Legal Blog: Real Estate
Deposit for purchase of a warehouse was $750,000 on a $10,225,000 purchase price. The purchaser failed to close and the vendor, without demonstrating any damages, elected to take the deposit. Purchaser relied on section 98 of the Courts of Justice Act that would allow a court to grant relief against penalties and forfeitures on such terms as are just. The court had to first determine whether the forfeited deposit was out of all proportion to the damages and whether it would be unconscionable for the seller to retain the deposit. In this case, the first test was satisfied; there were no damages. Since there was no gross disproportionality in the size of the deposit, the court had to consider other factors for unconscionability. Factors include: inequality of bargaining power, a substantially unfair bargain, the relative sophistication of the parties, the existence of bona fide negotiations, the nature of the relationship between the parties, the gravity of the breach, and the conduct of the parties. In this case there was no unconscionability; it was a straightforward real estate transaction with no inequality of bargaining power, no fiduciary relationship, and to sophisticated parties. Deposits between 7% and 20% had been held appropriate; in this case the deposit was only 7%. The deposit was forfeited in full.Continue Reading >
All standard agreements of purchase and sale contemplate a deposit being paid upon the execution of the agreement – and perhaps a second deposit at a later date – with the balance being paid on closing of the transaction. The standard agreements, however, do not specify what happens when a contemplated deposit is not paid. Does the vendor have a right to terminate – even when, typically, time is made of the essence of the agreement? As usual, it depends. The analysis of that termination right is set out in Reserve Properties Ltd. v. 2174689 Ontario Inc. (2015) 56 R.P.R. (5th) 133 (Ont SCJ).Continue Reading >
Renewal clauses are standard fare in leases. A tenant normally wants a renewal clause; it gives the tenant the ability to extend its lease, at its option, without being bound beyond the term if it prefers to vacate the premises. A landlord normally is content to grant a right of renewal. It usually receives at least 6 months’ notice if the tenant wants to renew and it does not matter to the landlord whether it has to re-let the premises to another prospect 6 months down the road or deal with the tenant for a further term. Indeed, the landlord would usually prefer the tenant to stay so that it does not have to spend the money and time to re-let the premises and does not have to be involved with, and pay for at least initially, further tenant’s improvements.
Almost invariably, the new rent under the renewed term will be at a rate to be agreed upon between the parties or arbitrated. Sometimes, the clause may make the rent subject to negotiation and, if there is no agreement, there is no lease extension – but this type of clause is rare.
Normally, we will see other conditions attached to the exercise of the option to renew. For example, the tenant cannot have continually been in default of its obligations under the existing lease. It certainly cannot be in default at the time it wants to exercise its option to renew. For the landlord, it is one thing to allow a good tenant to renew; it is quite another to have to put up with a rotten tenant for an extended term.
Of course, the extent to which landlords make it seem that they are granting a right of renewal, when they really are not, is limited only by the imagination of the landlord’s lawyer. Most renewal clauses stipulate that the renewed relationship between the landlord and tenant is to be governed by the terms of the existing lease, subject to named exceptions (e.g. a further right to renew, the new rent, payment towards tenant’s improvements, etc.). Recently, we have seen a new and, we suggest, perfidious clause by which the tenant agrees that the landlord’s standard form lease in effect at the time of the renewal will govern the relationship. Is that clause enforceable? Does it really say what it seems to say? These questions are answered in 1251614 Ontario Ltd. v. Gurudutt Inc. (2015), 54 R.P.R. (5th) 162 (Ont SCJ).
A franchisor negotiated a 10-year lease. It contained a 10-year right of renewal. During the original term, the franchisor assigned the lease to the tenant with the landlord’s approval. The tenant exercised the right of renewal within the time set out in the renewal clause and the landlord presented its then current standard form lease for signature. The current lease contained a clause, not contained in the old lease, which allowed the landlord to terminate the lease with 6 months’ notice if the property were to be demolished. Suddenly, the tenant saw the possibility of a 10-year term turned into something far shorter and the tenant balked.
The renewal clause stated:
“Any such renewal to be on the same terms and conditions as are contained in this Lease except: (emphasis added)
. . .
(iii) the form of renewal Lease shall be, at the landlord’s option, a lease extension agreement or a current lease in the landlord’s then current standard form.”
The tenant argued that the “current standard form” should mean the “same terms as the lease”; otherwise, the renewed term could be drastically reduced if the demolition clause were exercised. The possibility of this reduction in term would adversely affect the value of the lease and the value of the tenant’s business if it wished to sell the business.
The landlord argued that the clause meant what it said. It alleged that the value of its property would be reduced if the tenants did not all have demolition clauses in their leases. The demolition clause obviously gives the landlord more control over its property and control means money.
The judge noted that, under the rules of contract interpretation, he had to give effect to all the words in the lease contract; presume that the parties to the contract meant what they said; have regard to the objective factual matrix occurring during the contract negotiations; and do so in a manner that would avoid a commercial absurdity.
The evidence demonstrated that:
a) The landlord was using the current lease as its standard lease.
b) Five of the ten tenants in the property had signed the current lease before it was presented to the tenant.
c) Three more tenants had signed the current lease form after.
d) The landlord was going to present the current lease form to the 9th tenant when its term was completed.
e) The lease was negotiated between sophisticated parties with legal advice.
f) There was no allegation that the lease was contrary to the common intention of the parties negotiating it.
The judge reviewed the clause and noted that the word “except” had to be given its true meaning. It was a limitation of the general condition that the old lease’s terms and conditions would govern; otherwise, why insert the exceptions?
The judge therefore held that the tenant would be allowed to renew only if it accepted the landlord’s current standard form lease, including the demolition clause.
Assuming that a right of renewal is important, why would a tenant ever agree to this type of clause? The only situation we can envisage is one in which the tenant desperately wants the premises and is willing to accept whatever conditions the landlord imposes.
In the usual situation, it makes no sense to negotiate changes, sometime extensive changes, to the landlord’s standard form lease and then find, at the end of the original term, that all of those negotiations are useless for the renewed term because the tenant must accept the landlord’s current standard form lease, which may even be unchanged from the previous standard form before the negotiated changes. It defies logic.
Harvey Haber, in the 5th edition of The Commercial Lease: A Practical Guide (2013), referred to a renewal clause that was almost identical to the clause in the tenant’s lease and advised that,
“The Tenant should adamantly insist that this subsection be modified so that the only obligation of the Tenant is to enter into a renewal Lease on the terms set out in the renewal option. Under no circumstances should the Tenant agree to sign a new net Lease form, which could be substantially different from (and much more costly than) that originally negotiated with the Landlord in the first instance.”
We agree and go further. If a lawyer is acting for a tenant and misses this clause, the lawyer should call LawPro. Further, if the lawyer does not miss the clause, but the tenant accepts it outright or caves after it receives a take-it-or-leave-it ultimatum, the lawyer should either (i) obtain a written acknowledgement regarding the issue, or (ii) take notes confirming that the issue was discussed and refer to the discussions in the reporting letter to the tenant.Continue Reading >