This article addresses various practical aspects of commercial leases.
We will summarize good practices to adopt on the following topics:
- the offer to lease,
- premises and additional rent,
- insolvency and bankruptcy of a tenant, and
- tools to guarantee the performance of a tenant’s obligations.
The Offer to Lease
The offer can take the form of a very basic document that is one or two pages long, or a more elaborate one that can be comprised of several pages.
It usually provides that the tenant agrees to sign the landlord’s “long form” standard lease. If the long form is never signed and the offer to lease provides for all the essential elements of a lease (space, rent and duration), it may be considered as a valid lease that binds the parties. It should be noted that the courts have ruled that a tenant was justified in refusing to sign a long form lease that added obligations and where (i) the draft was not attached to the offer, and (ii) the offer did not mention that additional obligations would be incorporated into the long form lease.
Premises and Additional Rent
The landlord’s obligation to provide peaceful enjoyment includes the delivery of the leased premises in good condition and in accordance with the measurements provided in the lease.
In fulfilling its obligations, a good practice for the landlord would be to stipulate, in the lease, that the tenant acknowledges having received the leased premises in good condition, or, depending on the circumstances, that the tenant accepts the leased premises on an “as is where is” basis.
It is also important for the landlord and/or the tenant to obtain a certificate of measurement. This certificate will avoid potential disputes for a reduction or an increase in rent if the leased area differs from that indicated in the lease.
The additional rent commonly represents the tenant’s proportionate share of immovable maintenance expenses, insurance and taxes. The “proportionate share” is usually linked to the “rentable area”. The landlord should pay particular attention to the qualification of “rentable area”, since it will be difficult to change this qualification without opposition from the tenant after the commencement of the term of the lease.
Occasionally, it happens that the additional rent increases significantly from the initial estimate provided for in the lease. Unless there is a miscalculation or negligence on the part of the landlord in calculating the estimates, the tenant in a net lease will have to bear the increase. It is important, and would be a good practice, for the landlord to keep all notes and calculations used in order to establish the initial estimate. With respect to common costs, a tenant may negotiate a cap on its proportionate share.
Insolvency and bankruptcy of a tenant
In the case of a notice of intention to make a proposal, the tenant must still pay the rent. In case of default, the landlord may oppose an extension of delay to submit a proposal or request an interruption of that period.
The tenant may terminate its lease at any time between the filing of a notice of intention and the filing of the proposal (including the day of the filing of the proposal), by giving written notice to the landlord. The landlord then has a 15-day period to obtain a declaration of inapplicability from the Court. The Court cannot issue such a declaration if it is satisfied that the insolvent tenant would not be able to make a viable proposal without the resiliation of the lease.
In a bankruptcy, the hypothec granted to the landlord on the tenant’s assets is null and void, the reason being that the Bankruptcy and Insolvency Act (BIA) gives the landlord a priority of claim (section 136 (1) (f) BIA).
Clauses of cancellation of the lease in case of bankruptcy have been recognized by the Québec courts. In the absence of termination of the lease, the trustee may occupy the premises without paying rent until the first meeting of creditors. If it occupies after the first meeting, the trustee may be held personally liable for payment of the rent.
Tools to guarantee the performance of the tenant’s obligations
As we have seen, the hypothec on a tenant’s assets is of no effect in the case of bankruptcy.
In practice, the parties commonly use a suretyship to guarantee the performance of a tenant’s obligations. This is a very useful tool as long as the landlord confirms the solvency of the guarantor, and that the guarantor remains responsible for the obligations of the lessee for the whole term of the lease.
The deposit (sometimes referred to as “security deposit” or “prepaid rent”) is also often used to ensure the payment of the rent. The proper wording of the security deposit clause is essential in order to determine the rights to the amount remitted to the landlord. A deposit considered as a pledge or a movable hypothec with delivery shall not be enforceable against the trustee in the event of bankruptcy, while a non-refundable deposit effectively constitutes prepaid rent, upon payment becomes the property of the landlord and is opposable to the trustee.
The best tool to guarantee the fulfillment of the obligations of a tenant is undoubtedly the irrevocable letter of credit. This is a stand-alone contract and, other than in case of fraud, the financial institution must fulfill its obligation to pay in the event of a tenant’s default.
As such, good commercial lease practices are influenced as much by the interactions between landlords and tenants, as by developments in case law.
By Alexandre Béchard
1 Shawi-Pharma inc. c. Crombie Property Holdings Limited, 2017 QCCA 1675