Relocation

Often in shopping centres, the landlord will reserve the right to relocate the tenant during the term of the lease. If a relocation clause without any restrictions or conditions is exercised by the landlord, the franchisee would be obligated to move its premises within the shopping centre to a potentially worse location, at its own expense.

The franchisor should attempt to remove this clause. In large shopping centres, the landlord will most likely refuse to delete the relocation clause, but will often agree to add restrictions and/or conditions.

The franchisor should negotiate revisions that would only permit the landlord to exercise the relocation clause in the event that it plans on a reconfiguration or expansion of the shopping centre. It should not be permitted to relocate the franchisee if it wishes to provide the leased premises to another tenant.

The relocation clause should stipulate that the relocated premises will be a similar size and configuration as the current premises and be in a comparable location. For example, if the leased premises are in a food court of a shopping centre, the clause should dictate that the relocation must be within the food court. Without this clause, the franchisee could be forced to accept premises that are unfit for its business. In addition, the franchisee’s rent will likely increase if the relocated premises are larger than the original location. The franchisor may also be able to negotiate a revision to this clause that would permit it to terminate the lease should the relocated premises being offered to the franchisee be not to its satisfaction.

The franchisor should also negotiate compensation to the franchisee for relocating the premises. As a first step, the franchisor should require that the landlord pay for the franchisee’s costs to move its premises and the cost of new fixtures required to replace any fixtures that cannot be relocated. At a minimum, the landlord should be paying for the amortized value of the fixtures that cannot be relocated.

Demolition

The landlord will often have a clause that would permit it to terminate the lease in the event that it wishes to demolish the building. In this event, the franchisee would be forced to relinquish its leased premises.

The franchisor should attempt to remove this clause from the lease agreement. However, depending on its bargaining power, the landlord may insist that this clause remain in the lease. At a minimum, the franchisor should obtain a condition that would require the landlord to provide a year’s notice prior to terminating the lease and provide evidence that it has taken steps towards demolishing the building.

The franchisor may also attempt to negotiate compensation to the franchisee for the amortized value of the fixtures that cannot be removed from the premises.

Sale

The Landlord may have a sale clause in its standard form lease agreement, which would either entitle it to terminate the lease agreement upon entering into a sale agreement for the property, or would entitle the purchaser to terminate the lease agreement. Same as in the demolition clause, the franchisee would be forced to relinquish its leased premises.

The franchisor should demand that this clause be deleted from the lease agreement. It is more likely that a landlord would sell the property rather than demolish the property, and it creates too much uncertainty for the franchisee’s prospects in the location.

Renewal

It is in franchisor’s interest to obtain options to renew, whenever possible. It provides more certainty to the franchisor that it can have control over the leased premises for a period that is longer than the original franchise / lease term. Although the franchisee, when entering into a franchise agreement, is not likely to receive options to renew its franchise, it may still view options to renew the lease as a favourable term. In their mind, it increases the likelihood that its franchise agreement would get renewed at the end of the original term.

The thing to be careful with renewal clauses is that the landlord will likely stipulate that the tenant cannot be in default of the lease or previously in default of the lease. Considering the fact that the franchisor is not involved in the day to day operations at the premises and is relying on the franchisee to perform the tenant’s obligations, the franchisor should attempt to soften the condition. The tenant should have the option to renew if it has previously been in default, provided that the said defaults have been rectified. It may be reasonable for the landlord to require that the tenant cannot have been in default more than a couple of times during the term.

The franchisor should either negotiate the amount of rent that will be payable during the option(s) to renew or stipulate that the rental rate will be at the fair market rental rate and that the franchisor is permitted to take the landlord to arbitration in the event that the sides cannot agree on the fair market rental rate during the renewal term. Without an agreed upon rental rate or a method of determining the rental rate, the options to renew would be subject to the landlord agreeing to offer a fair rate.

Lastly, the franchisor should be mindful of when it must provide notice to the landlord of its intent to exercise an option to renew. If the franchisor intends to renew its franchise agreement with the franchisee, it should be in contact with the franchisee prior to the expiry of the lease’s notice period.

Disclosure

In addition to negotiating these clauses in the lease, the franchisor should highlight them in the disclosure document that it sends to the franchisee. In many cases, these clauses could result in either the franchise agreement being terminated before the end of the term or an increase in costs borne by the franchisee. As a result, they should be properly disclosed and considered by the franchisee before deciding on whether to make a significant investment in acquiring and establishing the business.

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You should review your commercial lease agreement. The act of failing to pay rent or abandoning the premises are both considered events of default, and its consequences will be covered in the lease, including any notice periods that the tenant has to remedy the default.

Generally speaking, the landlord will have three options upon the event of a default:

1. Re-entry and re-letting the premises

The first option would be to re-enter the premises for the purposes of re-letting the premises to a third party. Under this option, the lease agreement has not been terminated, and the obligations of the tenant under the lease will remain. However, the tenant will only be responsible to cover the difference in rent, if any, between the amount that the tenant owes the landlord and the rent amount that the new tenant is paying the landlord.

If the tenant refuses to pay the difference in rent, the landlord can sue to recover the difference. The problem with this option is that if the landlord intends to sue the tenant for failing to pay the difference in rent, it would need to be made within two years of the breach in the lease and it could take several years for the process to go through the Ontario court system. It may also prove difficult to recover payment from the tenant after it has vacated the premises and especially if it has no assets to recover.

2. Terminate the lease agreement

The second option would be to terminate the lease. Under this option, the landlord can demand that the tenant vacate the premises, if it has not already done so, and notify the tenant that it intends to sue for rent for the unexpired term of the lease.

The benefit to this option is that the landlord has immediate control of the premises and it can seek to obtain a new tenancy. Damage to the premises can arise when it is vacant due to neglected maintenance, improper heating/cooling …etc. and there may not be insurance coverage in place to cover these damages.

The drawback to this option is that the landlord cannot distrain (take) upon the assets of the tenant in order to satisfy the tenant’s debt to the landlord. The landlord is required to provide the tenant with an opportunity to remove its assets from the premises.

In addition, the landlord has the duty to mitigate its damages. The landlord’s right to sue for the remaining rent obligation is mitigated by the landlord’s responsibility to find a new tenant for the premises to recover the loss in rental income. However, the landlord can still sue the tenant for any months that the premises remain vacant and the landlord has taken reasonable steps to secure a new tenant. In other words, the tenant will be liable for rent for the months that it takes the landlord to advertise the vacant premises, find a new tenant, and offer the Tenant any rent-free periods to install new fixtures, equipment, improvements…etc. In addition, the tenant will remain liable for any reduction in rent that the landlord obtains from the new tenant and any costs it incurs to relet the premises (i.e. brokerage and solicitor costs).

3. Demand the payment of rent and sue for damages

The third option would be to demand the immediate payment of the rent outstanding. The lease may have a clause that will permit the landlord to demand an additional amount equal to a few additional months’ rent. If the tenant ignores this demand, the landlord can sue the tenant for the payment of rent. If the tenant has abandoned the premises, the landlord could also sue for damages resulting from the vacant premises.

In the alternative, if the tenant has not vacated the premises, the landlord can distrain upon the tenant’s assets that are located at the premises in order to satisfy its debt. This is not an option if the landlord elects to terminate the lease.

Under this option, the landlord is not under any obligation to terminate the lease, unless stated otherwise in the lease agreement. It could choose to keep the lease agreement in place, and sue the tenant for rent and damages, or distrain upon its assets.

Similar to option one, this option is costly for the landlord as it would require it to file a claim against the tenant within two years of the breach in the lease with no guarantee that the landlord will be able recover its losses upon being awarded damages by the court.

However, the benefit of this option is that the landlord is not under an obligation to mitigate its damages unlike the previous option. If the tenant has assets that the landlord can successfully go after in court, this option could prove costly for the tenant.

If the tenant is a corporation, its directors can be held personally liable if the tenant corporation removes the assets from the premises for the purpose of frustrating the landlord’s attempt to distrain upon the assets.

Conclusion

Before a tenant considers abandoning the premises or ceasing to pay rent, it may be beneficial for the landlord and tenant to come to an agreement that would allow the tenant to assign or sublet the lease to a third party under terms that are reasonable and acceptable to each party. For the landlord, it places the onus on the tenant to find a suitable new tenant for the premises and avoids costly litigation. For the tenant, it avoids the prospect of a lawsuit, removal of its assets, and the continuous obligation to pay rent until the expiry of the lease term.

The post A commercial tenant in hopeless default—Now what? appeared first on Sotos LLP.

In Dunkin’, the franchisor had obtained general releases from its franchisees in exchange for the franchisor offering funding for the renovation of the franchisees’ stores.  The franchisor relied on the releases when the franchisees made claims against it for abandoning the system in Quebec.  The trial judge annulled the releases, which was upheld by the Quebec Court of Appeal, on the grounds that the releases were abusive.

The Court found that the releases were cast in broad terms that absolved the franchisor from all liability from any past violation of agreements between the parties. The Court also found that the franchisor made misrepresentations to and exerted undue economic pressure on the franchisees to induce the signing of the releases. The Court also commented that there was a lack of evidence to support the franchisor’s argument that the releases were standard to the industry.

The decision provides guidance to franchisors drafting releases for application in Quebec to ensure that they will be enforceable by the court. However, the decision also provides an important lesson for franchisors conducting business in other provinces, including provinces that have statutory provisions affecting releases.

In provinces that have franchise legislation, including Ontario, the general principle with respect to releases is that, except in situations relating to a bona fide settlement of an existing dispute, a franchisee cannot provide a release of its rights under the legislation. The recent Cora decision² in Ontario which we wrote about in a recent blog³ further clarified that a general release that includes both statutory and common law claims will be unenforceable for both the statutory and common law claims.

The Dunkin’ Donuts decision provides direction for the drafting of releases that can be applied across all Canadian provinces.  Courts in all provinces can be expected to scrutinize the manner in which a franchisor has procured a release from a franchisee as well as its scope given the special relationship between the parties and any specific applicable statutory provision.

¹ Dunkin’’ Brands Canada Ltd. v. Bertico Inc.
http://www.canlii.org/en/qc/qcca/doc/2015/2015qcca624/2015qcca624.html
² 2176693 Ontario Ltd. v. The Cora Franchise Group Inc. 2015 ONCA 152
³ Cora Blog – April 14, 2015

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An amendment to the Act is set to come into force on April 30, 2015, which will make it no longer sufficient for a guarantor to have a guarantee signed before a notary public. Instead, when signing the guarantee, the guarantor must be in the presence of a lawyer, who is independent and not representing the interests of any other party to the transaction or anyone who would stand to benefit from the guarantee. Similar to the previous legislation, the independent lawyer must take the necessary steps to ensure that the guarantor is aware of and understands the contents of the guarantee and issue a prescribed certificate to that effect. Lastly, unlike the previous legislation, where notaries could only charge a nominal sum of $5.00 for issuing the certificate, there is no cap on the fees that a lawyer can charge to offer this service.

Any party that is seeking to benefit from a guarantee signed in Alberta should review the accompanying certificate carefully to ensure that it was issued by a lawyer who is independent of the parties in the transaction. Otherwise, the guarantee will not be enforceable.

The post Changes to the Alberta Guarantees Acknowledgement Act appeared first on Sotos LLP.

The SPIS is a questionnaire that can be completed by the vendor and used by the real estate agent in the course of showing the property to prospective buyers. The questionnaire includes questions about the vendor’s knowledge of any issues with the house (such as structural or plumbing). Despite the fact that information provided in a SPIS is not a warranty, the Court of Appeal has found that it could still form the basis for liability.

In this case, the vendors were aware of plumbing issues with the house but responded in the negative as to whether they had knowledge of any plumbing defects in completing the SPIS. The buyer was shown the SPIS at the open house and relied upon it when purchasing the property. The vendors were also aware that the house had issues with the foundation’s settling. Despite this fact, they told their real estate agent that the house had not faced settling issues for 17 years. That information was conveyed by the agent to the buyer.

The trial judge determined that the vendors were liable for negligent misrepresentation but dismissed the plaintiff’s claim against the real estate agent.

The Court of Appeal agreed with the trial judge with respect to the vendors’ negligence. The court reasoned that although preparing a SPIS is not mandatory, once it is used, the buyer is entitled to rely upon it. The warning found in most SPIS forms, stating that the buyer must undertake his or her own enquires despite information contained in the form, was found not to absolve the vendors’ liability. The Court also referenced the trial judge’s distinction between patent and latent defects. Patent defects are easily visible to the buyer and must be accepted upon purchase, whereas latent defects (such as structural defects) are not readily identifiable and the buyer relies on the vendor’s representations, if any are contained in the agreement.

However, the Court also extended liability to the real estate agent. The Court used the due diligence requirements found in the Real Estate Council of Ontario’s Code of Ethics to establish the agent’s standard of care. It concluded that the agent should have been apprehensive about the information provided by the vendors. In this case, the agent knew about the house’s history of settlement problems, and could also have discovered signs of problems through the agent’s visual inspection of the property. Those factors should have prompted the agent to verify the accuracy of the vendors’ statements.

Ultimately, the Court decided to apportion 50% fault to both the vendors and the agent. The agent should have informed the vendors about the implications of misrepresenting information in the SPIS. The vendors should not have offered misrepresented statements to the agent and in the SPIS.

This decision provides informative instructions to future vendors and agents. Vendors should be wary about offering information about their property that they know to be false. Real estate agents should counsel their vendor clients and should either take measures to verify the information provided by vendors or strongly recommend to buyers that they undertake an inspection of the property and make the closing conditional upon passing the inspection and obtain a statement confirming that the buyers are not relying upon the SPIS.

The post Krawchuk v. Scherbak et al – Implications for Real Estate Agents and Vendors appeared first on Sotos LLP.