The lease document binds the landlord and the tenant to a long term relationship, each dependent on the other to some degree for economic gain and in certain circumstances to some extent for economic survival. The covenantor, if any, has a substantial stake in this relationship.
The lease has similarities to a collective agreement in that both documents set out the rules of conduct, obligations, duties, and benefits for each party. As such, the negotiator for each side (whether they be the principal of the party or its solicitor) has the burden to consider a plethora of possible scenarios which could occur over the life of the agreement and its renewal.
Together with these obligations one must also consider the financial investment each party incurs in this venture, together with the expectation of economic success.
All too often one is faced by a client who brings to my attention a landlord’s “standard” 46 page lease that they are about to sign the next day. The document is usually received by way of fax or is photocopied such that its readability, to any degree of accuracy, is quite nearly impossible.
In addition, I receive the standard request to “give a quick review of any major problems,” “but don’t spend too much time as I want to keep the bill down to a couple hundred dollars.” The lease is usually delivered at about 3:45 p.m. the day before signing, with the additional requirement that the leasing agent needs it to be signed before noon the next day. I have long since refused to take those instructions from a client in order to keep my errors and omissions insurance down to its proper level. I do not propose to entertain accusations from the same client, six months or a year down the road, “why didn’t you tell me about the clause – I counted on you.”
In the business community today, very seldom can a lawyer review “a standard 46 page lease” adequately within the span of a couple of hours and fully advise their client.
A lawyer knowledgeable in commercial leasing requires substantially more time to review the lease, as well as meet with the client in order to ascertain whether or not the terms of the lease are fully understandable to the client and meet with their requirements.
All too often the tenant tells you that “he or she has a good rate at only $10.50 per square foot.” As you scan the lease for the quadruple net lease; net – taxes; net – insurance; net – maintenance; and the new net – everything else, your attention is generally drawn to those “new terms,” such as:
the payment of depreciation on fixed assets;
the 15% administration fee based upon the quadruple net;
the 16% gross up between rentable and usable (remember, is the building measured by B.O.M.A. standards?);
the lack of waiver of right of subrogation in favour of the tenant;
the one-sided indemnity clause;
the assignment of your client’s authority to the landlord regarding the estoppel certificate if he fails to sign the document within three (3) clear working days;
the new “shotgun clause” allowing the landlord to terminate the lease if the tenant wishes to assign or sublet the lease for the remainder of the term; and
other such matters of a “trivial nature”.
I do not propose, for the remainder of this article, to deal with all the clauses which one finds in “a standard lease.” I will however, touch upon a few examples in order to enhance the reader’s level of consciousness of the problems which may be visited upon them when they fail to take adequate advice.
Generally speaking, when a tenant rents 2,000 square feet in a multi-tenant building, they are, in fact, getting less than 2,000 square feet for their exclusive use. Part of the square footage is covered by way of the common areas which they share with other tenants on their floor or within the building or they may find that some of the square footage is hidden, literally, within the walls and ledges contained within their space. This will depend upon how the landlord has measured the building. In most cases the building will be measured pursuant to the B.O.M.A. standards and the difference between the rentable square footage (that is to say the 2,000 square feet) and the actual useable square footage is considered the “gross up.” In many cases it is more economical to rent at a higher rent where, in effect, the gross up is substantially less.
Many times the lease will be taken out by the tenant’s company and guaranteed by the principals of the tenant company. In fact, all though the word “guarantee” is used, in many circumstances the guarantee is one of indemnification and not one of guarantee. The main difference being that the principals become primary debtors, placed in the same position as, the tenant. In many instances the tenant has failed to negotiate at the appropriate time, a guarantee or indemnification less than full term of the lease, or for a fixed amount (ie. An amount of $25,000.00 or $50,000.00) less than the complete amount owed under the lease.
In many instances the tenant fails to give adequate consideration to the insurance provisions contained within the lease. Notwithstanding the fact that the tenant is required to pay the landlord’s portion of any insurance, the tenant may find himself or herself, exposed to liability where damage has occurred, ie. by way of fire due to the negligence of the tenant’s employees, servants, agents or invitees. In those circumstances, unless there is a waiver of right of subrogation, the tenant has not only paid the landlord’s insurance premiums, but also will find that the landlord’s insurance company will thereupon sue the tenant for the damage. What this means is that the tenant should consult a knowledgeable insurance agent or broker who can attend to the requirements of adequate insurance. The alternative would be to have the tenant’s lawyer negotiate the appropriate insurance clause.
If the tenant intends to borrow money from the bank in order to finance tenant improvements to the property, the tenant may find that it will require the lease to be executed in registrable form. In many jurisdictions the appropriate Land Title Act allows for the registration and, indeed, requires the registration, of the lease for the protection of the tenant, unless, of course, the tenant and landlord agree not to have the document registered. In many instances the landlord does not want the document registered on title. Therefore, consideration should be given to this important aspect of the landlord/tenant relationship.
In addition, the landlord may be financing the building by way of a mortgage, debenture, or other form of security instrument. In those circumstances, the financial institution will require a first charge against the property ahead of the tenant’s lease. This is generally accomplished by the landlord having inserted in the lease a subordination and attornment clause. While the tenant may be required to sign the clause he or she should have, at the negotiation stage of the lease, required the landlord to provide a non-disturbance clause from any financial institution before giving the subordination agreement. In this way, if the bank forecloses against the landlord, it cannot disturb the tenant so long as the tenant has performed under the terms and conditions of the lease.
In some cases the tenant may wish to assign the premises to another tenant or sublet the premises for a period of time, if not for the remaining portion of the lease. Unfortunately, in many instances, the tenant has not considered this fact at the time of entering into the lease, and is thereupon faced with a clause generally stating that the landlord can unreasonably withhold the assignment of subletting and further, that the landlord may cancel the lease on an application of this nature being made by the tenant. The landlord will generally exercise this form of clause where it believes that it may obtain a higher rent for the premises than it is presently enjoying with the original tenant.
In addition, where an assignment has been completed with the consent of the landlord, the “standard clauses of the lease” generally indicated that if the new tenant fails to live up to the covenants of the lease, then the landlord may seek the appropriate remedies from the original tenant.
I find that little, if any, attention is given to the wording use in the option to renew clause, on the assumption that one has been inserted in the lease. No consideration is given, whatsoever, for the basis of the increased rent for the option period.
Consider this simple example. A landlord leases space to the tenant for five(5) years at a rate of $10.00 per square foot, triple net, with an option to renew for a further five (5) years. The tenant then puts in $150,000.00 worth of tenant improvements. At the beginning of the option period, that is to say the beginning of year six (6), is the rent based upon bare space, or based upon space with the tenant improvements (which, of course, have been paid for by the tenant)?
The purpose of this exercise is to bring to your attention only a few of the problems which can be visited upon a tenant where he or she fails to adequately consider the ramifications of the lease they are about to enter. In order to avoid the standard pitfalls, the following rules apply:
When you become seriously interested in leasing a particular piece of property, see your lawyer immediately and spend at least one half hour with the lawyer, setting out your requirements;
Ensure that there is some leeway with the leasing agent on the terms of the lease;
Do not sign an offer to lease without having a copy of the lease and seeing your lawyer prior to signing the offer to lease;
See rule number 3;
See rule number 4;
Realize that your lawyer will have to spend a considerable amount of time reviewing the lease and advising you on the terms. Therefore, give him or her as much time as possible.
Lastly, if you are prepared to ignore one or more of these rules, then be prepared for protracted litigation at an amount which should roughly estimate anywhere from 10 to 30 times the amount you would have paid your solicitor had you followed the rules.
This material deals with complex matters and may not apply to particular facts and circumstances. As well, the material and references contained therein reflect laws and practices which are subject to change. This change may not only reflect the time change but a jurisdiction change. For these reasons, the material should not be relied upon as a substitute for specialized professional advice in connection with a particular matter.
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Kenneth J. Glasner, Q.C.
Tel: (604) 683-4181 / Fax: (604) 683-0226
Suite 1414, Nelson Square, Box 12156, 808 Nelson Street
Vancouver, British Columbia, V6Z 2H2 Canada