Law Times

www.lawtimesnews.com Page 12 January 21, 2008 / Law Times Hidden dangers in commercial leases Drafting and protecting renewal rights an 'art form' " P eople can take lease- renewal rights for grant- ed," says Bill Rowlands, chair of Lang Michener LLP's To- ronto real estate group. "Tenants especially don't give much thought to all the things that can affect those rights during the course of a 10-year lease." A simple example is a clause that grants the renewal right to "ABC Parent." During the course of the lease, ABC Parent may grow and reorganize, so it's prefer- able to take the lease in the name of "ABC Subsidiary." "Landlords think of renewal rights as very personal in nature," Rowland says. "That's not some- thing that can't be overcome by ne- gotiation but it only takes one case where the landlord is looking for a way out of the renewal to make the point. Drafting and protecting renewal rights is an art form, and lawyers should pay particular care to the wording that they choose." A good time for tenants to re- visit old renewal clauses is during negotiations for additional space. "That's usually a time where you end up renegotiating some- thing anyway," Rowlands says. Because renewal provisions are becoming more lengthy and com- plex, awareness is growing dur- ing initial lease negotiations, and battle lines dependent on market conditions are being drawn. "Extensions and renewals, generally speaking, are a bonus to tenants and a bane to landlords," says Deborah Watkins of Daoust Vukovich LLP, a Toronto leasing boutique. "Landlords typically re- sist granting such rights since they lose a certain degree of control by agreeing to terms that take effect several years later. "Tenants who have renewal rights, on the other hand, can maintain a great degree of flex- ibility." That's because renewal rights give tenants the ability to evalu- ate the pros and cons of a renewal having regard to the value of the location, the market for alternative premises, and the tenant's invest- ment in leasehold improvements. Watkins cautions that there is a legal distinction between extend- ing the term of a lease and renew- ing a lease. "In the case of an extension, the original lease remains in ef- fect and its terms and conditions are extended to operate during the option period," she says. "By contrast, if the tenant exercises a renewal right, the original lease terminates upon the expiry of the original term, and the tenant's obligations that fall into place at the end of the term — such as the requirement to remove fixtures and improvements and vacate the premises — crystallize." As a practical matter, of course, landlords will not insist on com- pliance with these obligations if the tenant renews the lease. Otherwise, rights under the lease that are considered personal to the tenant, like a right of refusal to lease space or an option to pur- chase, will continue if the term is extended. But they might cease to apply and might not be available to the tenant during the renewal term, unless the option to renew expressly states otherwise. The difference between renew- als and extensions is also impor- tant in assessing the continuing liability of assignors and sureties. Quite apart from the terms of a renewal, tenants must also be care- ful to meet the lease prerequisites for exercising that right. In almost all cases, the tenant will need to give a formal notice of renewal to the landlord. The manner of giving notice is likely prescribed in the lease, and if it's mandatory, the tenant must follow it strictly. If the notice language in the lease is permissible rather than mandatory, the tenant can use oth- er methods, so long as they are not less advantageous to the landlord, and so long as the notice is actually communicated by the landlord. "Since the onus would be on the tenant to show the propriety of the alternate method, it's usu- ally much safer to follow the par- ticular method described in the lease," Rowlands says. Tenants should also adhere strictly to time periods by which notice must be given. Landlords may require other prerequisites as well, including terms dealing with default. "There's a wide variety of lan- guage used for this purpose," Rowlands says. Landlords may also insist that the person or entity exercising the renewal right must be the original tenant. Related to this require- ment is the prerequisite that the tenant must be in possession or occupation of the premises. "The possession and occu- pancy requirement means that subleasing to a third party could result in a loss of renewal rights," Rowlands says. "But the courts have defined occupancy to mean either physical occupancy or legal occupancy." From time to time, tenants who fail to comply with prereq- uisites may ask courts to exercise their discretion to grant relief from forfeiture. "But because renewal rights benefit one party only, courts gen- erally require strict compliance and will rarely grant relief to the tenant, who will then lose the re- newal right," Rowlands says. Courts are sympathetic to granting relief in some cases. For example, where a tenant brings a lease into god standing shortly after a landlord terminate for non- payment of rent. But they have made a clear distinction between their power to grant relief from forfeiture for non-observance of terms and con- ditions, and the failure to comply with conditions-precedent to the exercise of a right. In boom markets, landlords may also try to impose sales-per- formance clauses as prerequisites for renewal. "Tenants should strenuously resist such clauses," Watkins says. From the landlord's perspec- tive, it's useful to insert clauses that avoid any argument that the landlord is granting a perpetual renewal right. If there is a further renewal right, its language should specifically state its duration. "Courts will try to find against a perpetually renewing option, but will hold that one exists if the clause is properly drafted," Watkins says. FOCUS 11218-08697 MM4 01/08 Williams and Rodes' Canadian Law of Landlord and Tenant, 6th Edition Christopher A.W. Bentley, John McNair, Mavis J. Butkus This publication provides an in-depth examination of both commercial and residential tenancies law in every province of Canada. It provides a consolidation of the statutory and regulatory developments of the past decade, including rent control. 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O n l i n e a t w w w. c a r sw e l l . c o m C a l l To l l - F r e e : 1- 80 0 - 3 8 7 - 5 16 4 I n To r o n t o : 4 1 6 - 6 0 9 - 3 8 0 0 Four Essential Real Estate Law References Available from Thomson Carswell A U T H O R I TAT I V E . IN N O VAT I V E . TR U S T E D . LT The possession and occupancy requirement means that subleasing to a third party could result in a loss of renewal rights. But the courts have defined occupancy to mean either physical occupancy or legal occupancy. BY JULIUS MELNITZER For Law Times *Pages 1-16.indd 12 1/17/08 7:18:47 PM

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