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Life Cycle of a Tenancy - Part 3: Lease

Tenancies are typically based on some form of written lease. In some instances, the offer to lease is the “lease”, never being replaced by a formal lease; in other cases, the lease was signed decades before and has been assigned, amended and renewed many times over the years.This article considers some basic lease terms and conditions, and current issues affecting these terms and conditions.

Lease document The lease document itself can be a few pages to hundreds of legal sized pages. This document describes the terms and conditions of the tenancy throughout the entire time the tenant occupies the premises, which may be decades.

Current issues:

Very comprehensive and sophisticated leases are now common. The forms are based on a structure which has been around for hundreds of years, but as the value of real estate increases, landlords become more sophisticated, and word processing and communication becomes more efficient, the power and complexity of leases increases accordingly.Challenging to understand all of the implications of all of the provisions, included or not, which may be triggered years later by circumstances that an unsophisticated or inexperienced party would or could not envision, to the detriment of the tenant.

Tenant
The tenant is the entity which leases the space from the landlord and is responsible for complying with terms and conditions. Typical “tenants” include a person or persons, a business company, or a professional corporation.

Current issues:

Professional corporations as tenants have become more common for a number of important reasons. Consequently, tenants have been attempting to assign their lease to professional corporations and have been encountering challenges from uncooperative landlords. Provisions of your assignment clause enabling you to assign your lease to your professional corporation, or a business corporation, are extremely important.Personal covenants are being required by landlords, either directly with the person as tenant, or as an indemnitor. Realize that by agreeing to a personal covenant, the landlord benefits by having a more secure tenancy, but the tenant, all of the tenants personal assets, and the tenants family are “on the hook”, in some cases long after the lease is assigned.Assignment clauses are causing severe trouble by prohibiting practice sales, enabling the landlord to take and keep the proceeds from practice sales, enabling the landlord to change the lease and/or terms and conditions of the lease at the time the lease is assigned.

Landlord
The landlord is the entity which leases the space to the tenant and may be the owner or an agent of the owner.

Current issues:

Institutional landlords are the “norm”. These large institutions governed by non-negotiable financial and operating policy which is not tenant friendly.Leasing representative with little or no control or authority to do anything are employed by large landlords making lease negotiation challenging if not impossible.

Term
The term of the lease is the length of time the tenant may remain in the premises. Typically, the term is five years, and the tenant may have optional rights to extend or renew the term for an extended period of time, typically a total of 20 years. Technically, the term can be any length of time ranging from days to hundreds of years.

Current issues:

Early termination clauses in favour of the landlord triggered by the landlord’s wish to remodel, redevelop, or sell the property, or the tenants wish to assign the lease when it sells the practice. This clause is a “kiss of death” clause, effectively destroying the ability to finance the practice.No options to renew or extend the term are being agreed to by some landlords, limiting the tenancy and effectively limiting the value of the practice to good will only.Financing against premises assets is prohibited by some leases, effectively eliminating the tenant’s ability to secure financing against leasehold improvements.

Use
The use clause describes what the premises may be used for, and often what it may not be used for.

Current issues:

Very limited or very broad restrictive use clauses are now becoming more common which can both be very cumbersome because either you can’t use the premises for new procedures, or the clause is so vague it is non-enforceable.No exclusive provision is becoming more common as institutional landlords want more control over their property, or wish to protect themselves against challenges by tenants claiming that their exclusive has been violated.

Rent
Rent is usually a based or minimum rent plus a share of the landlord’s costs of operating the property including tax, maintenance and insurance, calculated on a per square foot per annum basis, payable in equal monthly installments.

Current issues:

Minimum rents are creeping up steadily especially in new properties. What was $12 per square foot in 1987 is now $42 in 2017, an increase of about 4.3 per cent per annum cumulative increase, well above inflation.Additional rents are creeping up steadily, well in advance of inflation, in large part because real estate values and therefore real estate taxes have increased dramatically.Premises size is reducing both by tenants seeking new space, and by landlords building new plazas. This reduced premise size requires careful planning and efficient use of space by the tenant.

Contemporary lease negotiations are well beyond the capacity of inexperienced parties; what you as the tenant or your representative do not know can and will hurt you.

Written by
Ian D. Toms and Jennifer J. Miles