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Out of Options

Here we go again. Another tenant calls and a familiar story emerges. The tenant has just realized that its lease has ended, and has a matter of weeks to find, lease, build and move to alternate premises at a cost of hundreds of thousands of dollars. Incredibly, many tenants confess that they have known for a period of years that their lease term would not be renewed, but deferred action to correct the problem until the eleventh hour, hoping that by some miracle the matter would take care of itself.

As the conversation progresses, three horribly familiar questions emerge: 1) Who is to blame for this mess? 2) What is the way out? 3) How on earth can this problem be avoided in the future?

On the first question, the original sin always lies with the Tenant. Tenants forget or simply don’t have the time or expertise to manage lease affairs. As a result, the tenancy abruptly ends despite the fact that the Tenant has been flirting with disaster for years.

The answer to the second question is remarkably simple; either the lease can be resurrected, or the Tenant must move.  Resurrecting a dead lease is always a long shot, but worth a try.  If you must move, then enter a holdover period whilst you immediately secure alternate premises on acceptable terms.

How can you avoid this disaster?

Here is an equation for you to remember: (lease term + renewal option any early termination rights = the period of time you have control of both your premises and value of your leasehold improvements)

In Ontario, a lease term plus renewal option aggregate longer than 21 years is treated as a sale and not a lease for purposes of the Planning Act, and therefore lease arrangements longer than 21 years are not common.  Further, both Landlords and Tenants should be reluctant to commit to lease arrangements for longer than 20 years because circumstances will likely be very different that far into the future. But 20 years is shorter than most Dentists’ careers or practice lifespans, regardless of who is practicing at the premises. Ideally, aim to always maintain a forward event horizon of 15 to 20 years.

Implement your plan in two phases.  First, during the initial lease negotiation, break the tenancy into an “initial term plus renewal options” which provide periodic opportunities to adjust tenancy matters, at your option, for the next 20 years. A common formula is a 5 year term, plus three renewal options of 5 years each or an initial 10 year term with two 5 year options.  Progressively add a renewal option to replace the renewal option currently being used to always maintain the 20 year forward event horizon.

Your first sign of trouble will be when the landlord refuses to grant a replacement option to renew. Perhaps they plan to demolish the building? Plan to leave at the end of the remaining term plus option period.

Know that an Option or a Right to Renew or Extend the Term provides you with the ability to take advantage of the renewal opportunity if conditions are favourable to you.  Recognize and use this opportunity to your advantage!

For illustration purposes, consider the lease term renewal document shown below. Formally educated tenant Sir Thomas Tempest (1642-1691) exercised his right (fifth word) to renew the term of his lease for a period of three lives (210 years).  It’s likely that his Landlord would not have been eager to renew the Lease because the Landlord was the Anglican Bishop of Durham.  During the tenancy, Sir Tempest had converted from an Anglican to a Roman Catholic to accommodate a marital circumstance and was openly charged with absenting himself from the Anglican parish church.  Therefore, Sir Thomas Tempest managed his tenancy by exercising his Right to Renew and forced the Landlord to renew the term of his lease.

Follow the example set by Sir Tempest. Be proactive. Do not risk your investment in your practice. You, as a Tenant, need to take responsibility for your lease affairs.

First, hire a professional to review your existing lease or negotiate a new lease to ensure your (lease term + renewal option early termination provision = a reasonable event horizon).

Second, make sure you clearly understand how your options to renew work, and how you should administer them. Plan a premises timeline strategy based on your understanding that corresponds to your career plan.

Third, administer your renewal options properly by delegating responsibility to a competent professional. Do not risk your tenancy to save a few dollars in fees. A properly drafted renewal provision together with a competent negotiation will save you far more than the professional fees and will future-proof your Tenancy.

If you do not follow these recommendations and find yourself without a long advance period of premises control, please, face your problem sooner rather than later. Look forward to relocating and look for the opportunity in the move.

Written by
Ian D. Toms

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