Commercial Tenancies (19:XIV)

As contracts, tenancy agreements constitute commercial relations. The Commercial Tenancy Act, RSBC 1996, c 57, governs that aspect of tenancy. Special laws, rules, and procedures have been established for premises and tenancy agreements characterized as residential. Landlord and tenant matters not subject to the RTA, or exempted from particular provisions, are covered by the Commercial Tenancy Act. See RTB Policy Guideline 14: Type of Tenancy: Commercial or Residential.

A. Relationship of Landlord and Tenant

1. In General

Before entering into an agreement, a tenant should find out who owns the property and who rents the property to ensure that the new tenant is not leasing from a current tenant – see Section XV.A.2: Assignment and Subletting, below. A tenant should ensure that he or she does not enter into an agreement with a company that is not yet incorporated – see Section XV.A.3: Pre-Incorporation Contracts, below. A prospective tenant should perform a company search in order to determine if the company is incorporated. See Chapter 20 Small Claims Procedure for more information on how to do a company search. A prospective tenant may also want to do a title search at the Land Title Office to determine whether he or she is dealing with the registered owner or a tenant looking to sublease.

A new tenant should find out how the property is zoned to ensure lawful use of the property. Also, using the property for a different purpose than that outlined in the lease is a breach of the agreement. To vary the lease, both parties must consent.

2. Assignment and Subletting

When the tenant’s interest is conveyed to a third party for the remainder of the term, the lease is said to have been assigned. The assignee becomes a tenant of the landlord.

If the premises are to revert to the original tenant before the full term of the lease, a sub-lease is created. Note that a landlord-tenant relationship exists between the landlord and sub-tenant. If both parties live in the unit, payment of rent by a new tenant to the original tenant may also create a sub-tenancy.

Most leases require the landlord’s consent before an assignment or sublet is made. Such clauses usually specify that the landlord’s consent will not be unreasonably withheld. If the landlord does withhold his or her consent unreasonably, the tenant may proceed without consent, with litigation as the likely outcome. Tenants should decide if they want to deal with that or if they want to commence litigation on their own right to obtain an order that they can proceed. A landlord’s wish to charge higher rent or to prevent the tenant from receiving a premium by subletting are not reasonable grounds for withholding consent.

The onus is on the tenant to show that the landlord’s refusal is unreasonable. There are no fixed rules governing reasonable or unreasonable withholding of consent. The landlord can charge a fee for the tenant to sublet or assign the rental property, and that does not negate the landlord’s consent. The lease itself and all the circumstances must be considered.

3. Pre-Incorporation Contracts

A company is not bound by contracts it enters into before incorporation. Where a person enters into a contract in the name of a company before that company’s incorporation, that person may be liable for breach of warranty. To avoid difficulty, the lease should be entered into personally with the right to assign the lease to the company once incorporated.

4. Partnerships

A partner enters into contracts on behalf of all partners for any transaction that is in the ordinary course of business. Thus, a lease entered into in the firm’s name is binding on the firm and its partners.

B. The Agreement

1. Distinction between Lease and License

A license is a purely contractual relationship. It gives the licensee no interest in the licensor’s real property. Restaurants that operate in department stores are usually run as a licensee liquor arrangement, for example.

The courts distinguish leases from licenses by examining whether the parties intended to grant exclusive possession to the occupants, or merely permission to occupy subject to the rights of the owner. It is important for a prospective tenant to read the contract to determine what type of relationship they are entering into. Words in the agreement such as “lease”, “landlord” or “tenant” are, in the absence of a contrary statement, conclusive evidence of an intention to create a lease. Exclusive possession of the tenant does not require absolute exclusion of the landlord. If the contract refers to a “joint venture,” then it is probably NOT a lease; a joint venture creates liabilities in the tenant and does not grant exclusive possession or an interest in the land.

2. Distinction between Lease and Agreement to Lease

A lease is an immediate conveyance of land (though possession may be postponed) while an agreement for lease requires the parties to execute a lease at a later date. However, where the tenant is in possession, an agreement to lease may be construed as a lease.

3. Requirements for a Valid Agreement

• a) A lease or agreement to lease greater than three years in length must be in writing to satisfy the Law and Equity Act s 59 3(a);
• b) A lease over three years should be registered (but there is no legal obligation to do so);
• c) While a seal is no longer required for Land Title Office registration, if one of the parties to a lease is a corporation, its seal should be affixed to ensure the agreement is binding on the corporation, and to avoid any argument that the agreement was made without consideration; and
• d) The agreement must state the tenant’s right to exclusive possession as well as some indication of the premises being leased; the duration of the lease; the parties to the lease; the amount of rent; and covenants, conditions, exceptions or reservations.

4. Description of Premises

To avoid having the lease struck down for uncertainty, there must be a description of the property adequate to identify it. An ambiguous description may be supplemented by parole evidence.

5. Common Areas and Easements

Driveways, walkways, parking and delivery areas, lawns, lobbies, elevators, corridors, interior mall space, and common washrooms are normally common areas in which the tenant does not have exclusive possession. However, the tenant is often required to pay a share of the costs for the maintenance of these areas. The lease agreement may also provide the tenant with an easement, subject to restrictions on how and when the common areas may be used.

6. Fixtures

A fixture is annexed or fastened to the real property. They are either tenant’s fixtures, and therefore removable, or landlord’s fixtures, which are permanent. Tenant’s fixtures are annexed for the purposes of the tenant’s trade, ornamentation, or convenience. Landlord’s fixtures are installed by the landlord, previous tenants, or by the present tenant. They have become part of the realty and their removal would constitute waste: see Stack v Eaton (1902), 4 OLR 335 (Div Ct).

C. Rent and Security Deposit

1. Security Deposits

In commercial leases, security deposits are intended to cover damages for breach of a covenant or condition or to ensure a tenant will go into possession. The landlord’s covenant to repay the deposit is collateral to the lease, and personal to the landlord. Thus, if the landlord sells, his or her successor is not bound to repay the deposit.

2. Rent

Technically, rent is a contractual payment for the use of property. Commercial leases often also include additional rents such as a percentage of the tenant’s sales or profits, and the tenant’s portion of common expenses. By defining additional rents as part of the rent, the landlord gains the right to end the lease for non-payment of these amounts. Unless otherwise provided for, it is the tenant’s duty to seek out and pay the landlord. The tenant also bears the risk of a late payment if he or she uses the mail.

3. Net Lease Concept

Most commercial leases operate on the net lease concept. This means that fixed rent (dollars-per-square foot or dollars-per-month) is to be net to the landlord, with the tenant paying for all costs in operating the leased premises as additional rent. Thus, substantial payments can be made as “additional rent” to cover the tenant’s portion of the landlord’s expenses. This concept is also known as “triple net”.

4. Taxes

Unless the lease provides otherwise, the landlord is liable for all realty taxes. If the lease calls for the tenant to pay the taxes, the landlord may sue the tenant if taxes are in arrears.

5. Seizure of Personal Property for Non-Payment of Rent

A commercial landlord may distrain (seize personal property for non-payment of rent), while a residential landlord may not (regardless of any rental arrears). The personal property being distrained must be located in the rented premises and the landlord must give notice before seizing the property. The tenant will suffer a penalty if he or she removes the goods to prevent distrainment. Distrainment keeps the tenancy alive. Usually the month after distrainment the tenant will be evicted if there remain rent arrears or if new rent arrears accrue.

D. Occupier’s Liability

NOTE: For specific details, see the Occupier’s Liability Act, RSBC 1996, c 337 [OLA]. The OLA, s 6 speaks to sub-tenancies.

1. Landlord’s Liability for Injuries in Demised Premises

The landlord has no statutory or common law duty to maintain the demised premises unless provided for in the lease agreement. Contractual liability of the landlord is to the tenant alone, not to his or her family, guests, or customers. Moreover, as the landlord is not an occupier, he or she is not liable in tort.

However, where the landlord is under a duty to maintain the premises, s 6 of the OLA puts the landlord in the same position as the occupier of the premises. Where the landlord fails to maintain the premises and an injury results, the landlord will be held liable. The landlord is considered an occupier with regards to common areas. His or her duties are set out in s 3 of the OLA.

2. Tenant’s Liability for Injuries in Demised Premises

The tenant is considered an occupier, and inherits all duties that go along with that designation. A tenant should take reasonable care to inspect, notify the landlord, and give warning to an invitee of any unusual danger in the common areas. Where an occupier can foresee that a trespasser may enter the property, there is a duty to treat the trespasser with common humanity.

E. Termination of Tenancy

1. In General

If the landlord terminates because of the tenant’s default, the landlord’s damages are generally based on the landlord’s anticipated loss for the balance of the lease term. However, landlords are expected to mitigate their losses and so they are not always at liberty to claim damages for the remainder of the lease term. See Highway Properties Ltd. v Kelly, Douglas & Co. Ltd. (above). (There appears to be no duty to mitigate where the landlord does not accept the tenant’s repudiation of the lease, and simply sues for rent as it comes due under the principles of property law. Should this situation arise, clients are strongly advised to consult an experienced lawyer.)

There may also be damages available for work done to the property, the cost of re-renting, and the like. In a falling rental market, a tenant may be held responsible for the landlord’s losses in acquiring a new tenant at a lower rent. The landlord must look for another reasonable tenant.

2. Rent Acceleration

An agreement may contain a clause for rent acceleration. Rent is usually accelerated by 3 months, meaning for example that if you owe one month’s rent of $2,000, at the end of tenancy that becomes $6,000.

3. Bankruptcy and Insolvency

A trustee in bankruptcy can take over for a tenant and break the lease with fewer penalties than the tenant.

4. Personal Liabilities

If a personal guarantee is included in the lease agreement, the tenant will be held personally responsible for monies owed when their company is insolvent. However, personal guarantees do not necessarily require a determination of insolvency in order to obligate a tenant.

Also, there are issues for a guarantor and a covenantor regarding when liability accrues. Sometimes the guarantor is made a party to the lease (as one of the tenants), as well.