Commercial Leasing: A-Z DO’s & DON’Ts, CLAUSES TO LOOK FOR AND NEGOTIATING TACTICS AND STRATEGIES By: Sylvan Schneider LL.B. SCHNEIDER AVOCAT INC

Commercial Leasing: A-ZCommercial Leasing: A-Z

DO’s & DON’Ts, CLAUSES TO LOOK FOR AND DO’s & DON’Ts, CLAUSES TO LOOK FOR AND NEGOTIATING TACTICS AND STRATEGIESNEGOTIATING TACTICS AND STRATEGIES

By: Sylvan Schneider LL.B.By: Sylvan Schneider LL.B.SCHNEIDER AVOCAT INC.SCHNEIDER AVOCAT INC.

What Is A Commercial LeaseWhat Is A Commercial Lease

Business transaction involving two parties regarding Business transaction involving two parties regarding land/property:land/property: ex: Business developer of commercial space, purchaser of a ex: Business developer of commercial space, purchaser of a

business, seller of property AND tenantbusiness, seller of property AND tenant

Contract (Highway properties Ltd. vs. Kelly Douglas & Contract (Highway properties Ltd. vs. Kelly Douglas & Co. (1971) S.C.R. 562)Co. (1971) S.C.R. 562)

Involves financial consequences and remedies under the Involves financial consequences and remedies under the lawlaw

Letter of understanding/ offer to lease:Letter of understanding/ offer to lease:

Outlines the general points of a lease:Outlines the general points of a lease:

the parties must be namedthe parties must be named

there must be a clear description of the leased premises;there must be a clear description of the leased premises;

the commencement/expiration of the term must be set out;the commencement/expiration of the term must be set out;

the duration of the term must be determinable;the duration of the term must be determinable;

the rent must be agreed upon (percentage, basic, additional);the rent must be agreed upon (percentage, basic, additional);

all material terms of the contract not being matters incident to the all material terms of the contract not being matters incident to the relation of the landlord and tenant, including covenants, exceptions or relation of the landlord and tenant, including covenants, exceptions or reservations must be set out.reservations must be set out.

NOTENOTE: : AN OFFER TO LEASE IS NOT SUSCEPTIBLE TO REGISTRATION AND CANNOT BIND A SUBSEQUENT PURCHASER AN OFFER TO LEASE IS NOT SUSCEPTIBLE TO REGISTRATION AND CANNOT BIND A SUBSEQUENT PURCHASER OF THE PROPERTYOF THE PROPERTY

See: (See: (Industries Ultratainer Inc. vs. Rosenberg )Industries Ultratainer Inc. vs. Rosenberg )(Sobeys Quebec Inc. vs. 3764681 Canada Inc.)(Sobeys Quebec Inc. vs. 3764681 Canada Inc.)

First Step: OfferFirst Step: Offer

22NDND Step: THE LEASE Step: THE LEASE

Binding agreement upon the partiesBinding agreement upon the parties

ContractContract

Legal ramifications, consequences Legal ramifications, consequences and remedies under the lawand remedies under the law

Landlord considerations:

Financing: Landlord may want an offer to lease in order to permit it to move forward with its development plans.

Standard form of lease: Landlord may include a provision to have Landlord may include a provision to have the tenant sign the landlord’s standardthe tenant sign the landlord’s standardform of lease and consequences for not form of lease and consequences for not doing so.doing so.

Business decision: Business decision of landlord to attach itsBusiness decision of landlord to attach its standard form of leasestandard form of lease

Saving time and money: If time permits and it is appropriate in theIf time permits and it is appropriate in the circumstances, then it is advisable to gocircumstances, then it is advisable to go

straight to a lease to save time and moneystraight to a lease to save time and money

Do’s and Don’tsDo’s and Don’ts

Tenant Considerations:

Essential terms: Verify that all of the essential terms are agreedupon

Extraordinary/special rights: Include all special/extraordinary rights such as:Renewal rights, expansion rights, options to purchase and exclusivity rights etc.)

Legal counsel/advisor: If possible, have the lawyer review theagreement prior to signing, particularly when you

DO NOT have a real estate agent or broker acting on your behalf in the negotiations.

Bargaining power: When the tenant has bargaining power, INSIST upon it.

Landlord’s standard form: NEVER agree to sign the landlord’s standard form without the right to negotiate or amend the form

Do’s and Don’tsDo’s and Don’ts

GrossGross In addition to minimum base rent, tenant will pay the landlord a In addition to minimum base rent, tenant will pay the landlord a

stipulated amount per month based on the proportionate share of the stipulated amount per month based on the proportionate share of the escalation of the expenses over and above the expenses and/or taxes escalation of the expenses over and above the expenses and/or taxes paid in the previous yearpaid in the previous year

Net/Net (most leases today)Net/Net (most leases today) Landlord passes the risk onto the tenant and tenant is Landlord passes the risk onto the tenant and tenant is

responsible for all charges and costs related to the operation of responsible for all charges and costs related to the operation of the premises in addition to minimum base rentthe premises in addition to minimum base rent

Net/Net/NetNet/Net/Net Same as Net/Net but the Tenant is also responsible for costs of Same as Net/Net but the Tenant is also responsible for costs of

structural repairs structural repairs

Types Of LeasingTypes Of Leasing

Minimum Base RentMinimum Base Rent specific amount based on the area of the leased specific amount based on the area of the leased

premisespremises

Additional RentAdditional Rent calculated on a proportionate share basis and calculated on a proportionate share basis and

includes payment of such items as:includes payment of such items as: operating costs (“CAM”): (Include a right to inspect/ audit clause operating costs (“CAM”): (Include a right to inspect/ audit clause

of landlord’s records with respect to operating costs)of landlord’s records with respect to operating costs) TaxesTaxes administrative feesadministrative fees

RentRent

Landlord shifts the risk and shifts the cost of insurance premiums onto the Tenant for all damages, loss or claims arising from the leased premises through exculpatory, indemnification and insurance clauses

Indemnification: Tenant will be liable regardless of whether the Landlord was negligent or not and afford protection of the Landlord from third party claims. (i.e slip and fall in a store)

Tenant will be required to obtain appropriate insurance coverage for such liability

Insurance company will indemnify the Landlord for all costs and losses arising from the third party claim

Indemnification & Insurance clausesIndemnification & Insurance clauses

Tenant should attempt to have the Landlord agree not to claim against it for loss in excess of the liability limits the Tenant covenants to carry.

The Tenant should force the Landlord to make a claim to its insurer rather than just pursuing the Tenant for recovery

Tenant considerationTenant consideration

Insurance/Subrogation

EXAMPLE:EXAMPLE: Damage to the premises caused by tenant: $5 Damage to the premises caused by tenant: $5

millionmillion

Tenant’s insurance: $1 millionTenant’s insurance: $1 million

Landlord sues Tenant for recovery of monies ($4 Landlord sues Tenant for recovery of monies ($4 million)million)Note:Note: Landlord’s claim is not limited or capped to tenant’s Landlord’s claim is not limited or capped to tenant’s insurance policy insurance policy

Landlord can claim the extra $4 million from the Landlord can claim the extra $4 million from the tenant tenant

3 Possible Solutions:

Waivers of Subrogation Opinion from Insurance company Capping Landlord’s insurance claim (i.e capping

Tenant’s liability)

Insurance/Protection

Landlords ensure the solvency of their tenants by verifying their credit (credit history, credit reports), bank letters of credit, security deposits, pre-payment of last month’s rent, guarantees and indemnities

Financing And SecurityFinancing And Security

Security deposit should be available to the Landlord to Security deposit should be available to the Landlord to compensate it for damages incurred as well as unfulfilled compensate it for damages incurred as well as unfulfilled obligations (i.e. Tenant refuses to complete repairs to the obligations (i.e. Tenant refuses to complete repairs to the premises which Landlord ends up doing)premises which Landlord ends up doing)

Landlord should be entitled to retain the security deposit Landlord should be entitled to retain the security deposit until it can confirm that the Tenant surrendered the until it can confirm that the Tenant surrendered the premises in an appropriate state as per the Lease premises in an appropriate state as per the Lease AgreementAgreement

Landlord ConsiderationsLandlord Considerations

Resist payment of a security deposit/last month’s rent Resist payment of a security deposit/last month’s rent

where possiblewhere possible (rare occurrence) unless you have an (rare occurrence) unless you have an ongoing relationship with Landlord and that you are ongoing relationship with Landlord and that you are financially soundfinancially sound

Notice should be given to the Tenant prior to the Notice should be given to the Tenant prior to the Landlord using the security deposit fundsLandlord using the security deposit funds

Demand that the Landlord pay interest at a stipulated Demand that the Landlord pay interest at a stipulated rate each year on all security deposit funds and last rate each year on all security deposit funds and last month’s rentmonth’s rent

Tenant ConsiderationsTenant Considerations

Landlord may ask for a guarantor (“Caution’) to Landlord may ask for a guarantor (“Caution’) to guarantee and compensate the Landlord for guarantee and compensate the Landlord for unfulfilled obligations in the event that the tenant unfulfilled obligations in the event that the tenant is in defaultis in default

GuaranteesGuarantees

Difficult and onerous to enforce. The Landlord will likely Difficult and onerous to enforce. The Landlord will likely have to commence litigation to get the guarantor to have to commence litigation to get the guarantor to performperform

Landlord must exhaust remedies with tenant prior to Landlord must exhaust remedies with tenant prior to making any demand on the guarantor (Secondary making any demand on the guarantor (Secondary obligation)obligation)

Preference is to obtain an indemnity, as opposed to a Preference is to obtain an indemnity, as opposed to a guaranteeguarantee


While the Tenant may be agreeable to providing a While the Tenant may be agreeable to providing a guarantee, it will need a party willing to act as a guarantee, it will need a party willing to act as a guarantorguarantor

Insist on a limited time frame or limited financial liability Insist on a limited time frame or limited financial liability for the guarantee for the guarantee

(i.e The guarantee is only effective for the first two (2) years of (i.e The guarantee is only effective for the first two (2) years of the lease term if the Tenant is not in default or the guarantee the lease term if the Tenant is not in default or the guarantee being limited to $50,000)being limited to $50,000)


Alternative to a guarantee:Alternative to a guarantee: A landlord prefers an A landlord prefers an indemnity agreement over a guarantee provided by the indemnity agreement over a guarantee provided by the TenantTenant

Broader form of securityBroader form of security

Drafted as a separate agreementDrafted as a separate agreement

Indemnitor assumes the liabilities of the Tenant and Indemnitor assumes the liabilities of the Tenant and agrees to compensate the Landlord for all liability it agrees to compensate the Landlord for all liability it incurs.incurs.

Unlike a guarantee, the liability of the indemnifier is not Unlike a guarantee, the liability of the indemnifier is not contingent upon a Tenant’s failure to perform or default contingent upon a Tenant’s failure to perform or default under the Leaseunder the Lease

Indemnity AgreementIndemnity Agreement

Right of LandlordRight of Landlord Financial stability of Financial stability of

Tenant sufficient to pay Tenant sufficient to pay rent and other leasehold rent and other leasehold improvementsimprovements

Conduct and character Conduct and character compatible with the compatible with the present and prospective present and prospective tenants of other space in tenants of other space in the buildingthe building

Costs involved in Costs involved in administrating the administrating the premises and the leasespremises and the leases

Right of TenantRight of Tenant Right to downsize, Right to downsize,

restructure, or refinance restructure, or refinance the businessthe business

Restricts the Tenant from Restricts the Tenant from selling the business/ selling the business/ change of control and/or change of control and/or any other transfers any other transfers thereby restricting the thereby restricting the Tenant’s ability to operate Tenant’s ability to operate the business effectively the business effectively and successfullyand successfully

Assignment And SublettingAssignment And Subletting


Should be broadly drafted to include all types of transfers Should be broadly drafted to include all types of transfers

Landlord should reserve the right to terminate the lease in Landlord should reserve the right to terminate the lease in lieu of consenting to a proposed transfer/ assignment/ lieu of consenting to a proposed transfer/ assignment/ subletting of the Leasesubletting of the Lease

Reserve the right to increase the rent upon any Transfer/ Reserve the right to increase the rent upon any Transfer/ assignment/ sublettingassignment/ subletting

Transferor/ Assignor is not released from its obligations Transferor/ Assignor is not released from its obligations under the Leaseunder the Lease

Tenant remains primarily liable after any exercise of a Tenant remains primarily liable after any exercise of a renewal by the transfereerenewal by the transferee



Where the Landlord’s consent to the assignment is required, it must do so Where the Landlord’s consent to the assignment is required, it must do so acting reasonably. Any reference to the Landlord being able to acting reasonably. Any reference to the Landlord being able to unreasonably withhold consent should be deleted.unreasonably withhold consent should be deleted.

Certain permitted assignments without the consent of the Landlord include:Certain permitted assignments without the consent of the Landlord include:

1.1. Change of control of tenants who are public corporations;Change of control of tenants who are public corporations;

2.2. Transfers to franchisees;Transfers to franchisees;

3.3. Transfers to affiliates or subsidiaries, family members or to a Transfers to affiliates or subsidiaries, family members or to a purchaser purchaser of a company;of a company;

4.4. Change of control for the purposes of amalgamation or reorganization Change of control for the purposes of amalgamation or reorganization of the of the company;company;

5.5. Finance purposes;Finance purposes;



Avoid Landlord termination rightsAvoid Landlord termination rights

Lease should contain a right to share space with a Lease should contain a right to share space with a licensee, concessionaire or other third party where it will licensee, concessionaire or other third party where it will take up a certain percentage of the floor area (i.e less take up a certain percentage of the floor area (i.e less than 20%)than 20%)

Try to obtain a release from the Landlord in cases of Try to obtain a release from the Landlord in cases of assignmentsassignments

Try to retain a profit in cases of a subleaseTry to retain a profit in cases of a sublease


Monetary DefaultsMonetary Defaults

Non-Payment of rent:Non-Payment of rent: Notice will be given to tenant Notice will be given to tenant before the Landlord exercises its rights and remedies before the Landlord exercises its rights and remedies under the lawunder the law

Action for Rent:Action for Rent: Landlord may claim for damages for Landlord may claim for damages for future losses without terminating the leasefuture losses without terminating the lease

Terminating the lease: Terminating the lease: If the cost-benefit is no longer If the cost-benefit is no longer worthwhile to have a defunct tenant, the Landlord may worthwhile to have a defunct tenant, the Landlord may terminate the leaseterminate the lease

DefaultsDefaults

Non-Monetary DefaultsNon-Monetary Defaults

If a tenant is in default to perform an obligation, then the If a tenant is in default to perform an obligation, then the Landlord would prefer the tenant to comply with its Landlord would prefer the tenant to comply with its obligations pursuant to the Lease.obligations pursuant to the Lease.

In the event of a default, the Landlord may attempt to ask In the event of a default, the Landlord may attempt to ask for specific performance from the courtsfor specific performance from the courts

DefaultsDefaults

3 ways3 ways

1.1. Physically re-take possession of the premises by obtaining Physically re-take possession of the premises by obtaining possession of the premises and ensure that the tenant is possession of the premises and ensure that the tenant is deprived of its use (i.e change locks)deprived of its use (i.e change locks)

2.2. Commence a court action for possession of the premisesCommence a court action for possession of the premises

3.3. Enter into a written termination agreement where the parties Enter into a written termination agreement where the parties agree that the tenancy has been terminatedagree that the tenancy has been terminated

NOTENOTE: A Landlord should not accept rental arrears after termination of: A Landlord should not accept rental arrears after termination of the leasethe lease

Termination Of LeaseTermination Of Lease

Highway Properties Case: Highway Properties Case:

The Court held that the lease could be terminated and theThe Court held that the lease could be terminated and the

Landlord may still recover damages for losing the benefit ofLandlord may still recover damages for losing the benefit of

the Lease over its unexpired term and that the Landlordthe Lease over its unexpired term and that the Landlord

could claim for damages for loss of future rent for thecould claim for damages for loss of future rent for the

unexpired term of the Lease (less the actual rental value ofunexpired term of the Lease (less the actual rental value of

the premises over the term).the premises over the term).

Case Law: TerminationCase Law: Termination

If reluctant to sign a long-term lease and you are unsure If reluctant to sign a long-term lease and you are unsure whether your business will be successful or you might whether your business will be successful or you might not need so much space.not need so much space.

Landlord may impose a right to terminate if the tenant Landlord may impose a right to terminate if the tenant does not reach certain level of gross salesdoes not reach certain level of gross sales

Tenant has a right to terminate if a particular store Tenant has a right to terminate if a particular store ceases to carry on their business in a shopping centreceases to carry on their business in a shopping centre

Early Termination ClauseEarly Termination Clause

Goal:Goal: Eliminate or reduce the competition in a Eliminate or reduce the competition in a retail space within that market arearetail space within that market area

Exclusive rights to apply also to any successor Exclusive rights to apply also to any successor or assignee in order to increase the value of the or assignee in order to increase the value of the lease if the tenant later seeks to sell its businesslease if the tenant later seeks to sell its business

Exclusive Rights ClauseExclusive Rights Clause

Failure to implement certain clauses or protect Failure to implement certain clauses or protect your rights and obligations could be costly in the your rights and obligations could be costly in the future.future.

Lawyers need to be aware of the implications of Lawyers need to be aware of the implications of the lease provisions and the proposed structure the lease provisions and the proposed structure of the transactionof the transaction

Conclusion Of Certain ClausesConclusion Of Certain Clauses

Negotiating Tactics and Negotiating Tactics and StrategiesStrategies

1.1. Understanding the needs of the partiesUnderstanding the needs of the parties

Identify your needs Identify your needs What is the minimum acceptable terms?What is the minimum acceptable terms? What is the price spread?What is the price spread? What is the opposing parties needs? What is the opposing parties needs? Are there any compromises to be made?Are there any compromises to be made?

Negotiating Tactics And StrategiesNegotiating Tactics And Strategies

What is the time frame?What is the time frame?

Is the time frame realistic to close the deal?Is the time frame realistic to close the deal?

Setting The Agenda And TimetableSetting The Agenda And Timetable

Your office or theirs??Your office or theirs?? shows a sign of strengthshows a sign of strength

Sometimes advantageous to concede and go to their officesSometimes advantageous to concede and go to their offices

Telephone conference callsTelephone conference calls organize a time for the call organize a time for the call Be in command of the subject matterBe in command of the subject matter

Face to Face meetingsFace to Face meetings Learn from the other’s facial expressions and body languageLearn from the other’s facial expressions and body language rarely do people get up and walk away from face to facerarely do people get up and walk away from face to face

Where to NegotiateWhere to Negotiate

Before Introducing the proposalBefore Introducing the proposal

Present all the reasons that brought you to the proposalPresent all the reasons that brought you to the proposal

Invite the other side to correct you: This will establish a Invite the other side to correct you: This will establish a dialoguedialogue

Establish the facts beforehandEstablish the facts beforehand


Be UnequivocalBe Unequivocal

Be direct and unequivocal in what youBe direct and unequivocal in what you

want even if it is controversialwant even if it is controversial

Be honestBe honest


Responding to Counter-ProposalsResponding to Counter-Proposals

If the other party offers a reasonable compromise, you If the other party offers a reasonable compromise, you should promptly accept itshould promptly accept it

If the other side makes an unsupportable proposal, resist If the other side makes an unsupportable proposal, resist the temptation to criticize and reject it- try instead to re-the temptation to criticize and reject it- try instead to re-work and re-focus on the proposalwork and re-focus on the proposal

SilenceSilence is golden is golden


Avoid making statementsAvoid making statements

Ask questions instead of making statementsAsk questions instead of making statements

Questions allow the other side to respond with Questions allow the other side to respond with informationinformation

Listen carefully to the information and evaluate the Listen carefully to the information and evaluate the informationinformation


Avoid flat out rejectionsAvoid flat out rejections

Never state an ultimatum unless you truly mean itNever state an ultimatum unless you truly mean it

Never resort to threats; Warnings are far more Never resort to threats; Warnings are far more legitimatelegitimate


2.2. Confronting negative tacticsConfronting negative tactics

A.A. Prior Offer TacticPrior Offer Tactic““We already have a better offer”.We already have a better offer”.

If you cannot match it, simply say: “That is a great offer, if If you cannot match it, simply say: “That is a great offer, if I were you I would take it.” There is no sense now in I were you I would take it.” There is no sense now in continuing to negotiate.continuing to negotiate.

If they continue to negotiate with you, you instantly know If they continue to negotiate with you, you instantly know that there is no better offer.that there is no better offer.


B.B. When the other side will not negotiate When the other side will not negotiate

““Either take it or leave it”Either take it or leave it”

Talk about the reasons for their refusal to negotiate and ask Talk about the reasons for their refusal to negotiate and ask what facts have been relied upon.what facts have been relied upon.

If the facts are incorrect, suggest that there is a need to If the facts are incorrect, suggest that there is a need to determine whose facts are correctdetermine whose facts are correct


C.C. Confronting Confrontations Confronting Confrontations

Confrontation is a ploy to seek control of the meeting.Confrontation is a ploy to seek control of the meeting.

You should view this as a negotiation tactic on the other side’s You should view this as a negotiation tactic on the other side’s part to make you look for a compromise or find a solutionpart to make you look for a compromise or find a solution


D.D. Confronting Rudeness Confronting Rudeness

““raises his voice, rude, you receive a threat…etc.”raises his voice, rude, you receive a threat…etc.”

Tell the person that you are prepared to resume discussions Tell the person that you are prepared to resume discussions when he/she returns to civilitywhen he/she returns to civility

Tell the person that “I do not respond well to threats- I negotiate Tell the person that “I do not respond well to threats- I negotiate based on merits.”based on merits.”

Last resort: walk outLast resort: walk out


E.E. Do not Bid Against Yourself Do not Bid Against Yourself““You have to do better than that”You have to do better than that”

require a counter-proposal and until one is presented require a counter-proposal and until one is presented stand firm on your original proposalstand firm on your original proposal


F.F. Don’t respond to extreme positionsDon’t respond to extreme positions

Negotiators often start with extreme positions in order Negotiators often start with extreme positions in order to lower your expectations. The theory is that the to lower your expectations. The theory is that the parties will end up splitting the difference.parties will end up splitting the difference.

Ask for reasoning and merits of the other side’s Ask for reasoning and merits of the other side’s positionposition


G.G. Negotiate only with your counterparty Negotiate only with your counterparty

Ensure that the person to whom you are negotiating has the full Ensure that the person to whom you are negotiating has the full authority to compromiseauthority to compromise

If there is any doubt, no commitment should be madeIf there is any doubt, no commitment should be made

Adjourn the meeting until the other side can produce someone Adjourn the meeting until the other side can produce someone who is able to make a binding decisionwho is able to make a binding decision


Always end off on a cordial note whetherAlways end off on a cordial note whether

the negotiations fail or not.the negotiations fail or not.


ANY QUESTIONS???ANY QUESTIONS???

SCHNEIDER AVOCAT INC.SCHNEIDER AVOCAT INC.Sylvan Schneider, LL.B.Sylvan Schneider, LL.B.

1980 Sherbrooke West Suite 2101980 Sherbrooke West Suite 210

Montreal, Quebec, H3H 1E8Montreal, Quebec, H3H 1E8

Email: Email: [email protected]

Tel:Tel: (514) 439-1322 Ext. 112(514) 439-1322 Ext. 112

Fax:Fax: (514) 564-3380(514) 564-3380

Thank-youThank-you

Documents

Commercial Leasing: A-Z DO’s & DON’Ts, CLAUSES TO LOOK FOR AND NEGOTIATING TACTICS AND STRATEGIES By: Sylvan Schneider LL.B. SCHNEIDER AVOCAT INC