January 1st - 2009

Forum offers leasing lessons in a slow economy

The slowing economy has commercial real estate professionals anticipating various scenarios. What do you need to do to look out for your client? Can a tenant restructure his business without paying a penalty? Are landlords prepared to deal with a potential increase in tenant defaults and restructuring requests? What steps can be taken to anticipate default and minimise risk?

The slowing economy has commercial real estate professionals anticipating various scenarios. What do you need to do to look out for your client? Can a tenant restructure his business without paying a penalty? Are landlords prepared to deal with a potential increase in tenant defaults and restructuring requests? What steps can be taken to anticipate default and minimize risk?

These are legal issues and brokers should stay away from them with their clients. Leave that to the lawyers. But it doesn’t hurt to have some sense of which issues in the leasing document may become increasingly relevant with a recession looming.

A legal roundtable at the recent Real Leasing conference in Toronto addressed an assortment of issues that people often don’t understand.

What is in the lease?

While the legal experts covered some issues in a standard lease document that perhaps only other lawyers might understand, one theme reoccurred: what is in the lease and what if one party needs out. Here is a sample of the topics covered.

Subleasing: Why do some leases allow landlords to terminate in lieu of consenting to a sublease, or an assignment, while others do not?

On the office side, a lot of it depends on two things: bargaining power, and who’s paying for the improvements. If the tenant is investing significant amounts of money in the premises, the tenant will want the right to at least recover some of that cost. If the tenant needs an exit strategy to get out, it may look to another tenant to whom to assign or sublet the space.

If on the other hand the landlord has paid for improvements, and it is all built into the rent, then the tenant has less of an argument about whether or not the landlord should have the right to terminate the lease.

Subletting part of the premises is a different scenario. Most tenants, especially office tenants, want the right to downsize, especially if they are in a 10- or 20-year lease.

Lender/ owner/ tenant relations: What are Non-disturbance, Subordination, Attornment?

A non-disturbance agreement is an agreement between the landlord’s lender and the tenant under which the lender agrees that if it enforces on its mortgage and either takes over the property or sells the property under power of sale, that it will honour the tenant’s lease.

It’s necessary in a case where the tenant’s lease is subordinate to the landlord’s mortgage. Ontario’s registry system recognizes priorities. If you register your notice of lease on title before the landlord’s lender registers its mortgage, then your lease has priority over the mortgage. If the mortgage has priority over the lease and the lender enforces on the mortgage the lease will be no good. The tenant’s gone.

Tenants should be looking to protect themselves from that. Lenders can ask the tenant specifically to agree that their lease is subordinate. Under those circumstances the tenant can say fine, as long as you give me a non disturbance agreement.

That brings us to attornment. Attornment is the agreement by the tenant to recognize the lender as the new landlord if the lender takes over the property or to recognize the person to whom the lender sells the property as the new landlord. These things all come together as packages in what people typically refer to as SNDAs or Subordination, Non-disturbance and Attornment agreements.

Forfeiture: What is forfeiture? What is a waiver of forfeiture?

In simple terms it really just means a termination by the landlord because of default.

Waiver of forfeiture describes a legal principal whereby a landlord, by his actions, loses the right to terminate the lease because of a default.

How does a landlord lose his right to terminate? This occurs when the landlord commits an undeniable act confirming the existence of the lease. The best example is taking rent from a tenant after you are aware of a breach.

The waiver or forfeiture can occur any time the landlord is aware of the fault, whether or not a notice of forfeiture has been issued.

Practically speaking it is nearly impossible for the landlord to avoid having contact with the tenants after the landlord is aware of default. The landlord usually wants to talk to them to see if they can sort it out. It’s hard to do without waiving the right to terminate. When landlords meet with tenants in this circumstance they must be very up front that they are meeting without prejudice to their right to terminate. Make sure it is in writing.

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Ontario Real Estate Association

Jean-Adrien Delicano

Manager, Media Relations

JeanAdrienD@orea.com

416-445-9910 ext. 246

Ontario Real Estate Association
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