This article looks at some of the practical aspects of a vast area of law with a wealth of case law: commercial leases.
We’ll look at a few best practices to adopt on the following topics:
- the rental offer,
- measurement and additional rent,
- tenant insolvency and bankruptcy, and
- tools for guaranteeing the performance of a tenant’s obligations.
The rental offer
It can take the form of a very brief document (one or two pages), or be more elaborate over several pages.
It usually requires the tenant to sign the lessor’s “long lease”. If the long lease is never signed, and the offer to lease includes all the essential elements of a lease (specific space, rent and duration), it can be considered a lease. It should be noted, however, that the courts have already ruled that a tenant was justified in refusing to sign a draft long lease that added obligations, when (i) this draft was not attached to the offer to lease and (ii) the offer to lease did not mention that additional clauses would be incorporated into the long lease.
Measurement and additional rent
One of the lessor’s main obligations is to deliver and contain the leased premises.
In terms of best practice, a lessor can fulfill his obligation by stipulating in the lease that the lessee acknowledges having received the leased premises in good condition, or, for various reasons depending on the circumstances, that the lessee accepts them as they are (” as is where is “).
It is also important to obtain (jointly or on the initiative of either party) a measurement certificate. This will avoid potential disputes over rent reduction or increase in the event of a surface area different from that indicated in the lease.
Additional rent represents the tenant’s proportionate share of maintenance, insurance and tax expenses. In commercial leases, the tenant’s “proportionate share” is usually linked to the identification of “rentable areas”. The lessor will need to pay particular attention to the qualification of “rentable areas”, since it will be difficult to change this qualification after the start of the lease term without opposition from the lessee.
Occasionally, the additional rent may increase significantly in relation to the original lease estimates. Unless the lessor makes a calculation error or is negligent in establishing the estimates, the lessee in a net lease will have to bear all increases. 1 As a matter of good practice, it is important for the lessor to keep all calculations and notes used to establish the estimate. It should be noted that in the case of common expenses, a tenant may be able to negotiate a cap on his or her proportional share.
Tenant insolvency and bankruptcy
In the context of a notice of intention to make a proposal, the tenant must pay his rent. In the event of default, the landlord may oppose an extension of the deadline for the tenant to file a proposal, or request that the deadline be interrupted.
In the case of a notice of intent to make a proposal, the tenant may terminate his lease at any time between the filing of a notice of intent and the filing of the proposal (including the day the proposal is filed). The lessor then has 15 days to apply to the court for a declaration of inapplicability, but this is a heavy burden since the court will not issue such a declaration if it is convinced that without the termination of the lease, the insolvent tenant could not make a viable proposal to his creditors.
In a bankruptcy context, the hypothec held by the lessor on the lessee’s assets becomes ineffective. This is because the Bankruptcy and Insolvency Act (BIA) gives the lessor priority of collocation (article 136 (1) (f) BIA).
Quebec courts have recognized the validity of lease termination clauses in the event of bankruptcy. In the absence of termination, the trustee may occupy the premises rent-free before the first meeting of creditors. In the event of occupancy after the first meeting, the trustee could be held personally liable for the rent.
Tools for guaranteeing the performance of a tenant’s obligations.
As we have seen, the effectiveness of mortgaging a tenant’s assets is highly relative.
In practice, parties often use surety bonds to guarantee the performance of a tenant’s obligations. This is a very useful tool, since the lessor can be sure of the guarantor’s solvency, and the guarantor remains responsible for the lessee’s obligations for the entire term of the lease.
The security deposit (sometimes referred to as a “security deposit” or “prepaid rent”) is also often used. Proper drafting of the security deposit clause is essential, in order to determine the rights over the sum remitted to the lessor. A deposit considered as a pledge or movable hypothec with dispossession will be unenforceable against the trustee in the event of bankruptcy, whereas a non-refundable deposit that is in fact prepaid rent becomes the property of the lessor as soon as it is paid, and is enforceable against the trustee.
The best tool for guaranteeing the performance of a tenant’s obligations is without doubt the irrevocable letter of credit. Except in cases of fraud, the financial institution must fulfill its obligations upon presentation of the letter of credit.
These few observations show that good practice in commercial leasing is influenced as much by current interactions between lessors and lessees as by developments in case law.
1 Shawi-Pharma inc. c. Crombie Property Holdings Limited2017 QCCA 1675