Law Times

Law Times • June 15, 2009 FOCUS Economy switches balance of power BY DARYL-LYNN CARLSON For Law Times become perhaps even more complicated as the current economy shifts the balance of power a bit more towards tenants' favour. Accordingly, the Ontario Bar Associa- P tion's real property section recently hosted a three-part series, entitled Commercial Leasing in Tumultuous Times, to bring lawyers up to speed on developments. "Real estate practitioners who find they have less transactional work are revisiting their commercial leasing port- folios," says Lisa Borsook, managing partner at WeirFoulds LLP who was the keynote speaker at the three sessions. Many tenants are seeing opportunities to renegotiate the terms of their lease as landlords seek to secure reliable tenants. It goes without saying that "lawyers have to be careful to protect their clients' interests during the course of negotiation in these challenging times," she says. Besides failed businesses relinquishing their space across the province, there are three new office towers under construction in downtown Toronto. While Borsook notes that Canada's economy has not seen the number of bankruptcies that the Unit- ed States has, commercial tenants are more empowered in negotiating their leases than they have been for more than a decade. "The balance of power is one of the most important things for lawyers to un- derstand," says Borsook. "Given that the economy has been good for at least the last 10 years, it's been a continual process of consolidation of landlords and refining of reparing commercial lease contracts — already onerously voluminous in their content and coverage — have their leases that has given them an extraordinary balance of power. But that may be shifting." Bargaining power is essential to recognize, but Borsook also em- phasizes the need to be vigilant about covenants and timing. "Timing in this economy is more important than ever. If you can't get your deal done on a timely basis, the deal might walk away. Some people call it deal fatigue." Lawyers representing a client tenant should know in advance the full gamut of details to include in the contract, which could range from broader assign- ment rights and lender protections to covenants that don't restrict the business activity so it can expand services without violating covenants designed to protect neighboring business interests. Borsook cites the trend by pharma- cies to add groceries to their inventory as an example of restrictive covenants — which in some cases could violate a covenant within the lease designed to protect a neighbouring grocery store leasing from the same landlord. "A lot of people are scrutinizing 'Real estate practitioners who find they have less transac- tional work are revisiting their commercial leasing portfolios,' says Lisa Borsook. to request an exit strategy, she says. For instance, some retailers are suc- cessfully requesting the lease obligations be con- ditional only so long as a major anchor store (such as Wal-Mart) — leased from the same landlord — remains at the centre. Some are even obtain- ing rights to purchase the site in circumstances in which the landlord is considering selling. Landlords are be- coming more accom- modating in order to ensure their properties are occupied and pull- ing in revenue. "All of these are spe- cial rights that up to now, landlords were, by and large, just saying 'no' to," says Bor- sook. "Now they may be revisiting their entrenched position and maybe think- ing they need to be more flexible." For landlords, lawyers can in turn negotiate conditions on any concessions they've agreed to for tenants. "That's not uncommon. It's a way to make the rights personal. So once your client has made concessions, then you have to think about the best way to document them." During the sessions that were host- more closely the type of restrictions that they either might exact or be sub- ject to with respect to the business they can carry on," she says. Those same client tenants might want ed over April and May, Borsook also addressed the differences between leas- ing a property owned by a real estate investment trust and a pension fund, which can also determine the terms INSIGHT FOR EFFECTIVE REAL ESTATE TRANSACTIONS NEW EDITION THE 2009 ANNOTATED ONTARIO LANDLORD AND TENANT STATUTES MAVIS J. BUTKUS The latest edition of this annual reference work gives you easy access to reliable and comprehensive guidance on all legislation and case law pertaining to the landlord- tenant relationship. This edition is updated with latest developments in the legislation and case law, including the changes that were introduced by the passage of the Residential Tenancies Act, 2006. 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"A REIT is about generating income for its unit holders so that's going to be an im- portant consideration," she says. "Whereas landlords of a different institutional nature, such as pension funds, have historically been interested in capital gain appreciation in the value of the property. They may be looking at the quality of the covenant and may be less concerned about a dollar here or there on the face of the rent." She also addressed how tenants al- ready locked into lease obligations must revisit those obligations in circumstanc- es of a landlord's default, as well as the rights of both landlord and tenant in a situation of insolvency or bankruptcy. Rod Davidge, a partner of the business law and commercial property groups at Osler Hoskin & Harcourt LLP who also spoke at the session, says while the bal- ance of power has shifted, lawyers rep- resenting landlords need to ensure any concessions their clients provide are fair. "Remember when acting for the landlord you have to be careful if you're giving up a right, you have to draft that in a way that it protects your client's interest," says Davidge. He says it's helpful for lawyers to understand the client's property and ways that the economy has impacted the area, such as a retail mall where an anchor tenant has perhaps left. These are details that are arising as a result of the economic climate that lawyers haven't necessarily had to ad- dress in the past. "I think the problem being because we haven't focused on these aspects as much, you might want to think it through more carefully." LT PAGE 11 AVAILABLE RISK-FREE FOR 30 DAYS: Order Online at www.carswell.com Call Toll Free: 1-800-387-5164 (In Toronto: 416-609-3800) Prices will be converted to Canadian currency at time of invoicing. Shipping and handling are extra. Prices subject to change without notice due to currency fl uctuations and subject to applicable taxes. www.lawtimesnews.com Untitled-1 1 6/8/09 11:09:11 AM 12931-11071-10560 MM1 05/09

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