Law Times

PAGE 10 FOCUS November 2, 2009 • Law Times Commercial property market a tale of two regions BY DARYL-LYNN CARLSON For Law Times T he lingering economic down- turn has impacted commercial real estate properties through- out Ontario quite differently. In major centres in the southern part of the province, for example, a signifi- cant number of retail and industrial clo- sures have led to insolvencies. But aside from passing on files to bankruptcy practitioners to as- sist property owners with liquidating assets, many real estate lawyers have been infusing some creativity into their work in order to facilitate options for commercial clients challenged with balanc- ing their books. For example, Joanna Board of Daoust Vuk- ovich LLP in Toronto is a litigator whose practice caters to com- mercial property own- ers and landlords. She says the majority of her work during the past year has focused on as- sisting landlords with managing lease agree- ments with tenants whose businesses have been faltering. "Generally, I've been dealing with lease interpretation issues," says Board, who main- ly represents landlords within the Greater Toronto Area. She says many clients have come to her after receiving a request from a ten- ant in a shopping mall or a manufactur- ing site asking for a rent reduction, a re- vision in the terms of the lease or some other type of concession to lower costs. But unlike during a more buoyant alternative she has resorted to more fre- quently over recent months is advising the landlord to issue a control letter. It terminates the lease agreement for less than the mandated penalty while en- abling the tenant to continue operations on a month-to-month basis. "Landlords are in the business of run- ning a business, not a charity, but some- times they'll realize that a business is struggling," she says. "A control letter will terminate the lease and reinstate the ten- ant on a short-term arrangement while the landlord markets the space. Then the agreement can be terminated on 30 days notice." Alternatively, the tenant can stay on if business picks up. In more drastic sce- narios, landlords have taken measures to seize a tenant's goods and call in a bailiff to dispose of the assets through an auction to recoup the money owed. "If a landlord decides to restrain before a se- cured creditor decides to exercise their rights, the landlord has first rights" to the funds recovered, Board explains. "In this economy, 'We relied on natural resources historically, but I would attri- bute the rebound to diversifica- tion,' says Thunder Bay's Nick Melchiorre. when everybody's look- ing to get their money, you want to be first in line. So if you can get ahead of the banks, it's something you have to take into consideration." economy, landlords are reluctant to sim- ply evict or sue tenants who fall delin- quent on their rent or expenses. "The tenant says they're struggling and they want out, but the landlord doesn't want to let go" without filling the space with someone else, says Board. To assist, she tries to find a resolution so that landlords can give tenants a break without losing their shirts. "There are some things I found this year that were different than other reces- sions. We found that tenants are scrutiniz- ing their additional rent charges a lot more carefully like the costs they pay for utilities, administrative costs in a shopping centre, parking, snow removal, maintenance fees. "We also found that this year more of the tenants were withholding rent on the basis [that] they were being overcharged or disputing how taxes are allocated to the various tenants in a shopping centre." Board first tries to help the landlord understand any options available under the terms of the lease. She then arranges for the parties to talk. "If it was just a dis- pute over the costs, it would be more of a discussion," she says. If an agreement doesn't come about through discussions, she will leverage me- diation or arbitration to reach a deal be- tween the two parties. In some cases, "it's been very effective," she notes. "In terms of landlord remedies, if there's been a rental default, then a land- lord can terminate the lease. But in a downed economy, the question is, are you going to have a replacement tenant?" So in the case of a blatant default, one Untitled-1 1 10/20/09 9:05:53 AM www.lawtimesnews.com In a worse-case scenario, the landlord will litigate, although Board acknowl- edges property owners are being "much more scrutinizing of tenants" by research- ing their net worth to ensure it would be worth it to take a matter to court. Most of her clients over the past several months have had tenants in the manu- facturing and retail sectors. The types of resolutions have differed markedly from previous recessions, she notes. "I think this time things may have been more uncertain in terms of nobody really [seeming] to know how bad it was going to be. There was that eerie silence at the beginning of the year" before cli- ents started to call. Yet in the northern Ontario city of Thunder Bay, the commercial property market has been fuelled with a sense of resilience. "We've kind of been in a recession since probably the early 2000s," observes Nick Melchiorre, a partner at the Thun- der Bay law firm of Weiler Maloney Nel- son. But rather than dropping further into an abyss due the global recession, the city has been gaining momentum. "From a lawyer's point of view, there's a lot of activity in retail commercial devel- opment from big-box stores to hair salons starting up," says Melchiorre. He says there's also been a surge during most of 2009 in multi-residential build- ing projects. The city has also been a ben- eficiary of the federal government's infu- sion of money for infrastructure projects. As well, the province opened a research hospital in the city several years ago that draws leading professionals. All of those developments have served to bolster retail. "The retail sec- tor here is healthy," Melchiorre says. "It's a different economy than it was 10 years ago. We relied on natural resourc- es historically, but I would attribute the rebound to diversification." LT

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