of a portion of the shopping centre;
(c) expansion or alteration of the shopping centre in a manner which affects access to the tenant’s leased premises or visibility of the tenant's leased premises;
(d) substantial reduction in or alteration of parking facilities, access roads or perimeter roads servicing the shopping centre;
(e) substantial alteration in actual occupancy of the shopping centre (such as a specified number of tenants ceasing to conduct business or a substantial change in the use of the leased premises in the shopping centre so that the tenant mix and customer traffic patterns are altered).
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47
One should be aware that national retail tenants as a matter of course incorporate into their leases defined circumstances where rent may reduce, operating cost payments may cease and, in addition, an option to terminate arises. These circumstances habitually include an anchor tenant leaving or
“going dark” or a specific number of stores or percentage of the centre doing so. The greatest objection to this manner of provision lies, we would suggest, in the fact that these provisions do not force the tenant to elect to terminate but rather permit continued tenancy on a reduced rent basis - sometimes a significantly reduced basis.
The landlord is not particularly interested in granting its tenants the termination rights referred to above. The landlord knows its lenders are not prepared to lend on the security of leases having termination provisions. Lenders lend on the basis of the income flow from the rents, not on the inherent value of the property. Too many termination rights will impede a landlord’s opportunity to sell the property since the proposed purchaser may not find a new lender to come on board.
F. THE DEMISE OF COMMON LAW SUBDIVISION RIGHTS
Municipal planning legislation works a major interference in commercial leasing. Although we never attempt to transfer part of a parcel without formal subdivision, we do attempt to lease a part of a parcel without formal subdivision. There is legislation in most provinces prohibiting the land titles office or
Land Registry from accepting for registration “any transfer, lease or mortgage of a part only of a parcel of land. . . unless the registrar receives a copy of the certificate of approval of the approving authority”. The exceptions to this general rule are different in each province; therefore, the cases on the comparable sections from other provinces cannot be applied indiscriminately to section 134 of the
Planning and Development Act, 1983, R.S.S. 1983-84, c.P.-13.1
of Saskatchewan. It is helpful to be familiar with the comparable legislation in other provinces. The legislation from British Columbia is found in the Land Title Act , R.S.B.C. 1979, c.219, s. 73. The Alberta legislation is found in the
Municipal Government Act, R.S.A. c.M-26, s. 652(1). The similarities and differences are interesting.
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Before we try to understand section 134, let’s first understand why it exists. The courts have found that these restrictions on one’s common law right to effectively subdivide one’s own land serve two important public policies. The first is “to ensure that municipal authorities retain control over subdivision as a means of regulating zoning, drainage, utility supply, building encroachment, siting, local aesthetics, and land development and use generally in the public interest”.
The second reason is to ensure the integrity of the operation of the land registration system.
Next let’s understand the effect of non-compliance with section 134. The result, for sure in British
Columbia and probably elsewhere, is in a word, “invalidity”. The leading case on the effect of noncompliance with the subdivision requirements of the Land Titles Act of British Columbia is the Top
Line case. In reviewing existing leases in any province the lawyer must first consider the effect of the Top Line case on the validity of the lease .
In Saskatchewan the relevant law is contained in section 134 of the Planning and Development Act ,
1983.
The three exceptions to the general prohibition on subdivision by leasing are each unclear.
Section 134 (8)(a) exempts leases of a part of a parcel “where the term of the lease together with the term of any lease entered into pursuant to the lease does not exceed ten years”. The problem arises with the phrase “entered into”. It suggests that the calculation of the ten years is only to be considered once the renewal lease is actually entered into. For example, if the term of the original lease is ten years with one five-year option to renew, it appears that invalidity does not become an issue until the renewal term actually begins. This is the manner in which the writer interprets this exception. As a result, the original term is entirely valid if ten years or less and it is only the renewal term that is jeopardized. This permits the seeking of appropriate approvals prior to the commencement of the renewal term.
55
International Paper Industries Ltd.
v. Top Line Industries Inc.
(1996), 20 B.C.L.R. 41 at 49.
56
See also F.A. Laux, Planning Law and Practice in Alberta , 2 nd
ed. (Carswell, 1996).
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49
One can argue that the issue of compliance should be judged is at the outset of the lease. That is the way it is done in Ontario which has a 21-year rule. This would require an interpretation of two words from the language of the section “where the term of the lease together with the term of any lease [to be] entered into pursuant to the lease. . . does not exceed ten years”. From my discussions, representatives of the Community Planning Services apparently have indicated that the interpretation used by the people administering applications pursuant to section 134 is that the section requires calculation of the length of the term and all renewal terms at the outset of the lease to determine if one is in compliance with the exemption.
The second exemption contained in section 134(8)(b) exempts “any lease that has the effect of granting the use of or right to part of a building” from the requirement to effect a subdivision or to gain approval. There is, unfortunately, no exemption for the lease of an entire building as there is in
British Columbia. The legislation in British Columbia makes it clear that a lease of a building or part of a building is exempted. The representatives of Community Planning Services and the
Department of Justice in Saskatchewan have confirmed that their interpretation of this section is that an application for approval is necessary for a lease of a building on a parcel of land.
The third exemption, contained in section 134(8)(c), exempts “any lease. . . entered into prior to the coming into force of this Act ”. When did the Act come into force? The Act was brought into force in respect of section 15 which contains the new sections 133 and 134 on November 1, 1989. Other provisions were brought into force as of the day of assent, August 25, 1989 and other sections were made effective retroactively to April 17, 1984. Section 134 (8) was made retroactive to June 21,
1988. The Department of Justice advises that it would be reasonable to take November 1, 1989 as the relevant date for the purposes of section 134 (8)(c).
The purpose and drafting of section 134 needs to be reviewed by the Department of Justice, compared to the legislation in the other provinces and reformed to facilitate modern leasing practices.
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A. BACKGROUND
A ground lease is not a special category of lease. No different law applies than that previously discussed. Practically speaking, a ground lease refers to a lease of bare land upon which a tenant will construct a building. The term “building lease” is also used for the same type of arrangement.
As a result, ground leases are leases of substantial duration (usually 30 to 99 years). Mr. Philip
Walker’s article, “Ground Leasing in Shopping Centres,” in Shopping Centre Leases , Volume 2 contains a good discussion of ground leasing and an excellent, plain English precedent ground lease.
O’Brien’s Encyclopedia of Forms
also has a helpful section of precedents on ground leases.
Ground leases are used in connection with a single user tenant, for example, a fast food or confectionery chain or retailer who wishes to construct a stand alone building from which to conduct its business. In a more complex situation, a ground lease may be obtained by a developer who intends to construct a retail mall or an office complex. An example of this circumstance exists in Saskatoon both at Innovation Place and at Preston Crossing. The intended use has a direct effect upon the form of ground lease required.
B. FROM THE TENANT’S PERSPECTIVE
A ground lease permits the tenant to save its capital for the building rather than spending it on land acquisition costs. Often the initial rent under the ground lease compares favourably with interest that would be payable by the tenant if it had made the outlay of capital required to buy the lands subject to the ground lease. It also may be a reflection of an inability between the tenant and the landlord to reach an agreement on an acquisition price for the land. In addition, the tenant may view the lease as a method of reducing its risk in respect of the proposed enterprise. There may also be tax incentives to leasing depending on the income tax regime at any point in time.
57
11th ed., Div. IV, Leases Vol. 1 (Aurora: Canada Law Book, 1992).
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C. FROM THE LANDLORD’S PERSPECTIVE
51
From the perspective of the landlord a ground lease to a well-established tenant means a relatively secure, regular and above-average rate of return on its investment. If substantial improvements are to be constructed on the land, they provide security which in many circumstances is sufficient to ensure the landlord the due payment of rent (whether from the original tenant or from the financial institution which has provided financing in respect of the construction of the improvements). If the lease has been negotiated properly there will be some adjustment in ground rent on a regular basis to provide a hedge against inflation and keep the rent current with fair market rentals. Lastly, at the expiration of the term the landlord will be returned a property which (even without accounting for the improvements) may have appreciated significantly over the term of the lease.
D. HIGHLIGHTS OF A GROUND LEASE
In the single-user situation the ground lease will be similar to the standard lease discussed in these materials. However, in a multi-user circumstance, as illustrated in Mr. Walker’s precedent, the intention of the developer is to develop the property and then lease premises to retail or office users by way of sublease.
1. Building
The tenant agrees to construct the building. The landlord is entitled to approve the plans.
Ownership of the building is transferred to the landlord either on completion of construction or on expiry or earlier termination of the lease. Mr. Walker’s precedent contemplates a separate “Building
Agreement” and a lot of control over the building activities of the developer.
2. Subletting
The ground lease may give the developer a fairly unrestricted ability to conduct its intended business of subleasing. The landlord has to have some control of the subleasing not just to ensure
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Real Estate - Commercial Leases that its tenant remains profitable in the venture and will pay the ground rent but also because there is always the possibility that if for some reason the ground lease is terminated the landlord will inherit the subleases previously entered into by the tenant.
There should be specific guidelines established within which subleases are permitted. If a sublease does not conform to these guidelines, the tenant must obtain the landlord’s specific consent to the sublease. Suggestions in this regard would include:
(a) that rent payable would insure recovery an equitable portion of the actual operating and maintenance and support ground lease payments;
(b) that specific uses are contemplated within zoning requirements;
(c) that there be no inconsistency with the terms and provisions of the ground lease and shall permit the Lessee to adhere to its obligations both under the ground lease and other subtenants;
(d) that there is an obligation, upon termination of the ground lease to attorn;
(e) exclusive uses or restrictive covenants are only permitted within guidelines and are to be consistent with other subleases and expire concurrently with the expiration or sooner termination of the sublease;
(f) prohibition of setoffs or prepayments;
(g) no non-arm’s length arrangements are permitted without consent; and
(h) there may be merchandise restrictions to be adhered to.
Under section 8 of the Landlord and Tenant Act
, if a merger (by operation of law or surrender) occurs whereby the head lease or the ground lease is surrendered and merges with the landlord’s reversionary interest, the subleases become a burden upon the land so far as those covenants which run with the land are concerned as if the landlord had entered into the subleases directly. Where the
58
When we can understand section 8 of the Landlord and Tenant Act , we will know we understand the medieval aspects of land law in leases. Section 8 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 on the reversion as but for the surrender or merger thereof would have subsisted, be deemed the reversion expectant on the lease.
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Real Estate - Commercial Leases landlord terminates the lease for a default of the tenant, a sublessee may apply under section 11 of
53 the Landlord and Tenant Act for an order charging the land with, in effect, the sublease. In these circumstances the court has discretion as to the terms under which the order will be made but, to avoid a loss by the subtenants of their interest, one can be assured that the order will impose certain obligations upon the landlord.
In light of the statutory provisions it is prudent for the landlord to ensure that it has some control over the contents of the subleases the tenant enters into. These controls will invariably be subject to intense negotiation. Today, in a ground lease, the landlord would have to ensure the tenant and the subleasee would be responsible for environmental damage and remediation. The lawyers for the parties should also raise the issue of whether the land is being leased “as is” or if the landowner must perform site assessment tests and clean up an existing problem.
3. MORTGAGING
The tenant will require financing for the substantial improvements it will make to the lands. The lender will insist upon entering into an agreement which prohibits the landlord from indiscriminately terminating the lease thus robbing the lender of its security. The provisions of most ground lease permit the tenant to mortgage its leasehold interest and term and set out the terms of an agreement with the tenant’s lender which the landlord would be prepared to enter into.
Ground leases have been utilized for many years in Canada and in Saskatoon. The legal foundation of the Midtown Plaza is, or, at least at the outset was, a ground lease. The chain of leases for Innovation Place starts with a ground lease. With increases in building costs and the price of land, landowners and developers will continue to find the ground lease a useful legal product.
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54
V. AGREEMENTS TO LEASE
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A. BACKGROUND
An agreement (or “offer”) to lease is an agreement by the landlord to grant and by the tenant to accept a lease in the future. It requires the signing of the subsequent lease. Most agreements to lease stipulate that the agreement is not itself a lease and is not to operate as such (except possibly at the option of the landlord in the event of failure of the proposed tenant to sign the stipulated form of lease). To be a valid agreement to lease the essential terms required for a lease must be contained in or be determinable pursuant to the provisions of the agreement to lease.
Clients sometimes talk in terms of needing an agreement to lease when a lease would be more appropriate. The following discussion should prepare you to identify the right course. If not necessary, an agreement to lease should be avoided as it is always more trouble and expense for your client, whether landlord or tenant.
Mr. Haber has once again benefited the profession by producing an excellent text on agreements to lease: Understanding the Commercial Agreement to Lease
. It is in his standard format of a
precedent agreement with a commentary outlining the business and legal issues from the perspectives of both landlord and tenant.
B. WHEN LANDLORDS USE AGREEMENTS TO LEASE
When a landlord is leasing premises in a well-established office building or shopping mall it is usual that the lease itself will be the subject of negotiation and resort will not be made to an agreement to lease. Incidental obligations of either party can be dealt with in and as part of the negotiated form of lease (such as specific obligations of the landlord to prepare the leased premises for occupancy by the tenant) and rarely will any conditions precedent to the lease be necessary.
59
(Aurora: Canada Law Book, 1990).
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However, where the office or shopping complex has yet to be constructed or where certain conditions precedent or uncertainties exist respecting either the complex or the specific leased premises the agreement to lease is a suitable preliminary document.
For example, when a landlord wishes to lease space in a centre already occupied by an existing
55 tenant, or when the landlord is bound by certain restrictions on leasing or exclusive use provisions, it will be necessary for the landlord to negotiate concessions from existing tenants or to negotiate the surrender of a subsisting lease. Prior to going to the expense of obtaining concessions or surrender of a subsisting lease, the landlord will want to ensure that the proposed tenant is firmly bound to take a lease of the premises. The agreement to lease is a suitable intermediary document to effect this result pending fulfilment of the conditions precedent. In these circumstances the agreement to lease can be a relatively simple document setting out the conditions precedent with some suitable time limit in which the landlord may fulfil these with a fully completed form of lease ready for signing by the tenant attached as a schedule to the agreement to lease.
More often, however, an agreement to lease is used by a landlord for a complex to be constructed where there may exist several additional considerations and uncertainties the landlord must address prior to being committed to provide a lease. The landlord may “pre-lease”, by way of agreements to lease, a certain percentage of the proposed complex or obtain binding obligations from principal tenants prior to making substantial commitments for construction and financing. The landlord may not yet be in a position to grant a lease as it may only be entitled to become the owner. The construction of the complex may be less than certain due to zoning considerations or the necessity of acquiring additional rights of access from local authorities. In many cases the form of lease to be used will not yet be fixed as a result of the design of the centre not having been finalized, particularly in regard to location and quantity of parking, the location and size of premises and the number and location of major tenants not having been conclusively determined. It is also likely that precise details of expense sharing between tenants will be unresolved as a result of the foregoing. Until the final form of lease with principal tenants has been negotiated and concluded, the landlord will often reserve on the final form of lease to be used by smaller tenants.
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Lastly, during the period that an agreement to lease subsists and prior to the execution of the formal lease document, the landlord is often required to effect certain dealings with the land including subdivisions, severances and the placement of interim and long-term mortgage financing, which it wants to effect with as little interruption or delay as possible. Therefore an agreement to lease often provides that the interest of the prospective tenant under the agreement to lease will not be registered against title to the property (a provision which would be untenable in respect of a lease but which is usually acceptable to a tenant who has not yet taken possession of the premises or commenced construction of leasehold improvements).
In summary, the use of the agreement to lease provides the landlord with a certain and necessary degree of flexibility respecting the development of the centre.
From the perspective of the tenant the considerations which make the agreement to lease a useful instrument to the landlord render the agreement less than satisfactory to the tenant. Flexibility for the landlord means uncertainty for the tenant. In most instances the premises are not available for viewing and even the design of the centre may be subject to considerable modification at the sole discretion of the landlord from the plans presented to the tenant in the agreement to lease. When the premises will be available for occupancy will be uncertain and also whether in fact they ever will be made available. If the agreement to lease does not attach a standard form of lease to be used, the tenant will be placed in a vulnerable situation: agreeing to be bound by a document it has not had the opportunity to review.
Reasonable restrictions and time parameters must be incorporated in the agreement to lease for the benefit of the tenant particularly in regard to modifications to the intended plan, minimum requirements for the provision of parking facilities and relocation of the tenant's premises. If the form of lease is attached to the agreement to lease, the form of lease will have to be thoroughly reviewed, negotiated and modified concurrently with the execution of the agreement to lease.
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Where a settled form of lease is not attached, the tenant must make the agreement to lease as
57 complete as possible so as to restrict the ability of the landlord to provide later a form of lease which would prove to be unacceptable in any material respect to the tenant. A commitment regarding timely delivery of a lease prepared in accordance with the agreement to lease should be obtained from the landlord. There is no reason this provision could not be in the agreement to lease. Once the tenant is in occupation and has made a substantial investment by constructing leasehold improvements its ability to negotiate a satisfactory form of lease is compromised.
In summary, the agreement to lease has a role, but do not be panicked into using one just because you don’t have a suitable lease precedent for a particular situation on the shelf.
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SCHEDULES
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Schedule A - Sample Form of Lease
- 1 -
LEASE
By this Agreement dated the day of , 19__
, as LANDLORD upon and in consideration of the covenants, terms, and conditions contained in this LEASE and which are implied, hereby demises and leases to
, as TENANT those PREMISES outlined in red on Schedule I attached, in the BUILDING known as constructed (or being constructed) on LAND described as :
,
- agreed to contain a Rentable Area of
on the
- for a TERM of floor(s) of said BUILDING
- from a COMMENCEMENT DATE of
- and expiring on years
, 19 square feet/metres
, 19
- for an ANNUAL RENT of $ (
- or (if greater) a PERCENTAGE RENT at an agreed PERCENTAGE RATE
of ( %) per cent of GROSS SAL ES
Dollars) with review and adjustment (if any) at the commencement of the year(s) of the TERM
- and other payments in accordance with the LEASE for USE as
A - 1
The following appendices are attached to and form part of the Lease:
Schedule I — Plan of Premises
Schedule 2
Schedule 3
— Project Supplement with definitions
— Retail Supplement
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Schedule A - Sample Form of Lease
- 2 -
ARTICLE 1
GRANT OF LEASE
Demise 1.01
Landlord leases the Premises to Tenant, and Tenant leases the Premises from Landlord, to have and to hold during the Term, subject to the provisions hereof.
Covenants
Quiet
Enjoyment
Use of
Common Areas
Use of
Premises
1.02
Landlord covenants to keep, observe and perform all of the terms and conditions to he kept. observed and performed by Landlord under this Lease. Tenant covenants to pay the Rent when due, and to keep. observe and perform all of the terms and conditions to be kept, observed and performed by Tenant under this Lease.
1.03
Landlord shall warrant and defend Tenant in the quiet enjoyment and possession of the
Premises during the term, subject to the provisions of this Lease.
1.04
During Normal Business Hours. Tenant, its employees, customers. invitees and others requiring communications with Tenant in connection with the operation of its business shall have the use in common with others entitled thereto of the Common Areas, provided that the Common
Areas shall at all times be subject to the exclusive control of Landlord.
1.05
The Premises shall be used and occupied for the use and purpose identified on page 1 of this
Lease, or for such other purpose as Landlord may specifically authorize in writing.
Consent 1.06
Unless otherwise provided, whenever consent or approval of Landlord or Tenant is required under the provisions of this Lease, such consent or approval shall not be unreasonably withheld or delayed.
Compliance with Laws
1.07
Tenant shall at all times, use and occupy the Premises in accordance and compliance with all laws, by-laws, regulations, directions and orders of every governmental authority having jurisdiction
(without limitation including any directives, policies or requests of any governmental or quasigovernmental authority serving the public interest in the fields of energy, environment, conservation or security) and with all requirements of the insurers of the Project and their advisors organizations, and Tenant’s insurers, and shall not commit, suffer or permit any act or omission which shall breach any thereof. If any such governmental authorities or insurers or insurers' advisory organizations require changes, Tenant shall make same at its own expense, but subject to such approvals of Landlord as are required pursuant to the provisions of this Lease.
Nuisance 1.08
Tenant shall not cause or maintain any nuisance in or about the Premises, and shall keep the
Premises free of debris, rodents, vermin and anything of a dangerous. noxious or offensive nature, or which could create a fire hazard (through undue load on electrical circuits or otherwise) or cause undue vibration, heat or noise.
Abandonment 1.09
Tenant shall not vacate or abandon the Premises at any time during the Term.
ARTICLE 2
RENT
Landlord, and Tenant of Rent shall, to the complete indemnification of Landlord, pay all costs and expenses relating or attributable to the Premises and the conduct of business therein, without limitation including Tenants Proportionate Share of
Operating Costs for the Building, and Other Charges.
(b) The Annual Rent shall, if less than the current market rental for comparable space, be reviewed at the end of the year(s) of the Term so identified on page 1 of this Lease, and for the period next ensuing shall be adjusted to such market rental current at the date of review, as the same may be agreed between the parties, provided that in the absence of agreement within 30 days of the date for review, either party may at any time thereafter unless and until the adjusted Annual Rent is settled submit the matter to arbitration pursuant to applicable law. Tenant shall not be in default hereunder if, pending settlement of the increased Annual Rent, Tenant shall continue to pay, when due, the installments of Annual Rent payable immediately preceding the date for review, together with all other payments which comprise Rent, and if Tenant shall pay the deficiency (if any) without interest within 10 days of the adjusted Annual Rent being agreed or determined.
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Schedule A - Sample Form of Lease
Early
Occupancy
Delayed
Occupancy
Payment of
Annual Rent
Payment of
Percentage
Rent
A - 3
- 3 -
(c) All amounts payable by Tenant to Landlord under this Lease (without limitation including Tenants Proportionate Share of Operating Costs for the Building. and Other
Charges) shall constitute and be deemed to be Rent and shall be payable and recoverable as Rent, and shall be payable, when due, in legal tender of Canada, without deduction or rights of set-off, and without demand or, where so specified, upon notice or invoice, at such place as Landlord from time to time may designate, and
Landlord shall have all rights against Tenant for default in any payment as in the case of arrears of Annual Rent. Tenant's obligation to pay Rent shall survive the expiration or earlier termination of this Lease, until fully discharged.
(d) Tenant shall make payments required under this Lease within the period of time specified, or if a time period is not specified, within a reasonable period of time.
2.02
If Tenant begins to conduct business in any portion of the Premises before the
Commencement Date, Tenant shall pay to Landlord on the Commencement Date a rental in respect of the portion so used for the period from the date Tenant begins to conduct business therein to the
Commencement Date, which rental shall be that proportion of Annual Rent for the first year of the
Term which the number of days in such period bears to 365, and which the area of the portion so used bears to the area of the Premises. The provisions of this Lease shall be applicable during such period, without limitation including that Tenant shall, mutatis mutandis proportionately contribute to Operating Costs for the Building during such period.
2.03
If Landlord is delayed in giving possession of the Premises to Tenant, then, unless such delay is principally caused by or attributable to Tenant, its servants, agents or contractors, Tenant shall take possession of the Premises on the date when Landlord delivers such possession, and this
Lease shall commence on the first day of the month next following and shall thenceforth ensue until the date of expiration aforesaid. This Lease shall not be void or voidable nor shall Landlord be liable to Tenant for any loss or damage resulting from any delay in delivering such possession to Tenant, but no Rent shall be payable by Tenant for the period prior to such deferred commencement date except pursuant to Section 2.02. If the delay is principally caused by or attributable to Tenant, its servants, agents or contractors, then Tenant shall pay Rent pursuant to the provisions of this Lease from the Commencement Date without reduction abatement or deferral.
2.04 (a) Annual Rent shall be paid to Landlord in equal monthly installments payable in advance on the first day of each calendar month, with the first installment to be paid on the
Commencement Date.
(b) In addition to the Annual Rent, Tenant shall pay to Landlord as Percentage Rent for the
Premises an amount for each Lease Year equal to the Percentage Rate of Gross Sales in the Lease Year, minus the Annual Rent for such Lease Year, payable in monthly installments at the times and in the manner next provided.
(c) (i) On or before the tenth day of the second and each succeeding calendar month during the Term and of the month following the end of the Term, Tenant shall deliver to Landlord a written statement certified to be correct by Tenant showing in reasonable detail the Gross Sales in the immediately preceding month. If the
Percentage Rate of Gross Sales in such month exceeds the installment of Annual
Rent which was payable in and for such month, the statement shall be accompanied by payment to Landlord of an amount equal to the excess.
(ii) Unless delayed by causes beyond Tenant’s reasonable control, Tenant shall deliver to Landlord within 90 days after the end of each Lease Year (or, if so delayed, as soon as practical thereafter) a written statement certified to be correct by an independent public accountant showing in reasonable detail and by month the
Gross Sales for the Preceding Lease Year. If the aggregate of monthly installments of Percentage Rent actually paid by Tenant to Landlord in respect of such Lease
Year differs from the amount of Percentage Rent payable for such Lease Year under Section 2.04(b), Tenant shall pay or Landlord shall refund the difference (as the case may be) without interest within 30 days after the date of delivery of such statement.
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2.05 (a) Tenant shall pay its Proportionate Share of Operating Costs for the Building as next provided.
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Payment of
Operating
Costs
Payment of
Other Charges
(b) On or about the Commencement Date, and the beginning of each Fiscal Year thereafter, Landlord shall compute and deliver to Tenant a bona fide estimate of
Tenant’s Proportionate Share of Operating Costs for the Building for the appropriate period and, without further notice, Tenant shall pay to Landlord equal monthly installments of such estimate of Tenant’s Proportionate Share of Operating Costs for the Building simultaneously with installments of Annual Rent during such period.
(c) Unless delayed by causes beyond Landlord’s reasonable control, Landlord shall deliver to Tenant within 120 days after the end of each Fiscal Year a statement certified to be correct by Landlord, (the "Statement") setting out in reasonable detail the amount of
Operating Costs for the Building for such Fiscal Year and Tenant’s Proportionate Share thereof. If the aggregate of installments of Tenant’s Proportionate Share of Operating
Costs for the Building actually paid by Tenant to Landlord during such Fiscal Year differs from the amount of Tenants Proportionate Share of Operating Costs for the
Building payable for such Fiscal Year in accordance with the Statement, Tenant shall pay or Landlord shall credit the difference without interest within 30 days after the date of delivery of the Statement.
(d) If Tenant disagrees with the accuracy of the Operating Costs for the Building or
Tenant’s Proportionate Share thereof as set forth in the Statement, Tenant shall nevertheless make payment in accordance with the Statement, but Tenant shall, within
30 days of delivery of the Statement, advise Landlord thereof and the disagreement shall immediately be referred by Landlord for prompt decision by a public accountant, architect, insurance broker or other professional consultant who in the opinion of
Landlord, acting reasonably, is best qualified to assess and determine the matter and who shall be deemed to be acting as an expert(s) and not as an arbitrator(s) and whose determination shall be final and binding on Landlord and Tenant, unless within 21 days of the determination either party elects to submit the matter to arbitration pursuant to applicable law. The cost of the expert(s) and of any arbitration shall be borne equally by Landlord and Tenant. Any adjustment required to any previous payment made by
Tenant or Landlord by reason of any final decision shall be made, without interest, within 30 days thereof.
(e) Neither party may claim a re-adjustment in respect of Operating Costs for a period if based upon any error or computation or allocation except by notice delivered to the other party within 6 months after the date of delivery of the Statement.
(f) If the Term expires or the Lease is otherwise terminated on a date other than the last day of the Fiscal Year, Tenant’s Proportionate Share of Operating Costs for the
Building shall be adjusted on a per diem basis, based on and calculated at the time of the delivery of the next Statement after such date. If the aggregate of installments of
Operating Costs actually paid by Tenant to Landlord during the period up to and including the expiry or earlier termination date differs from the amount of Tenant’s
Proportionate Share of Operating Costs for the Building payable for the period up to such date, Tenant shall pay or Landlord shall refund the difference without interest within 30 days after the date of delivery of the Statement.
2.06 Tenant shall make payments to Landlord of Other Charges which pursuant hereto are the responsibility of Tenant.
ARTICLE 3
OPERATION OF THE PROJECT applicable laws and regulations, and with high standards of efficient and prudent property management from time to time prevailing for buildings in a project similar in use, type, and location.
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Services
To Premises
Building
Services
Maintenance,
Repair and
Replacement
A - 5
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3.02
Landlord shall (with participation by Tenant by payment of Tenant’s Proportionate Share of
Operating Costs for the Building) provide: heat, ventilation and air conditioning as required for the comfortable use and occupancy of the Premises during Normal Business Hours, and shall provide in the Premises at the cost of Tenant:
(a) replacement of building standard fluorescent tubes, light bulbs, ballasts, and starters as required from time to time as a result of normal usage; and
(b) electric power for normal lighting and small business office equipment.
3.03
Landlord shall (with participation by Tenant by payment of Tenant’s Proportionate Share of
Operating Costs for the Building) provide in the Project:
(a) hot and cold or tempered running water and necessary supplies in public washrooms sufficient for the normal use thereof;
(b) elevator or escalator service for access to and egress from the Premises;
(c) heat, ventilation, air conditioning, lighting, electric power, and janitorial services in the
Common Areas, and
(d) a general directory board, under the exclusive control of Landlord, on which Tenant shall be entitled to have its name shown.
3.04
Landlord shall (with participation by Tenant by payment of Tenant’s Proportionate Share of
Operating Costs for the Building) operate, maintain, repair, and replace the systems, facilities, and equipment necessary for the proper operation of the Project and for the provision of services under this Article (except as such may be installed by or be the property or responsibility of Tenant), and shall be responsible for and shall expeditiously maintain and repair the foundations, structures, exteriors, and roofs of the Project and, pursuant to Article 7, repair damage to the Project which
Landlord is obligated to insure against under this Lease, provided that:
(a) if all or part of such systems, facilities and equipment are destroyed, damaged or impaired, Landlord shall have a reasonable time in which to complete the necessary repair or replacement and during that time shall be required only to maintain such services as are reasonably possible in the circumstances;
(b) following initial installation and any significant alteration of partitioning or installations, proper operation of heating and air handling systems will require balancing and rebalancing;
(c) Landlord may temporarily discontinue such services or any of them at such times as may be necessary due to causes (except lack of funds) beyond the reasonable control of
Landlord;
(d) Landlord shall use reasonable diligence in carrying out its obligations under this Article, but shall not be liable under any circumstances for any consequential damage to any person or property for any failure to do so;
(e) Landlord shall not be liable for damage to any person or property, fixtures, furnishings, or equipment or claims for loss of business, or other loss or damage suffered or caused by failure of the mechanical or electrical systems of the Project, or interruption in the supply of power or other services, or malfunction of the sprinkler system, or bursting or leaking of sewer pipes or of gas, steam, or water, or leakage of any type;
(f) no reduction or discontinuance of services under this Article shall be construed as an eviction of Tenant. or a breach of the covenant of quiet enjoyment, or release Tenant from any of its obligations under this Lease;
(g) nothing contained herein shall derogate from the provisions of Article 7; and
(h) Landlord shall be deemed to have observed and performed the terms and conditions to be performed by Landlord under this Lease, including those relating to the provision of utilities and services, if in so doing it acts in accordance with a directive policy or request of a governmental or quasi-governmental authority serving the public interest in the fields of energy, environment, conservation or security.
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Additional
Services
Alternations by Landlord
Access by Landlord
Name of
Building
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3.05 (a) If from time to time requested in writing by Tenant and to the extent that it is reasonably able to do so, Landlord shall provide in the Premises services in addition to those set out in this Article, except that Tenant shall be solely responsible or the cost thereof and shall within 10 days of receipt of an invoice for any such additional service pay Landlord therefor at such reasonable rates as Landlord may from time to time establish.
(b) Tenant shall not, without Landlord’s prior written consent, install or permit in the
Premises, equipment (including telephone equipment) which generates sufficient heat to affect the temperature otherwise maintained in the Premises by the air conditioning system as normally operated. If Tenant should do so, Landlord may install supplementary air conditioning units, facilities or services in the Premises, or modify its air conditioning system, as may in Landlord’s reasonable opinion be required to maintain proper temperature levels, and Tenant shall pay Landlord for all Outlays within 10 day’s of receipt of an invoice therefor.
(c) If Landlord shall from time to time reasonably determine that the use of electricity or any other utility or service in the Premises is materially disproportionate to the use of other tenants, Landlord may separately charge Tenant for the excess costs attributable to such disproportionate use and Tenant shall pay Landlord the amount thereof within 10 days of receipt of an invoice therefor. Tenant may and, at Landlord’s request, Tenant shall, install and maintain at Tenant’s expense, metering devices for checking the use of such utility or service in the Premises.
3.06
Landlord may from time to time:
(a) make repairs, replacements, changes or additions to the structure, systems, facilities and equipment in the Premises or the Project where necessary to serve the Premises or the
Project;
(b) make changes in or additions to any part of the Project not in or forming part of the
Premises; and
(c) change or alter the location of the Common Areas; provided that in doing so, Landlord shall not disturb or interfere with Tenant’s use of the Premises and operation of its business any more than is reasonably necessary in the circumstances and shall repair any damage to the Premises caused thereby.
3.07
Tenant shall permit Landlord to enter the Premises outside Normal Business Hours, and during Normal Business Hours where such entry will not unreasonable disturb or interfere with
Tenant’s use of the Premises and operation of its business, to examine, inspect, and show the
Premises to persons wishing to lease them, to provide services or make repairs, replacements, changes or alterations as set out in this Lease, and to take such steps as Landlord may deem necessary for the safety, improvement or preservation of the Premises or the Project. Landlord shall, whenever possible, consult with or give reasonable notice to Tenant prior to such entry, and shall use its best efforts to observe security and safety measures reasonably requested by Tenant from time to time, but such entry shall not be construed as an eviction of Tenant, or a breach of the covenant of quiet enjoyment, and shall not release Tenant from any of its obligations under this
Lease.
3.08 Landlord may determine and specify one or more names, .numbers, or like designations, by which the Building or Project (or any component thereof) shall be known and identified. Landlord shall have the right after 30 days notice to Tenant, to change any such name, number or designation of the Building or Project, .without liability to Tenant.
Condition of
Premises
ARTICLE 4
MAINTENANCE OF THE PREMISES
4.01
Tenant shall provide all janitorial services and window washing to keep the Premises in a clean and tidy condition, and (subject to fair wear and tear, provided that nothing herein shall require
Landlord to remedy such fair wear and tear) maintain the Premises and all improvements therein in good order and condition, including, without limitation:
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Failure
To Maintain
Premises
Alterations by Tenant
A - 7
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(a) repainting and redecorating the Premises and dry-cleaning drapes and shampooing of carpets at reasonable intervals as needed; and
(b) making repairs, replacements, alterations and installations as needed.
4.02
If Tenant fails to perform any obligation under this Lease, then on not less than 10 days’ notice to Tenant, (except in the event of an emergency as determined by Landlord, acting reasonably in which case entry may be made immediately) Landlord may enter the Premises and perform or cause performance of such obligation without liability to Tenant for any loss or damage to Tenant thereby occasioned, and Tenant shall pay Landlord for all Outlays plus 20% of such for overhead and supervision within 10 days of receipt of an invoice therefore, and the entry and performance of such obligations by Landlord shall not be construed as an eviction of Tenant, or a breach of the covenant of quiet enjoyment, and shall not release Tenant from any of its obligations under this Lease. Tenant shall not be entitled to any compensation for any inconvenience, nuisance or discomfort occasioned by such entry.
4.03 (a) Tenant may from time to time at its own expense make changes, additions and improvements in the Premises to better adapt the Premises to its business, provided that any such change, addition or improvement shall:
(i) comply with the requirements of any governmental or quasi-governmental authority having jurisdiction;
(ii) be made only with the prior written consent of Landlord;
(iii) be equal or exceed the then current building standard for the Project as established by Landlord; and
(iv) be carried out only by persons selected by Tenant and approved in writing by
Landlord, who shall, if required by Landlord, deliver to Landlord before commencement of the work, an authorized building permit from the applicable municipality, performance and payment bonds, and proof of workers’ compensation and public liability and property damage insurance coverage, with Landlord named as an additional insured, with companies and in amounts and with coverages and in form reasonably satisfactory to Landlord, and which shall remain in effect during the entire period in which the work will be carried out and for a reasonable period of time thereafter.
(b) Subject to compliance with such reasonable rules and regulations as Landlord may make from time to time, Tenant and its contractors shall have access to the Building and the
Premises for purposes of undertaking the work approved pursuant to sub-section (a), provided such work shall be undertaken and completed with all reasonable diligence; and such work shall, save as Landlord acting reasonably may otherwise require or direct that same be done by Landlord’s contractors at Tenant’s expense be done by contractors selected by Tenant, provided that there shall be no conflict caused thereby with any union or other contract to which Landlord or its contractor(s) may be a party and in the event that Tenant’s contractors or workmen cause such conflict Tenant shall forthwith remove them from the Project.
(c) It is understood and agreed that Landlord shall have no responsibility or liability whatsoever with respect to any such work or attendant materials left or installed in the
Project, and shall be reimbursed for any Outlays and for any delays caused Landlord or its contractor(s) directly or indirectly as a result thereof. Tenant shall be solely responsible for the removal of any and all construction refuse or debris resulting from such work with such removal to occur only after Normal Business Hours.
(d) Any increase in Taxes, fire or casualty insurance premiums for the Project attributable to such change, addition or improvement shall be done by Tenant. Tenant shall promptly repair at its own expense any damage to the Premises or the Project, without limitation including the property of others, resulting from such changes, additions or improvements.
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Builders’
Liens
4.04
Tenant shall pay before delinquency all costs for work done, without limitation including materials supplied, or Liens caused to be done by Tenant in the Premises which could result in any lien or encumbrance on Landlord’s interest in the Project or any part thereof, and shall keep the title to the Project and every part thereof free and clear of any lien, certificate of lis pendens or encumbrance in respect of such work or materials., and shall indemnify and hold harmless Landlord against all Outlays. Tenant shall immediately notify Landlord of any such lien, claim of lien or other action of which it has ore reasonably should have knowledge and which affects the title to the Project or any part thereof, and shall cause the same to be removed within 15 days (or such additional time as Landlord may allow in writing), failing which Landlord may take such action as Landlord deems necessary to remove the same and Tenant shall pay Landlord for all Outlays within l0 days of receipt of an invoice therefor.
Signs 4.05
All signs shall be at Tenant’s expense and any sign, or lettering or design of Tenant which is visible from the exterior of the Premises shall be subject to approval by Landlord, and shall conform to the uniform pattern of identification or signs for tenants in the Project as prescribed by Landlord.
Tenant shall not inscribe or affix any sign, lettering or design in the Premises or Project which is visible from the exterior of the Project.
Tenant’s
Property
4.06 (a) Tenant may install in the Premises its usual trade fixtures and personal property in a proper manner, provided that no such installation shall interfere with or damage the mechanical or electrical systems or the structure of the Building. If Tenant is not then in default hereunder, Tenant’s Property installed in the Premises by Tenant may be removed from the Premises:
(i) from time to time in the ordinary course of Tenant’s business or in the course of reconstruction, renovation, or alteration of the Premises by Tenant, and
(ii) during a reasonable period prior to the expiration of the Term, provided that Tenant shall promptly repair at its own expense any damage to the Premises or the Project resulting from such installation or removal.
Leasehold
Improvements
(b) For purposes of this Lease the expression “Tenant’s Property” (whether owned or leased by Tenant and whether or not affixed to the Premises) shall mean personal property, trade fixtures and fittings, furniture and furnishings, supplies, inventories and merchandise, and equipment and systems from time to time installed, provided and used by Tenant in the Premises for the conduct of its business.
4.07 (a) Provided that nothing in this Section shall inhibit Tenant’s rights pursuant to Section 4.03 to make alterations or pursuant to Section 4.06 to install and replace Tenant’s Property, all Leasehold Improvements in or about the Premises shall upon the completion thereof, whether by or at the instance or cost of Landlord or Tenant forthwith and without more be and become the absolute property of Landlord without compensation therefore, but without Landlord having or thereby accepting any responsibility in respect of the maintenance, repair, replacement or removal thereof (other than pursuant to Articles 6 and 7 hereof) which shall be Tenant’s responsibility.
(b) For purposes of this Lease the expression “Leasehold Improvements” shall include, without limitation, all improvements, installations, alterations and additions from time to time made, erected or installed in the Building by or for or on behalf of Tenant, or any previous or other occupant of the Premises including, without limitation, all partitioning, doors and hardware, mechanical, electrical and utility installations, light fixtures, floor and window coverings, decorations, finishes and fixtures, howsoever affixed and whether movable or immovable, excepting only Tenant’s Property.
ARTICLE 5
TAXES
Landlord’s
Taxes
5.01
Landlord shall (with participation by Tenant by payment of Tenant’s Proportionate Share of
Operating Costs for the Building) pay Taxes, (except any payable by Tenant) before delinquency.
Landlord may to the fullest extent permitted by law and provided it diligently prosecutes any contest or appeal of Taxes, defer payment of Taxes or defer compliance with any statute, by-law, or regulation in connection with the levying and payment of Taxes.
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Allocation 5.02
If there are not separate assessments of Taxes for the Premises or Building, Landlord shall allocate Taxes to the Building and any other of the Project Components covered by or included in an assessment covering the Land or the Building, on an equitable basis having regard, without limitation, to the various uses and values of the subject Project Components, any separate assessments that may have been rendered by the taxing authority, and any assessment principles known, or prescribed by any lawful taxing authority.
Tenant’s
Taxes
5.03
Tenant shall pay before delinquency every tax, assessment, license fee, excise fee and other charge (excluding income tax), however described, which is imposed, levied, assessed or charged by any governmental or quasi-governmental authority having jurisdiction and which is payable in respect of the Term or upon or on account of:
(a) separate assessments of or in respect of the Premises;
(b) operations at, occupancy of, or conduct of business in or from the Premises by or with the knowledge of Tenant;
(c) Tenant’s Property or fixtures or personal property in the Premises which do not belong to
Landlord;
(d) the Rent paid or payable by Tenant to Landlord for the Premises or for the use and occupancy of all or any part thereof; and
(e) any tax or duty imposed upon Landlord which is measured by or based in whole or in part directly upon the Rent payable under this Lease whether existing at the date hereof or hereafter imposed by any governmental authority including, without limitation, goods and services tax, value added tax, business transfer tax, retail sales tax, federal sales tax, excise taxes or duties or any tax similar to the foregoing. provided that if Landlord so elects by notice to Tenant, Tenant shall add any amounts payable under this Section to the monthly installments of Annual Rent payable and Landlord shall remit such amounts to the appropriate authorities.
Right to
Contest
Additional
Taxes
5.04
Tenant shall base the right to contest in good faith the validity or amount of any tax, assessment, licence fee, excise fee or other charge which it is responsible to pay under Section 5.03 or 5.05, provided that no contest by Tenant may involve the possibility of forfeiture, sale or disturbance of Landlord’s interest in the Premises or Project and that upon the final determination of any contest by Tenant. Tenant shall immediately pay and satisfy the amount found to be due, together with any costs, penalties and interest.
5.05
If by reason of any act or election of Tenant, or any subtenant, licensee or occupant of the
Premises (except Landlord after election by Landlord of any right to sublease pursuant to this Lease), the Project, Building or Premises or any part thereof shall be assessed an increased rate or assessment. Tenant shall pay before delinquency the amount by which the resulting Taxes exceed those which would otherwise base been payable.
ARTICLE 6
INSURANCE
Landlord’s
Insurance
6.01 (a) During the Term, Landlord shall maintain (with participation by Tenant by payment of
Tenant’s Proportionate Share of Operating Costs for the Building) insurance on the Project and all property and interest of Landlord in the Project, including, without limitation,
Leasehold Improvements, but excluding Tenant’s Property, with coverage and in amounts and in respect of risks which are from time to time acceptable to a prudent owner of a project similar in age, use, type, and location and from time to time insurable at reasonable premiums. When obtainable without payment of additional premium (or if Tenant shall pay any such additional premium) all policies for such insurance shall waive any right of subrogation against Tenant and its officers, directors, partners and employees. Landlord shall review its insurance in consultation with an independent, professional insurance broker not less frequently than every three years and may on the recommendation of such insurance broker effect insurance subject to reasonable deductibles to be borne by the insured in the event of a claim arising. Nothing herein shall preclude Landlord effecting so-
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Project Components (and such other properties as may be appropriate), covered by the insurance policy on an equitable basis having regard, without limitation, to the various uses and values of the subject Project Components, and any other properties so included, and the recommendation of Landlord’s insurance broker.
(b) Provided that:
(i) if in the opinion of Landlord any Leasehold Improvements do not constitute a finishing of the Premises in a manner which would have general utility but are specially or peculiarly adapted for Tenant’s use, or if the insurance of any of the Leasehold
Improvements in the Premises involves, or would in the opinion of a the insuring of
Landlord’s insurance broker involve a premium exceeding that for the insuring of
Leasehold improvements normal in the Building, or any special stipulations or conditions of a policy of insurance are imposed or involved in the insurance thereof.
Landlord may from time to time elect, by written notice to Tenant, not to insure or cause to be insured any such Leasehold Improvements, in which event, Landlord shall not be required to insure such Leasehold Improvements;
(ii) if from time to time the insuring of the Leasehold Improvements in the Premises (other than those which Landlord may have elected not to insure or cause to be insured as aforesaid) requires a premium or an allocated part of a premium, as established either by the insurer or by the estimate of Landlord’s insurance broker, which exceeds the average premium cost per unit of area for insuring Leasehold Improvements normal to the Building, Landlord may from time to time charge the excess premium cost to
Tenant and Tenant shall make prompt payment therefore upon receipt of invoices from Landlord.
(c) Upon the request of Tenant from time to time Landlord will furnish a statement as to the perils in respect of which and the amounts to which the Building and the Leasehold
Improvements in the Premises have been insured, and Tenant shall be entitled at reasonable times upon reasonable notice to Landlord to inspect copies of the relevant portions of all policies of insurance in effect and a copy of any relevant opinions of
Landlord’s insurance broker.
6.02
During the Term Tenant shall maintain at its own expense:
(a) comprehensive general public liability insurance including bodily injury, death and property damage on an occurrence basis with respect to the business carried on or in or from the
Premises and Tenant’s use and occupancy thereof, which insurance shall contain a cross liability clause, and include Landlord as a named insured and shall protect Landlord in respect of claims by or through Tenant as if Landlord was separately insured; and shall be for not less than $2,000,000 inclusive limits for personal injury or property damage in respect of each occurrence, or such higher limits as Landlord’s insurance broker may reasonably require from time to time;
(b) insurance in respect of fire and other perils as are from time to time defined in the usual endorsement covering Tenant’s Property and such Leasehold Improvements (if any) as
Landlord may have elected not to insure, which insurance shall include Landlord as a named insured as its interests may appear with respect to insured Leasehold
Improvements and provide that any proceeds recoverable in the event of loss to
Leasehold Improvements shall be payable to Landlord (but Landlord agrees to make available such proceeds towards the repair or replacement of the insured property if this
Lease is not terminated pursuant to any other provision hereof);
(c) water damage and such other insurance of the Premises, its contents and appurtenances, and the business conducted as Tenant deems necessary without limitation in respect of damage or deprivation contemplated in Section 3.04 (e), or as would, in the opinion of
Landlord acting reasonably, be carried by a prudent operator of premises similar in use, type, and location.
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Use of
Proceeds
Landlord
May Place
Insurance
Increase in
Insurance
Premiums
Cancellation of Insurance
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All such policies of insurance shall provide Landlord with 30 days’ prior notice of material amendment or cancellation and to any additional extent required waive any right of subrogation against Landlord and its directors, officers and employees.
6.03
Tenant agrees that in the event of damage or destruction to the Premises covered by insurance required to be taken out by Tenant pursuant to Section 6.02 or otherwise, Tenant shall use the proceeds of such insurance for the purpose of repairing or restoring such damage or destruction. In the event of damage to or destruction of the Project or the Building entitling Landlord to terminate the Lease pursuant to this Lease, then, if the Premises have been damaged or destroyed, Tenant shall pay to Landlord all of its insurance proceeds relating to any Leasehold
Improvements in the Premises which Tenant was required to insure and if the Premises have not been damaged or destroyed, Tenant shall deliver to Landlord, in accordance with the provisions of the Lease, all Leasehold Improvements and the Premises.
6.04
If requested by Landlord, Tenant shall from time to time promptly deliver to Landlord evidence that insurance pursuant to Section 6.02 is in effect. If Tenant fails to take out or to keep in force any insurance referred to in Section 6.02, or should any such insurance not be approved by either
Landlord or a mortgagee, and Tenant shall not diligently rectify the deficiency within 2 business days after notice by Landlord to Tenant (stating, if Landlord or the mortgagee does not approve of such insurance, the reasons therefor), Landlord shall have the right, without assuming any obligation in connection therewith, to effect such insurance at the sole cost of Tenant and Tenant shall pay
Landlord for all Outlays within 10 days of receipt of an invoice therefor.
6.05
Tenant shall not permit, keep, use, sell or offer for sale in or upon the Premises or Project any article which may be prohibited by any fire insurance policy in force from time to time covering the
Premises or the Project. If (a) the occupancy of the Premises, (b) the conduct of business in the
Premises, or (c) any acts or omissions of Tenant in the Project or any part thereof, causes or results in any increase in premiums for the insurance carried from time to time by Landlord with respect to the Project, Tenant shall pay Landlord for any such increase within 10 days of receipt of an invoice for such additional premiums from Landlord. In determining whether increased premiums are caused by or result from the use or occupancy of the Premises, a schedule issued by the organization computing the insurance rate on the Project showing the various components of such rate, shall be conclusive evidence of the several items and charges which make up such rate.
Tenant shall comply promptly with all requirements of the insurer’s advisory organizations now or hereafter in effect or of the insurers pertaining to or affecting the Premises or the Project.
6.06
If any insurance policy upon the Project or any part thereof shall be cancelled or shall be threatened by the insurer to be cancelled, or the coverage thereunder reduced in any way by the insurer by reason of the use or occupancy of or any article, material or equipment brought upon or stored or maintained in the Premises or any part thereof by Tenant or by any assignee or subtenant of Tenant, or by anyone permitted by Tenant to be upon the Premises, (other than Landlord or an agent, representative or designate of Landlord), and if Tenant fails to remedy the condition giving rise to cancellation, threatened cancellation, or reduction of coverage within 2 business days after notice thereof by Landlord, Landlord may at its option either (a) re-enter and take possession of the
Premises forthwith by leaving upon the Premises a notice in writing of its intention so to do and thereupon Landlord shall have the same rights and remedies as are contained in this Lease for events of default, or (b) enter upon the Premises and remedy the condition giving rise to such cancellation threatened cancellation or reduction, without limitation or restriction including removal of any offending article, and Tenant shall pay Landlord for all Outlays within 10 days of receipt of an invoice therefor. Landlord shall not be liable for any damage or injury caused to any property of
Tenant or of others located on the Premises as a result of such entry Subject to this Section, any such entry by Landlord shall not be construed as an eviction of Tenant or a breach of the covenant of quiet enjoyment and shall not release Tenant from any of its obligations under this Lease.
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ARTICLE 7
DAMAGE BY FIRE
Limited
Damages to
Premises
Major Damage to Premises
7.02
If all or part of the Premises are rendered untenantable by damage from fire or other casualty whether to the Premises, the Building, or the Project which, in the reasonable opinion of the Architect, cannot be substantially repaired under applicable laws and governmental regulations within 180 days from the date of such casualty (employing normal construction methods without overtime or other premium), then either Landlord or Tenant may elect to terminate this Lease as of the date of such casualty by notice delivered to the other not more than 10 working days after receipt of the Architect’s opinion, failing which, Landlord shall forthwith at its expense, repair such damage other than damage to Tenant’s Property.
Abatement 7.03
The Rent payable by Tenant hereunder shall be proportionately reduced to the extent that the
Premises are untenantable by Tenant for its business, from the date of such casualty until the earlier of:
(a) 5 days after completion by Landlord of the repairs to the Premises (or part thereof rendered untenantable) or the end of such extended period as in the opinion of the Architect, Tenant, acting diligently and expeditiously, would reasonably require to repair other improvements which Tenant may have installed (to the extent same may have been damaged) or,
(b) Tenant again uses the Premises (or part thereof rendered untenantable) in its business; provided however that Rent payable by Tenant hereunder shall not be reduced if the damage is caused by any act or omission of Tenant, its agents, servants, employees or any other person entering upon the Premises under express or implied invitation of Tenant.
Major Damage to Building
7.01
If all or part of the Premises are rendered untenantable by damage from fire or other casualty which, in the reasonable opinion of the Architect, can be substantially repaired under applicable laws and governmental regulations with 180 days from the date of such casualty (employing normal construction methods without overtime or other premium), Landlord shall forthwith at its expense repair such damage exclusive of damage to Tenant’s Property.
Reconstruction by Landlord
7.04
If all or a part (whether or not including the Premises) of the Building or the Project is rendered untenantable by damage from fire or other casualty to such a material or substantial extent that, in the opinion of Landlord, the Building should be totally or partially demolished, whether or not to be reconstructed in whole or in part, Landlord may elect to terminate this Lease as of the date of such casualty (or on the date of notice if the Premises are unaffected by such casualty) by notice delivered to Tenant not more than 60 days after the date of such casualty, and thereupon Tenant shall have 60 days within which to vacate the Premises.
7.05
If all or any part of the Premises are at any time rendered untenantable as set out in this Article, and neither Landlord or Tenant elect to terminate this Lease in accordance with the rights granted herein, Landlord shall, following such destruction or damage, commence diligently to reconstruct, rebuild or repair that part of the Project or the Premises or the Building which was damaged or destroyed, but only to the extent required above. If Landlord elects to repair, reconstruct or rebuild,
Landlord may repair, reconstruct or rebuild according to plans and specifications and working drawings other than those used in the original construction of the Project. The Premises, as repaired or re-built, will have reasonably similar facilities and services to those in the Premises prior to the damage or destruction having regard, however, to the age of the Project at such time.
Architect’s
Certificate
Limitation of
Landlord’s
Liability
7.06
Whenever for any purpose of this Article an opinion or certificate of the Architect is required, the same shall be given in writing to both Landlord and Tenant. Landlord covenants that it shall request such opinion or certificate promptly following the event which gives need for same and shall cause the
Architect to act diligently and expeditiously. The certificate of the Architect shall bind the parties:
(a) whether or not the Premises are untenantable and the extent of such untenantability; and
(b) the time required for and the date upon which the Landlord’s work or Tenant’s work of reconstruction of repair is commenced or completed or substantially completed and the date when the Premises are rendered tenantable.
7.07
Except as specifically provided in this Article, there shall be no reduction or abatement of Rent and Landlord shall have no liability to Tenant by reason of any injury to or interference with Tenant’s business or property arising from fire or other casualty, howsoever caused, or from the making of any repairs resulting therefrom in or to any portion of the Building Project, or Premises.
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ARTICLE 8
INJURY TO PERSON OR PROPERTY
Indemnity of
Landlord
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8.01 (a) Tenant agrees that Landlord shall not be liable for any bodily injury or death of, or loss or damage to any property belonging to, Tenant or its employees, contractors, invitees or licensees or any other person in, on or about the Project unless resulting from the actual fault, privity or negligence of Landlord, but in no event shall Landlord be liable:
(i) for any damage caused or occasioned through smoke or water, or by steam, gas, rain or snow which may leak into, issue or flow from any part of the Project or from the pipes or plumbing works, without limitation including the sprinkler system, therein or from any other place or quarter or for any damage caused by or attributable to the condition or arrangement of any electric or other wiring or of sprinkler heads or for any damage caused by anything done or omitted by any other tenant;
(ii) without limitation for any act or omission (including theft, malfeasance or negligence) on the part of any agent, contractor or person from time to time employed by it to perform janitor services, security services, delivery services, supervision or any other work in or about the Premises or the Project; or
(iii) for loss or damage, however caused, to money, securities, negotiable instruments, books, files, papers or other valuables of Tenant.
(b) Tenant shall indemnify and save harmless Landlord in respect of:
(i) all claims for bodily injury or death, property damage or other loss or damage arising from the conduct of any work by or any act or omission of Tenant or any assignee, subtenant, agent, employee, contractor, invitee or licensee of Tenant, and in respect of all costs, expenses and liabilities incurred by Landlord in connection with or arising out of all such claims, without limitation including the expenses of any action or proceeding pertaining thereto;
(ii) any loss, cost expense or damage suffered or incurred by Landlord arising from any breach by Tenant of any of its obligations under this Lease; and
(iii) all costs, expenses and Outlays that may be incurred or paid by Landlord in enforcing against Tenant the covenants, agreements and representations of Tenant set out in the
Lease.
(c) Tenant hereby covenants and agrees to indemnify and hold harmless Landlord, its directors, officers, employees and shareholders, from and against any and all losses, liabilities, damages, costs, expenses and claims of any and every kind whatsoever, including without limitation the cost of defending and/or counterclaiming over against third parties in respect of any action or matter which at any time or from time to time may be paid or incurred by any such party for, with respect to, or as a result of:
(i) the presence of any hazardous substances on or under the Premises or the escape, seepage, leakage, spillage, discharge, emission or release from the Premises into or upon any other lands, the atmosphere of any water course, body of water or wetland of any hazardous substance and caused or contributed by or resulting from Tenant’s occupancy or use of the Premises; and
(ii) any misrepresentation on the part of Tenant relating to a representation regarding hazardous substances and/or the environmental condition of the Premises.
“Hazardous Substances” means any contaminants, pollutant, dangerous substance, potentially dangerous substance, noxious substance, toxic substance, hazardous waste, flammable, explosive, radioactive material, urea formaldehyde foam insulation, asbestos, PCBs and substances or any other materials declared or defined to be hazardous, toxic, contaminants or pollutants in or pursuant to any applicable federal, provincial or municipal statute or bylaw.
For greater certainty Tenant confirms and acknowledges that the provisions of this Article shall survive the termination or expiry of this lease.
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ARTICLE 9
ASSIGNMENT AND SUBLETTING BY TENANT
Conditions 9.01 (a) Except as specifically provided in this Article, Tenant shall not assign or transfer this Lease or any interest therein, or in any way part with possession of all or any part of the
Premises, or permit all or any part of the Premises to be used or occupied by any other person. Any assignment, transfer, or subletting or purported assignment, transfer, or subletting except as specifically provided herein shall be null and void and of no force and effect and shall render null and void as at and from the time thereof any options or rights to renew this Lease, any options or rights to additional space and any options or rights to parking space.
(b) If and whenever Tenant shall wish or purport or propose to assign this Lease, or sublet all or part of the Premises, Tenant shall furnish Landlord all such information, particulars and documents as Landlord may reasonably require.
(c) Landlord may withhold its consent to an assignment of this Lease or a sublease of all or part of the Premises by Tenant to any tenant in a building which is owned or managed by
Landlord or any affiliate of Landlord; or to an assignee, subtenant, occupier, or other person whatsoever, inconsistent, in the opinion of Landlord, with the character of the
Building, the Project, or its other tenants, or if Section 9.04 has not been complied with; or to any assignee or subtenant which does not propose to occupy and use the Premises for the conduct therein of its own business.
(d) The rights and interests of Tenant under this Lease shall not be assignable by operation of law without Landlord’s written consent, which consent may be withheld in Landlord’s discretion.
(e) No assignment, transfer, or subletting (or use or occupation of the Premises by any other person) whether or not permitted under this Article shall in any way release or relieve
Tenant of its obligations under this Lease unless such release or relief is specifically granted by Landlord to Tenant in writing.
(f) Landlord’s consent to an assignment, transfer, or subletting (or use or occupation of the
Premises by any other person) shall not be deemed to be a precedent or a consent to any subsequent assignment, transfer, subletting, use, or occupation.
(g) Landlord’s expenses and Outlays incurred in the consideration of any assignment or subletting, or any request therefore, and any documentation attendant on any consent of
Landlord, shall be borne by Tenant.
Assignment 9.02
Tenant may not assign this Lease or in any manner transfer or convey all or any part of its interest in this Lease or the Premises without the prior written consent of Landlord, which shall not be unreasonable withheld if the same is:
(a) to an assignee who is a parent, or wholly owned subsidiary company of Tenant, a company which results from the reconstruction, consolidation, amalgamation or merger of
Tenant, or a partnership in which Tenant (or not less than one-half of the principals thereof) has a substantial interest, if such assignee shall covenant with Landlord to observe and perform and comply with each and every covenant, term and condition in this
Lease imposed on Tenant, or undertaken, made, or assumed by Tenant; or
(b) to an assignee. acceptable to Landlord, who is a purchaser of all of the business of Tenant that is conducted in the Premises if such assignee shall covenant with Landlord to pay from the date of assignment an Annual Rental equal to the greater of the average total amount paid or payable by Tenant pursuant to Sub-sections (a) and (b) of Section 2.04 as
Annual Rent and Percentage Rent for the two completed Lease Years preceding the date of assignment (or, if there was only one such Lease Year completed, then the total aforesaid paid by Tenant for that Lease Year) and an Annual Rent computed as at the date of assignment in accordance with the provisions of Sub-section (b) of Section 2.01
(as if such date was a date set for review) and if such assignee shall covenant with
Landlord to observe and perform and comply with each and every covenant, term and condition in this Lease imposed on Tenant, or undertaken, made, or assumed by Tenant
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- 15 and if such assignee shall provide, if required by Landlord acting reasonably, in support of such payment, observance, performance and compliance, a guarantee, in form and from a guarantor acceptable to Landlord; or
(c) to any other assignee if Section 9.04 has been complied with, and Landlord has not exercised it rights thereunder.
Subletting 9.03
Tenant, with Landlord’s prior written consent and subject to Section 9.01 and Section 9.04, may sublet all or any part of the Premises to a sublessee who will not be inconsistent with the character of the Building, the Project, and its other tenants.
First Order to
Landlord
9.04
If Tenant wishes to assign this Lease (except as set out in Sub-sections (a) or (b) of Section
9.02) or sublet all or any part of the Premises, Tenant shall first offer in writing to assign or sublet (as the case may be) to Landlord for the same period and upon the same conditions except that the last day of the Term shall be excluded, that Landlord shall pay no consideration for the assignment or sublease, and that every assignment or sublease to Landlord shall be without profit to Tenant, and the
Rent payable by Landlord shall be the Rent payable hereunder apportioned pro tanto to the portion(s) of the Premises affected plus only a reasonable allowance in respect of improvements and equipment in such portion(s) as agreed between the parties or failing agreement determined by arbitration pursuant to applicable law.
Corporate
Control
9.05
If and while Tenant is a corporation whose shares are not listed on any recognized stock exchange or which has less than 25 shareholders, in the event at any time during the Term it is proposed that any part or all of the shares or the voting rights of shareholders be transferred by any means whatsoever, or treasury shares be issued, or any such transfer or issue shall occur, so as to result in a change of the control of said corporation, such a transferor issuance shall be deemed to be an assignment of this Lease and all of the provisions of this Article and all of the provisions of the
Lease relating to assignment, default and termination shall apply mutatis mutandis. Tenant shall make available to Landlord, or its lawful representatives, all corporate books and records of Tenant for inspection at all reasonable times in order to ascertain whether there has been any change in the control of Tenant.
ARTICLE 10
SALE AND MORTGAGE BY LANDLORD
Transfers by Landlord
Subordination and
Attornment
10.01 (a) Subject to the rights of Tenant under this Lease, nothing in this Lease shall restrict the right of Landlord to sell, convey, assign or otherwise deal with all or a part of the Land,
Building, or the Project.
(b) A sale, conveyance, or assignment of the Land, Building, or the Project shall, to the extent they are assumed by the transferee or assignee, operate to release Landlord of liability from and after the effective date thereof upon all of the covenants, terms, and conditions of this Lease express or implied, except as such may relate to the period prior to such effective date, and Tenant shall to the extent aforesaid, thereafter look solely to
Landlord’s successor in interest in and to this Lease. This Lease shall not be affected by any such sale, conveyance, or assignment, and Tenant shall attorn to Landlord’s successor in interest thereunder.
10.02 (a) This Lease and all the rights of Tenant hereunder are subject and subordinate to all mortgages and deeds of trust and all instruments similar or supplemental thereto creating a charge or encumbrance and now or hereafter existing on or which now or hereafter may affect the Project or the Building, and to all renewals, modifications, consolidations, replacements and extensions thereof and to every charge or lien resulting or arising therefrom and to every advance made or to be made thereunder (collectively referred to herein as a “Mortgage”) and Tenant, whenever requested by Landlord or any mortgagee, or any trustee under a deed of trust or mortgage or any holder of a charge of encumbrance or any purchaser, their successors or assigns (collectively referred to herein as a “Mortgagee”), shall acknowledge the same and attorn to the Mortgagee as a tenant upon all the terms of this Lease and give further assurances as may be necessary.
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(b) Such subordination of this Lease and the obligation on the part of Tenant to acknowledge and attorn as aforesaid, shall be conditional upon the Mortgagee acknowledging by agreement or otherwise, in form binding on the Mortgagee, that so long as no default exists nor any event has occurred which has continued to exist for such period of time
(after notice, if any, required by the Lease) as would entitle Landlord to terminate the
Lease, or would cause, without further action of Landlord, the termination of the Lease, or would entitle Landlord to dispossess Tenant thereunder, the Lease shall not be terminated nor shall Tenant’s use, possession, or enjoyment of the Premises be interfered with, nor shall the leasehold estate granted by the Lease be affected in any manner in any foreclosure or any action or proceeding instituted under or in connection with the Mortgage, or at law, and this Lease shall remain effective as against the
Mortgagee who shall be bound by the terms of this Lease.
(c) Upon attornment. this Lease shall continue in full force and effect as a direct lease between Mortgagee and Tenant, upon all of the same covenants, terms, and conditions as set forth in this Lease except that, after such attornment, the Mortgagee shall not be:
Execution of
Instruments
Status
Statement
(i) liable for any act or omission of any prior landlord; or
(ii) subject to any offsets or defenses which Tenant might have against any prior landlord; or
(iii) bound by any prepayment by Tenant of more than one month’s installment of Rent, or by any previous modification of this Lease, unless such prepayment or modification shall have been approved in writing by the Mortgagee, or such prepayment shall have been made pursuant to the provisions of this Lease.
10.03
Tenant shall, upon request, execute and deliver any and all instruments further evidencing such subordination and Instruments (where applicable hereunder) such attornment notwithstanding any previous subordination, postponent or attornment that may have been given.
10.04
Each of Landlord and Tenant shall at any time and from time to time, at the expense of the party requesting the statement, forthwith after 20 days notice from the other, execute, acknowledge, and deliver a written statement which may be relied upon by a prospective transferee or encumbrancee of all or any part of the Project, or the leasehold estate created hereby, certifying:
(a) that this Lease is in full force and effect, subject only to such modifications (if any) as may beset out in such statement;
(b) whether Tenant is in possession of the Premises and paying Rent as provided in this
Lease;
(c) the dates (if any) as to which Rent is paid; and
(d) there are not, to such party’s knowledge, any uncured defaults on the part of the other party hereunder, or specifying such defaults if any are claimed.
ARTICLE 11
EXPROPRIATION
Definitions 11.01
In this Article,
(a) “Expropriated” means the taking of property for any public or quasi-public use under any statute or by any right of expropriation or condemnation or purchased under threat of such taking.
Total Taking of Premises
Partial Taking of Premises
(b) “Expropriation Date” means the date on which the pertinent authority takes possession of property which has been Expropriated.
11.02
If during the Term, all of the Building or the Project shall be Expropriated, this Lease shall automatically terminate on the Expropriation Date.
11.03
If any portion of the Premises (but less than the whole thereof) is Expropriated, and no rights of termination herein conferred are timely exercised, the Term shall terminate with respect to the portion so taken on the Expropriation Date. In such event, the Rent payable hereunder with respect
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- 17 to such portion so taken shall abate and the Rent thereafter payable with respect to the remainder not so taken shall be adjusted pro rata by Landlord in order to account for the resulting reduction in the area of the Premises from the Expropriation Date.
11.04
If during the Term, part of the Building or the Project is Expropriated, then: Partial Taking of Project
(a) if in the reasonable opinion of Landlord substantial alteration or reconstruction of the
Building is necessary or desirable as a result thereof, whether or not the Premises are or may be affected, Landlord shall have the right to terminate this Lease by giving the
Tenant 30 days’ notice of such termination; and
(b) if more than one-third of the area of the Premises is Expropriated Landlord and Tenant shall each have the right to terminate this Lease by giving the other 30 days’ notice thereof; and
(c) if either party exercises its right of termination hereunder, this Lease shall terminate on the date stated in the notice, provided, however, that no termination pursuant to notice hereunder may occur later than 90 days after the Expropriation Date.
Surrender 11.05
On any such Expropriation Date under this Article, Tenant shall immediately surrender to
Landlord the Premises or portion thereof as the case may be and all interest therein under this
Lease. Landlord may re-enter and take possession of the Premises or such portion thereof and remove Tenant therefrom, and the Rent shall abate on the date of termination, except that if the
Expropriation Date differs from the date of termination. Rent shall abate on the former date in respect of the portion taken. After such termination, and on notice from Landlord stating the Rent then owing (if any), Tenant shall forthwith pay Landlord such Rent.
Awards 11.06
lf the Project or any part thereof is Expropriated, Landlord shall be entitled to receive and retain the entire award or consideration for the affected lands and improvements, and Tenant shall not have, nor advance any claim against Landlord for the value of its property or its leasehold estate or the unexpired Term, or for costs of removal or relocation, or business interruption expense or any other damages arising out of such taking or purchase, but nothing herein shall give Landlord any interest in or preclude Tenant from seeking and recovering on its own account from the pertinent authority any award or compensation attributable to the taking or purchase of Tenant’s Property, chattels or trade fixtures, or the removal or relocation of its business and effects, or the interruption of its business. If any award made or compensation paid to either party specifically includes an award or amount for the other, the party first receiving the same shall promptly account therefor to the other.
ARTICLE 12
RULES AND REGULATIONS
General
Purpose
12.01
Subject to Section 12.04, Landlord may from time to time make and from time to time modify by amendment, deletion, addition, recission or replacement, rules and regulations for the safety, use, care, and cleanliness of the Project, the comfort and convenience of tenants and other persons in the
Project, the preservation of good order and efficient management, and the control of Common Areas,
Delivery Facilities, Parking Facilities, Retail Concourse, any Project Component, construction activities, movement in and out of the Project, delivery and shipping, and other services and functions.
Loading and Delivery
12.02 (a) Landlord may from time to time pursuant to this Article make and modify regulations for the orderly and efficient operation of the Delivery Facilities, and may require the payment of reasonable charges for storage and for delivery services provided by Landlord.
(b) The delivery and shipping of merchandise, supplies, fixtures, and other materials or goods of whatsoever nature to or from the Premises and all loading, unloading and handling thereof shall in any event be done only at such times, in such areas, by such means, and through such elevators, entrances, malls and corridors, as are designated by
Landlord.
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Construction
Procedures
(c) Landlord accepts no liability and is hereby relieved and released by Tenant in respect of the operation of the Delivery Facilities, or the adequacy thereof, or of the acts or omissions of any person or persons engaged in the operation thereof, or in the acceptance, holding, handling, delivery or dispatch of any goods for or on behalf of
Tenant, or for any claim of Tenant by reason of damage, loss, theft, or acceptance, holding, handling, delivery or dispatch, or failure of any acceptance, holding, handling or dispatch, or any error, negligence or delay therein.
12.03
Landlord may from time to time pursuant to this Article make and modify regulations for the orderly, efficient and expeditious conduct of alterations pursuant to Section 4.03 and other construction work. Without limiting the generality of the foregoing, such regulations may prescribe reasonable provisions for:
(a) submission, examination and approval of drawings, plans and specifications and standards to be observed;
(b) supervision and co-ordination of such work with any work of Landlord and other work proceeding and avoidance of undue noise and vibration;
(c) protection of property, preservation of warranties, compliance with pertinent by-law’s and codes, and procuring of permits;
(d) deliveries, access, hours of work, material and equipment hoisting and storage, use of power, heating, and washroom facilities, clean-up and screening: and
(e) customary insurance and charges relating to above.
Repugnancy 12.04
Such rules and regulations aforesaid shall:
(a) not conflict with and negate the terms of this Lease;
(b) be reasonable and conform to good standards of property management;
(c) have general application to the Project other than tenants whose use is different to that of
Tenant;
(d) not impose charges, fees or costs which are not customary or competitive; and
(e) be effective only upon delivery of a copy thereof to Tenant at the Premises.
Observance 12.05
Tenant shall at all times comply with, and shall cause its employees, agents, contractors, licensees and invitees comply with the rules and regulations from time to time in effect.
Non-
Compliance
12.06
Landlord shall use reasonable efforts (but shall not be required to institute legal proceedings) to secure compliance by all tenants and other persons with the rules and regulations from time to time in effect, but shall not be responsible to Tenant for failure of any person to comply with such rules and regulations.
ARTICLE 13
COMMUNICATION
Notices 13.01
Any notice from one party to the other shall be in writing and shall be deemed duly served if delivered to a responsible employee of the party being served, or dispatched by telegraph, telex, telecopier, facsimile or like electronic means (provided dispatch, receipt and content thereof can be established and evidenced) or if mailed by registered or certified mail addressed to Tenant at the
Premises (or if Tenant has departed from, vacated or abandoned the Premises by attaching a copy to the main door thereof) or to Landlord at the place from time to time established for the payment of
Rent. Any notice shall be deemed to have been given at the time of delivery or, if mailed, 7 days after the date of mailing thereof. Either party shall have the right to designate by notice, in the manner established in this Section, a change of address or one additional address to which copies of notices are to be mailed. For purpose of this Section, the expression “Notice” shall, without limitation, include any request, response, statement, or other communication to be given by one party to the other.
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13.02
Landlord may act in any matter provided for herein by its property manager. Tenant may
(and, if required by Landlord, shall) designate in writing one or more persons to act on its behalf in any matter relating to this Lease and may from time to time change, by notice to Landlord, such designation. In the absence of any such designation, the person with whom the Landlord’s property manager customarily deals shall be deemed to be authorized to so act on behalf of Tenant.
13.03
A party’s sole remedy if the other unreasonably withholds or delay’s any consent or approval required by the provisions hereof shall be an action for specific performance, and the other party shall not be liable for damages.
ARTICLE 14
DEFAULT
Force
Majeure
14.01
Notwithstanding anything to the contrary contained in this Lease, if either party hereto is bona fide delayed or hindered in or prevented from the performance of any term, covenant or act required hereunder by reason of strikes, labour troubles, inability to procure materials or services, power failure, restrictive governmental laws or regulations, riots, insurrection, sabotage, rebellion, war, act of God, or other reasons whether of a like nature or not, which is not the fault of the party delayed in performing work or doing acts required under the terms of this Lease, nor due to that party’s failure or inability to make payment, then performance of such term, covenant, or act, is excused for the period of the delay, and the party so delayed shall be entitled to perform such term, covenant or act within the appropriate time period after the expiration of the period of such delay. The provisions of this
Article shall not operate to excuse Tenant from the prompt payment of Rent, or any other payments required by this Lease.
14.02
If and whenever: Events of
Default
(a) part or all of the Rent hereby reserved is not paid when due, and such default continues
(inclusive of and not in addition to any period or days of grace by law or custom prescribed or allowed) for 7 day’s after notice thereof; or
(b) the Term, or any goods, chattels, or equipment of Tenant on the Premises are taken or exigible in execution or in attachment, or if a writ of execution is issued against any thereof; or
(c) Tenant becomes insolvent or commits an act of bankruptcy or becomes bankrupt, or takes the benefit of any statute that may be in force for bankrupt or insolvent debtors, or becomes involved in voluntary or involuntary winding-up proceedings, or if a receiver shall be appointed for any business, property, affairs, or revenues of Tenant; or
(d) Tenant makes a bulk sale of its goods, or moves or commences, attempts, or threatens to move its goods, chattels, inventories or equipment out of the Premises (other than in the normal course of its business), or ceases to conduct business from the Premises; or
(e) Tenant shall or shall purport or attempt to assign this Lease or sublet all or part of the
Premises in contravention of Article 9, or, without the prior consent of Landlord, the
Premises shall be used or occupied by any persons other than Tenant or its permitted assigns or subtenants, or for any use other than that for which they are leased, or if the
Premises shall be vacated or abandoned, or remain unoccupied for 15 days or more while capable of being occupied; or
(f) Tenant fails to observe, perform and keep each and every of the covenants, terms and conditions herein contained or otherwise to be observed, performed and kept by Tenant
(other than payment of Rent) and persists in such failure after 10 days’ notice by
Landlord requiring that Tenant remedy, correct, desist or comply (or if any such breach would reasonably require more than 10 day’s to rectify, unless Tenant commences rectification within the 10 days’ notice period and thereafter promptly and effectively and continuously proceeds with the rectification of the breach);
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Interest and
Costs then, and in any of such cases, at the option of Landlord, the full amount of the current month’s and the next ensuing three months’ installments of Annual Rent shall immediately become due and payable and Landlord may immediately distrain for the same, together with any arrears then unpaid, and Landlord may, without notice or any form of legal process, forthwith re-enter upon and take possession of the Premises or any part thereof in the name of the whole and remove and sell
Tenant’s goods, chattels, and equipment therefrom, any rule of law or equity to the contrary notwithstanding, and Landlord may seize and sell such goods, chattels and equipment of Tenant as are in the Premises or have been removed therefrom and may apply the proceeds thereof to all Rent to which Landlord is then entitled under this Lease. Any such sale may be effected in the discretion of Landlord by public auction or otherwise, and either in bulk or by individual item, or partly by one means and partly by another, all as Landlord in its entire discretion may decide. If any of the
Tenant’s Property is disposed of as provided in this Article, 10 days’ prior notice to Tenant of disposition shall be deemed to be commercially reasonable.
14.03
Tenant shall pay to Landlord interest calculated and payable at a rate equal to the lesser of the prime commercial lending rate of the chartered bank with which Landlord conducts its banking for the Project from time to time plus five per cent per annum on a per diem basis, or the maximum rate permitted by applicable law, upon all Rent required to be paid hereunder from the due date for payment thereof until the same, including this interest, is fully paid and satisfied. Tenant shall indemnify Landlord against and shall pay on demand all Outlay’s incurred in enforcing payment thereof, and in obtaining possession of the Premises after default of Tenant or upon expiration or earlier termination of the Term, or in enforcing any covenant, term or condition herein contained.
Landlord’s
Right to
Perform
Covenants
Waiver of
Exemption and
Redemption
14.04
All covenants, terms and conditions to be performed by Tenant under any of the provisions of this Lease shall be performed by Tenant, at Tenant’s sole cost and expense, and without any abatement of Rent. If Tenant shall fail to perform any act on its part to be performed hereunder, and such failure shall continue for 10 days after notice thereof from Landlord (or immediately in the case of an emergency of which Tenant has knowledge), Landlord may (but shall not be obligated so to do) perform such act without waiving or releasing Tenant from any of its obligations relative thereto.
Tenant shall pay Landlord on demand for all Outlays together with interest thereon at the rate set Out in this Article from the date each such payment was made or each such cost was incurred by
Landlord, until paid in full.
14.05
Notwithstanding anything contained in any statute now or hereafter in force limiting or abrogating the right of none of Tenant’s goods, chattels or equipment on the Premises at any time during the continuance of the Term shall be exempt from levy by distress for Rent in arrears, and upon any claim being made for such exemption by Tenant or in a distress made by Landlord, this
Article may be pleaded as an estoppel against Tenant in any action brought to test the right to the levying upon any such goods, chattels or equipment as are named as exempted in any such statute,
Tenant hereby waiving all and every benefit that could or might have accrued to Tenant under and by virtue of any such statute but for this Lease. Landlord may seize Tenant’s goods, chattels or equipment at any place to which Tenant or any other person may have removed them from the
Premises in the same manner as if such goods, chattels or equipment had remained in the Premises.
Tenant hereby expressly waives any and all rights of redemption being granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in the event of Landlord obtaining possession of the Premises by reason of the violation by Tenant of any of the covenants, terms or conditions of this Lease or otherwise.
Termination 14.06
If and whenever Landlord is entitled to or does re-enter, Landlord may terminate this Lease by giving notice thereof, and in such event Tenant shall forthwith vacate and surrender the Premises.
Payments 14.07
If the Landlord shall re-enter or if this Lease shall be terminated. Tenant shall pay to Landlord on demand:
(a) Rent up to the time of re-entry or termination, which ever shall be the later, plus accelerated Annual Rent as in Section 14.02 provided; and
(b) as damages for the loss of income of Landlord expected to be derived from the Premises:
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Remedies
Cumulative
(i) the amounts (if any) by which the Rent which would have been payable under this
Lease exceeds the payments (if any) received by Landlord from other tenants in the
Premises, payable on the first day of each month during the period which would have constituted the unexpired portion of the Term had it not been terminated; or
(ii) if elected by Landlord by notice to Tenant at or after re-entry or termination, a lump sum amount equal to the Rent which would have been payable under this Lease from the date of such election during the period which would have constituted the unexpired portion of the Term had it not been terminated, reduced by the rental value of the Premises for the same period, established by reference to the terms and conditions upon which Landlord re-lets them if such re-letting is accomplished within a reasonable period after termination, and otherwise established by reference to all market and other relevant circumstances, such Rent and rental value being reduced to present worth at an assumed interest of 10% per annum on the basis of Landlord’s estimates and assumptions of fact which shall govern unless shown to be erroneous.
14.08
No reference to nor exercise of any specific right or remedy by Landlord shall preclude
Landlord from exercising or invoking any remedy without limitation including any rights to require specific performance to obtain an injunction, and to recover damages, whether allowed at law or in equity or expressly provided for herein. No such remedy shall be exclusive or dependent upon any other remedy, but Landlord may from time to time exercise any one or more of remedies independently or in combination.
ARTICLE 15
SURRENDER AND TERMINATION
Surrender of
Possession
Tenant’s
Property,
Personal
Property and
Improvements
15.01
Upon the expiration or earlier termination of the Lease, Tenant shall immediately quit and surrender possession of the Premises in substantially the condition in which Tenant is required to maintain the Premises excepting only reasonable wear and tear, and damage covered by Landlord’s insurance. Upon such surrender, all right, title and interest of Tenant in the Premises shall cease.
15.02
Subject to Tenant’s rights under Section 4.06, after the expiration or earlier termination of the
Lease, all of Tenant’s Property, personal property and improvements remaining in the Premises shall be deemed conclusively to have been abandoned by Tenant and may be appropriated, sold, destroyed or otherwise disposed of by Landlord without notice or obligation to compensate Tenant or to account therefor, and Tenant shall pay Landlord for all Outlays within 10 days of receipt of an invoice therefor. Landlord may at its option, require Tenant to remove all or part of the Leasehold
Improvements, partitioning or other tenant improvements made or installed in the Premises, and may require Tenant to restore the Premises to their original condition before the making or installation of the partitioning or other tenant improvements.
Merger 15.03
The voluntary or other surrender of this Lease by Tenant or the sublease of space by Tenant to Landlord or the cancellation of this Lease by mutual agreement of Tenant and Landlord shall not operate as a merger, but shall, at Landlord’s option, terminate all or any subleases and subtenancies or operate as an assignment to Landlord of all or and subleases or subtenancies. Landlord’s options hereunder shall be exercised by notice to Tenant and all known subtenants in the Premises or any part thereof.
Payments After
Expiration or
Termination
15.04
No payments of money by Tenant to Landlord after the expiration or earlier termination of the
Lease or after the giving of any notice (other than a demand for payment of money) by Landlord to
Tenant, shall reinstate, continue or extend the Term or make ineffective any notice given to Tenant prior to the payment of such money. After the service of notice or the commencement of a suit, or after final judgement granting Landlord possession of the Premises, Landlord may receive and collect any sums of Rent due, and the payment thereof shall not make ineffective any notice, or in any manner affect any pending suit or any judgement theretofore obtained.
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Holding Over 15.05 (a) If Tenant remains in possession of the Premises after the expiration or earlier termination of the Lease, a tenancy from year-to-year shall not be created, and Tenant shall be deemed to be occupying the Premises on a month-to-month tenancy only, at a monthly rental equal to the Rent, which is payable or accrues hereunder on an installment or monthly or periodic basis, but nothing contained in this Article shall be construed to limit or impair any of Landlord’s rights of re-entity or eviction or constitute a waiver thereof.
(b) Any such month-to-month tenancy may be terminated by Landlord or Tenant on the last day of any calendar month by delivery of 30 days’ advance notice of termination to the other.
(c) Any such month-to-month tenancy shall be subject to all other terms and conditions of this Lease except any right of extension or renewal; except any right of Tenant to require, after the expiration or earlier termination of the Lease, any reconciliation, adjustment or repayment of amounts paid or payable on an estimated or contingent basis, which amounts, or any thereof, may at the option of Landlord, be deemed final payments or accruals in respect of the month for which they are paid or due; and except that Landlord, at its option, may resort to Section 2.01(b) as if the date of expiration or earlier termination and the first day of every month thereafter was a date set for review.
ARTICLE 16
AMENDMENT AND WAIVER
Amendment or
Modification
No Implied
Surrender or Waiver
16.01
No amendment, modification, or supplement to this Lease shall be valid or binding unless set out in writing and executed by the parties hereto in the same manner as the execution of this Lease.
16.02
No provisions of this Lease shall be deemed to have been waived by a party unless such waiver is in writing signed by that party. A party’s waiver of a breach of any term or condition of this
Lease shall not prevent a subsequent act or omission which would have originally constituted a breach, from having all the force and effect of any original breach. Landlord’s receipt of Rent with knowledge of a breach by Tenant of any term or condition of this Lease shall not be deemed a waiver of such breach. Landlord’s failure to enforce against Tenant or any other tenant any rule or regulation made under Article 12 shall not be deemed a waiver of such rule and regulation. No act or thing done by Landlord, its agents or employees during the Term, without limitation including inspection, repair, re-entry, or sale or leasing (or attempts thereat) of all or any part of the Premises shall be deemed a constructive termination of this Lease or an acceptance of a surrender of the
Premises, or an eviction of Tenant or a breach of the covenant of quiet enjoyment and no agreement to accept a surrender of the Premises shall be valid, unless in writing signed by Landlord. The delivery of keys to any of Landlord’s agents or employees shall not operate as a termination of this
Lease or a surrender of the Premises. No payment by Tenant, or receipt by Landlord, of a lesser amount than the Rent due hereunder shall be deemed to be other than on account of the earliest stipulated Rent, nor shall any endorsement or statement on any cheque or any communication accompanying any cheque, or payment of Rent, be deemed an accord and satisfaction, and
Landlord may accept such cheque or payment without prejudice to Landlord’s right to recover the balance of such Rent or pursue any other remedy available to Landlord. The acceptance by
Landlord of Rent or any installment or proportion of Rent from any person other than Tenant shall not be construed as a recognition or acceptance of the right of such person to use or occupy the
Premises, nor as a waiver of any of Landlord’s rights hereunder.
ARTICLE 17
INTERPRETATION
Time 17.01
Time is of the essence of this Lease and every part hereof and schedule hereto.
Obligations as Covenants
17.02
Each obligation of Landlord or Tenant expressed in this Lease, even though not expressed as a covenant, is considered to be a covenant for all purposes.
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Severability 17.03
Should any provision of this Lease be or become invalid, void, illegal or not enforceable, it shall be considered separate and severable from the Lease and the remaining provisions shall remain in force and be binding upon the parties hereto as though such provision had not been inserted.
Governing Law 17.04
This Lease shall be interpreted under and is governed by the laws of the Jurisdiction in which the Land is located.
Grammatical
Conformance
17.05
The necessary grammatical changes required to make the provisions of this Lease apply to all genders and to corporations, associations, partnerships, or individuals, and in the plural sense where a party may comprise more than one entity, will be assumed in all cases as though in each case so fully expressed.
Headings and
Captions
Extended
Meanings
17.06
The indices, article headings, and section headings are inserted for convenience of reference only and are not to be considered when interpreting this Lease.
unless otherwise expressly provided.
17.07
The words “hereof”, “herein” and similar expressions used in any Article, Section or paragraph of this Lease relates to the whole of this Lease and not to that Article, Section or paragraph only,
ARTICLE 18
CONTRACTUAL
Entire
Agreement
18.01
This Lease contains the entire agreement between Landlord and Tenant concerning the
Premises and the subject matter of this Lease, and Tenant acknowledges that it has not relied upon any representations, warranties, covenants, agreements, conditions or understandings except such as are set out in this Lease.
Relationship of Parties
Joint and
Several Liability
Successors
Bound
18.02
Nothing contained in this Lease shall create any relationship between the parties hereto other than that of lessor and lessee, and it is acknowledged and agreed that Landlord does not in any way or for any purpose become a partner of Tenant in the conduct of its business, or a joint venturer, or a member of a joint or common enterprise with Tenant.
18.03
If Tenant hereunder comprises more than one person or corporation then all representations, warranties, conditions, covenants and undertakings on the part of Tenant hereunder shall be joint and several representations, warranties, conditions, covenants, agreements and undertakings of each and all such persons and corporations.
18.04
Except as otherwise provided, the covenants, terms and conditions contained in this Lease shall apply to the benefit of and bind the heirs, executors, administrators, successors, and assigns of the parties hereto.
Registration 18.05
Neither Tenant nor anyone on Tenant’s behalf or claiming under Tenant shall register this
Lease or any assignment or sublease of this Lease or any document evidencing any interest of
Tenant in the Lease or the Premises, against the Land or any part thereof. If any such party intends to register a document for the purpose only of giving notice of this Lease or of any assignment or sublease of this Lease, then such party shall be permitted to register only a caveat in the appropriate land titles office. The form of the caveat shall be prepared by Tenant and shall only describe the parties, the premises, the Commencement Date, the expiration date of the Terms, and such other matters necessary to give proper notice of Tenant’s interest and shall be submitted to
Landlord for its review prior to registration. Forthwith following termination of this Lease any such caveat shall be removed. All costs and expenses necessary to prepare, approve, register or file the caveat and the ultimate removal thereof shall be paid by Tenant.
Division of
Project
18.06 (a) Landlord shall be entitled to sever the Land into separate parcels, or to consolidate the
Land with other parcels, and after completion of such severance or consolidation the definitions of “Land” and “Project” shall be read to correspond to such change. The separate parcels of the Land on severance may be owned by or may be treated as if they were owned by separate entities other than Landlord. Landlord may in its discretion create and grant rights and easements among separate parcels or Project
Components and may register same as encumbrances.
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(b) Tenant acknowledges and agrees that if the Land is severed into two or more separate parcels or consolidated into fewer parcels, Tenant will register any caveat indicating its interest in this Lease and the Premises against only the parcel(s) of the Land which is directly affected by Tenant’s interest in this Lease and the Premises as directed by
Landlord, and if the Land is severed subsequent to the registration of such caveat.
Tenant shall, at Landlord’s request, cause to be registered a partial discharge of such caveat against the parcels of Land not so directly affected by Tenant’s interest in this
Lease and the Premises. If Tenant fails to cause such partial discharge to be registered within 15 days of a written request from Landlord, Landlord may take such steps as it considers necessary to cause such caveat to be partially discharged, and
Tenant shall pay Landlord for all Outlays within 10 days of receipt of an invoice therefor.
(c) (i) Landlord may from time to time, if in the opinion of Landlord more efficient or economical operation of the Project or more equitable distribution of Operating
Costs will result, establish Project Components (of which the Building shall be one) and divide, apportion, and allocate Operating Costs among such Project
Components.
(ii) In any such division, apportionment and allocation of Operating Costs, Landlord shall charge any item which relates exclusively to one of the Project Components directly to that Project Component only, and, in respect of items which do not exclusively relate to any single Project Component, Landlord shall divide, apportion and allocate same to all Project Components affected thereby, on an equitable basis having regard, without limitation, to the various uses and values of the subject Project Components, to prudent practices of property management, to the provisions of this Lease, and to generally accepted accounting and engineering principles. The aggregate so directly charged or divided, apportioned and allocated to the Building is herein called the “Operating Costs for the
Building”.
(iii) If such treatment would result in a more equitable and compatible recognition of the cost of their respective usage, Landlord may similarly, mutatis mutandis, charge, divide, apportion and allocate Operating Costs, or Operating Costs for the
Building, among office, retail and other differing elements of the Building.
Tenant hereby accepts this Lease of the Premises, to be held by it as Tenant subject to the covenants, conditions, and restrictions set forth herein and implied. Tenant’s taking of possession of all or any portion of the Premises shall be conclusive evidence as against Tenant that the Premises or such portion thereof of which possession is taken are in satisfactory condition on the date of taking possession, subject only to latent defects and to deficiencies (if any) listed in writing in a notice delivered by Tenant to Landlord not more than 30 days after the later of the date of taking possession or the Commencement Date.
IN WITNESS WHEREOF, LANDLORD AND TENANT HAVE EXECUTED AND DELIVERED THIS
LEASE BY AUTHORIZED SIGNATURES, AND BY AFFIXING CORPORATE SEALS WHEN APPLICABLE,
EFFECTIVE THE DATE INDICATED ON PAGE 1 OF THIS LEASE AGREEMENT.
_____________________________
Title __________________________________
Per __________________________________
Title __________________________________
Per__________________________
Title__________________________
Per__________________________
Witness ___________________________
Title__________________________
LANDLORD
____________________________________ _______________________________
Per __________________________________ Per _____________________________
Title _____________________________
Per _____________________________
Title _____________________________
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SCHEDULE 2
PROJECT SUPPLEMENT
PART ONE - DEFINITIONS
1. In this Lease, unless the context or content otherwise requires:
Annual Rent means the amount so identified on Page 1 of this Lease.
Architect means such firm of independent professional architects or engineers engaged by Landlord from time to time in regard to the Project, including any consultant appointed by the
Landlord or Architect.
Article
Building means an Article of this Lease.
means that building so identified on Page 1 of this Lease, being the Project Component in which the Premises are situated.
Clause means a numbered subdivision of a Part of this Schedule.
Commencement
Date means the date so identified on Page 1 of this Lease.
Common Areas means at any time those portions of the Project which are not leased or designated for lease by Landlord to tenants but are provided (and which may be changed from time to time) to be used in common by Landlord. Tenant, and other tenants of the Project (or by the sublessees, agents, employees, customers or licensees of Landlord, Tenant and such other tenants) whether or not the same are open to the general public, and shall, without limiting the generalities aforesaid. Include all improvements, fixtures, chattels, equipment, systems, decor, signs, facilities, utilities, or landscaping contained therein or maintained or used in connection therewith, and also all pedestrian and vehicular exits and entrances, and all malls, courtyards, passageways, hallways, stairways and public washrooms, and any elevators and escalators, and any pedestrian walkway system, park, bus stop, transportation facility or other public facility for which Landlord is subject to obligations from time to time in its capacity as owner of the Project.
Delivery
Facilities
Fiscal Year
Land means those portions of the Common Areas on or below street level of the Project as are from time to time designated by Landlord as facilities to be used in common by Landlord, tenants of the Project, and others, for the purposes of loading, unloading, delivery, dispatch and holding of merchandise, goods, and materials entering or leaving the Project and giving vehicular access thereto.
means a twelve month period from time to time determined by Landlord at the end of which
Landlord’s financial statements for the Project are prepared and audited.
means the land on which the Building is constructed, as so identified on Page 1 of this
Lease, subject to the provisions of Section 18.06
of this Lease.
Landlord
Lease means that party or parties so identified on Page 1 of this Lease.
means this lease document (including without limitation all of its schedules, attachments and appendices) and every properly executed instrument which by its terms amends, modifies, or supplements it.
Leasehold
Improvements has the meaning prescribed in Section 4.07(b) of the Lease.
Normal
Business Hours means the hours from 8:00 a.m. to 6:00 p.m. Monday through Friday, excluding days which are legal or statutory holidays in the jurisdiction where the Project is located, or such other reasonable hours as Landlord may stipulate from time to time in respect of one or more or all Project Components.
Operating Costs has the meaning defined, distinguished, prescribed or identified in Part Two of this
Schedule.
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Schedule A - Sample Form of Lease has the meaning prescribed in Section 18.06 of the Lease.
Outlays
Parking
Facilities
Premises
Project
Project
Components
Proportionate
Share
Rent means all amounts other than Annual Rent and Operating Costs, which are payable by
Tenant under this Lease without limitation including Outlays.
means any and all costs of any nature or kind whatsoever, incurred by Landlord as a direct or indirect result of failure by Tenant to perform its obligations under this Lease, or for account of Tenant pursuant to this Lease.
means that part of the Project containing parking facilities with vehicular access thereto without limitation including parking spaces, ramps, circulation space, vehicular entrances and exits, the structural elements thereof and services, facilities and systems contained in or servicing the Parking Facilities.
means the space so identified on Page 1 of this Lease (approximately shown in outline on
Schedule 1), having the agreed area shown on Page 1, but specifically excluding any part of the roof or exterior of the Project.
means the Land, and all improvements and buildings (without limitation including the
Building and any other Project Components) and all equipment and facilities erected thereon or situate therein from time to time together with all such other land, easements, licenses, leases or rights (if any) contiguous, convenient, adjacent or appurtenant to the
Land, and like improvements, buildings, equipment and facilities thereon or therein, which
Landlord may from time to time own, develop, or operate as an entity integrated with the
Building.
means the segments of the Project (of which the Building shall be one and which together comprise the whole Project) which may be designated by Landlord from time to time.
has the meaning prescribed in Clause 2 of Part Two of this Schedule.
Rentable Area
Retail
Concourse
Section
Taxes means the aggregate of all amounts payable by Tenant to Landlord under this Lease for and relating to, but not limited to:
(a) Annual Rent; (d) Percentage Rent in leases of space in the Retail
(b) Operating Costs;
(c) Other Charges;
Concourse and other leases which provide therefore. has the meaning determinable from Clause 3 of Part Two of this Schedule. means the floors or areas (if any) of the Project whether located on the ground level, or any upper or lower level as designated from time to time by Landlord for occupation and use as retail stores, service or financial outlets, restaurants, cafeterias, kiosks and like commercial purposes (sometimes called retail space) together with all improvements, equipment, facilities, escalators, installations, systems and services and all public areas in or adjacent to the Retail Concourse or which serve or are for the benefit of the Retail Concourse, and any alteration, expansion or reduction thereto or thereof. means any numbered subdivision of an Article. means the aggregate of all taxes, duties and imposts, without limitation including property, school, and local improvement taxes, rates, charges, levies, assessments and capital taxes, payable by Landlord and imposed by any competent governmental authority upon or in respect of the Project and all improvements thereon or services therein or on account of its ownership thereof, and any other amounts which are imposed in lieu of, or in addition to any such Taxes, whether of the foregoing character or not and whether in existence at the
Commencement Date or not, together with all expenses incurred by Landlord in contesting in good faith the imposition, amount or payment of any of them; but excluding any income, profits, excess profits, and business tax imposed upon the income of Landlord and any other impost of a similar nature charged or levied against Landlord, except to the extent that such is levied in lieu of taxes, rates, charges, or assessments in respect of the Project or improvements thereon, or the ownership or operation thereof by Landlord.
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Tenant means that party or parties so identified on Page 1 of this Lease. has the meaning prescribed in Section 4.06(b) of this Lease. Tenant’s
Property
Term means the period of time so identified on Page 1 of this Lease. means that permitted and restricted usage identified on Page 1 of this Lease. Use
2. (a)
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“Unit of Area” means a conventional component of expressing or measuring the aggregate area of space, denoted either in square metres (metric system) or square feet (imperial system) or computed in the equivalent relationship or conversion of one to the other, in all cases limited to two decimal figures.
(b) The Landlord may for any purpose of this Lease, without limitation including any measurement of rentable area or any formula prescribed in this Lease, substitute, or convert one or more or all units of area using conversion factors of .0929 square feet to square metres and 10.7639 square metres to square feet.
PART TWO - OPERATING COSTS
1. For purposes of this Lease and subject to the provisions of Section 18.06:
Operating Costs means the aggregate amount, without duplication, of all costs and charges incurred by or on behalf of Landlord during the Fiscal Year in operating, supervising, securing, repairing, managing, and maintaining the Project in good repair as a first class facility, as established in accordance with generally accepted accounting principles and confirmed in a certificate of Landlord, including, without limitation;
(a) all costs, charges, wages, salaries and expenses which are attributable to the operation, management, supervision, security, repair, and maintenance of the Project, including, without limitation, wages, salaries, and other amounts paid or payable to and for all on-site personnel; and Taxes (except where same are paid by individual tenants pursuant to Section 5.03 and 5.05 of the Lease);
(b) the applicable amortization (properly allocable to such fiscal year) of all costs incurred after the date any space in the Building was first occupied by any tenant for
(i) any capital improvement to the Project required by any change in the law’s, rules, regulations or orders of any governmental or quasi-governmental authority having jurisdiction, or incurred by Landlord principally to reduce Operating Costs, or
(ii) any replacement not charged to Operating Costs in the year in which incurred of any equipment, floor covering or system in the Building, or
(iii) any repairs, including without limitation structural repairs and repairs to the exterior, roof or equipment of the Building not charged to operating costs in the year in which incurred, which costs shall be amortized over the useful life of the subject capital improvement, replacement or repair;
(c) all other costs of repairs, maintenance and replacements to the Project, without limitation including painting, renovations, repair and replacement of carpet, snow clearing, and gardening and landscaping;
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(d) the total of the costs and amounts paid for all gas, steam or other fuel used in heating and cooling the Project, all electricity furnished to the Project (except for electricity furnished to and paid for by individual tenants), all hot and cold water, telephone and other utility costs used in the operation, supervision, repair, security and maintenance of the Project (except where any of these is chargeable to individual tenants by reason of their extraordinary consumption);
(e) all costs of insuring the Project and the improvements, equipment, and other property in the Project and such other insurance in respect of the Project as Landlord from time to time reasonably determines;
(f) audit fees and the cost of accounting services incurred in the preparation of the
Statements required to be furnished by Landlord pursuant to this Lease, and in the computation of Rent and other charges payable by tenants of the Project;
(g) a charge for offsite administration and management overhead equal to 5 percent of the gross revenue for the Project in such Fiscal Year; but the following costs shall be specifically excluded:
(i) Outlays;
(ii) Capital improvements, replacements, additions, or alterations to the Project or its equipment except as provided in sub-clause (b) above;
(iii) repair and replacement resulting from inferior or deficient design, workmanship, or materials in the initial construction of the Project or for which Landlord is reimbursed by insurers or pursuant to warranties;
(iv) interest on and capital retirement of debt;
(v) repair or maintenance done for the direct account of other tenants and of unleased space; and
(vi) tenant improvements, tenant allowances, and leasing commissions.
2. For purposes of this Lease:
Proportionate (a) means a fraction, which has as its numerator the rentable area of the Premises, and
Share has as its denominator the total rentable area of the Project, calculated by Landlord in accordance with the method of measurement described in Clause 3 below.
(b) Provided that, if and whenever pursuant to Section 18.06 of the Lease, Landlord shall have established and designated Project Components, in respect of operating costs which pertain only to a Project Component. The denominator aforesaid shall be the total rentable area of such areas as comprise that Project Component.
(c) If and whenever the Building shall base been established and designated a Project
Component. “Operating Costs for the Building” shall have the meaning indicated in
Section 18.06, and sub-clause (b) above shall govern apportionment thereof.
(d) In calculating Operating Costs for the Building for any Fiscal Year, if and while less than
95% of the Building is occupied by tenants, then the amount of Operating Costs shall be deemed for purposes of this Schedule to be increased to an amount equal to
Operating Costs which normally would be expected to have been incurred had occupancy of the Building been 95% during period(s) when vacancies existed, to the intent that, after allowing for a periodic vacancy factor of 5%, the cost of services actually provided by Landlord to the Premises will be recovered by Landlord from
Tenant, while Landlord will absorb the costs incurred in or attributable Co rentable areas which are not occupied.
3. Method of Measurement of Rental Area.
If not specified herein or otherwise or by agreement determined,
Rentable Area shall be measured as below prescribed.
Reproduced with permission
Not to be used or reproduced without permission - August 2004 - Saskatchewan Legal Education Society Inc.
Saskatchewan: Bar Admission Program
Real Estate - Commercial Leases
Schedule A - Sample Form of Lease
(a) For Office Space - Single Tenancy Floors
A - 29
The rentable area for premises on a single tenancy floor in the Building (if any), shall be calculated (from dimensioned Architect’s drawings) to the inside face of the glass, whenever the area of the exterior Building walls, as measured from the interior between the floor and finished ceiling, is at least 50% glass; or, if not, to the inside finish of permanent exterior Building walls. It shall include all space within exterior building walls except for stairs, elevator shafts, flues, pipe shafts, and vertical ducts forming part of the basic
Building service areas and their enclosing walls. No deduction shall be made for washrooms, janitor closets, air conditioning rooms, fan closets, or electrical or telephone cupboards within and servicing that floor, or for any mail conveyor shutes or other rooms, corridors, stairways, or areas available to the subject lessee on that floor for its use, furnishings, or personnel, or for any columns, whether internal, corner or perimeter columns, located wholly or partially within that space, or for reveals, or for any enclosures around the periphery of the Building used for the purpose of cooling, heating, or ventilating.
(b) For Office Space - Multiple Tenancy Floors
The rentable area for premises on a multiple tenancy floor in the Building (if any), shall be calculated (from dimensioned Architect’s drawings) front the inside face of the class or permanent exterior walls as described in sub-clause (a) for a single tenancy floor, to the face of permanent interior walls; or, as the case may be, to the centre line of demising partitions. If contained within the subject premises no deduction shall be made for washrooms, columns, janitor closets, air conditioning rooms, fan closets, or electrical or telephone cupboards; or for any mail conveyor shutes or other rooms, corridors, stairways, or areas exclusively available to the subject lessee for its use, furnishings, or personnel, or for reveals, or for any enclosures around the periphery of the Building used for the purpose of cooling, heating, or ventilating. There shall be added to the area so measured an area equal to the product of multiplying:
(i) a traction in which the numerator is the Rentable Area of the subject premises, so calculated, and the denominator is the aggregate of all rentable areas, measured according to this sub-clause (b), of space on that floor; by
(ii) the area obtained when such denominator is deducted from the Rentable Area of the subject floor if measured according to sub-clause (a).
(c) For Retail Space
The rentable area of retail space in the Building (if any), shall be calculated (from dimensioned Architect’s drawings) from the inside face of permanent exterior walls, to the centre line of demising partitions, or, as the case may be, to the face of permanent interior walls, or to the centre line of a predetermined lease line (usually referred to as the storefront line) in the case of retail space facing onto either an interior public mall or corridor or onto a public street or lane. No deduction shall be made for vestibules inside the permanent exterior Building walls or inside the pre-determined lease line or for washrooms, columns, janitor closets, air conditioning rooms, fan closets, or electrical or telephone cupboards within the subject premises; or for any other rooms, corridors, or areas exclusively available to the subject lessee for its use, furnishings, or personnel, or for any enclosures around the periphery of the Building used for the purposes of cooling, heating or ventilating.
(d) Total Area of the Building
The total rentable area of the Building shall be calculated (from dimensioned Architects drawings) and shall be the aggregate area of the Building rentable as office or retail space, excluding all storage and parking areas. The area for offices shall be calculated as if the
Building were entirely occupied by tenants renting single tenancy floors on each floor of the
Building. The total rentable area of the Building shall be adjusted from time to time to give effect to any structural, functional, or other changes affecting the Building.
Reproduced with permission
Not to be used or reproduced without permission - August 2004 - Saskatchewan Legal Education Society Inc.
A - 30 Saskatchewan: Bar Admission Program
Real Estate - Commercial Leases
Schedule A - Sample Form of Lease
SCHEDULE 3
RETAIL SUPPLEMENT
SECTION A - DEFINITIONS
In this Schedule and Lease:
1. Lease Year
“Lease Year” means a period of twelve calendar months beginning on the Commencement Date or any anniversary thereof provided that if elected by Tenant by notice delivered to Landlord “Lease Year” shall thereafter mean the fiscal year of Tenant (and the first and last Lease Years in the Term may contain less than twelve calendar months), but Tenant shall have no further right of election.
SECTION B OPERATION OF RETAIL PREMISES
1.
Restrictions On Use
The Premises shall be used and occupied only as prescribed and permitted on Page 1 of this Lease, Tenant
(or anyone acting through, or in place of Tenant) shall not conduct or advertise on or from or pertaining to the Premises any auction or closing-out or wholesale business, nor shall Tenant without prior written consent of Landlord, grant any concession, license, or permission to any third party to sell or take orders for merchandise or services in the Premises. Tenant shall not divert to another location business that would normally be conducted on or from the Premises.
2. Hours of Business
During the Term, Tenant will conduct its business in the Premises during the regular and customary hours for such business on all business days and will conduct such business, unless prevented by properly constituted authority, on such evening or evenings in each week and on such extended days and for such extended hours as are from time to time customary in the area in which the Project is located.
3.
Continuous Occupancy
Tenant acknowledges that its continued occupancy of the Premises and the proper and regular conduct of its business therein are of utmost importance to neighbouring tenants and to Landlord in the renting of space in the Project, the renewal of other leases therein, the efficient and economic supply of services and utilities, the maintenance of Percentage Rent, and in the character and quality of the other tenants in the Project.
Tenant therefore covenants and agrees that throughout the Term it will occupy the entire Premises and comply strictly with the provisions of this Schedule. Tenant acknowledges that Landlord is executing this
Lease in reliance thereupon and that the same is a material element inducing Landlord to execute this
Lease. Tenant further agrees that if it vacates or abandons the Premises or fails to so conduct its business therein, or without the prior written consent of Landlord uses or permits or suffers the use of the Premises for any purpose not specifically herein authorized and allowed, then without constituting a waiver of Tenant’s obligations or limiting Landlord’s remedies hereunder, all Annual Rent reserved in this Lease until the expressed termination date thereof shall immediately become due and payable to Landlord, unless guaranteed to the satisfaction of Landlord.
4.
Inventory, Staff and Fixtures
Tenant shall maintain a substantial stock of goods, wares and merchandise adequate to ensure successful operation of Tenant’s business, and shall employ and maintain management, supervisory, sales and other personnel sufficient at all times for proper service to customers, but Tenant shall store and stock in the
Premises only such inventories as the Tenant intends to sell at retail at, in, from or upon the Premises, and
Tenant shall use for office, storage and other non-selling purposes only such space in the Premises as is reasonably required to maintain Tenant’s retail sales therein. Tenant shall install and maintain at all times in the Premises modern and high quality fixtures, furnishings, fittings and equipment adequate, appropriate and properly laid out to sustain the Tenant’s retail sales. Tenant shall keep display windows (if any) neatly dressed.
Reproduced with permission
Not to be used or reproduced without permission - August 2004 - Saskatchewan Legal Education Society Inc.
