Legal Blog

Capital

Your client, a small prospective tenant, requests you to review the landlord’s suggested lease – just in case something in it is really bad. The tenant then presents you with a 60-page, single-spaced lease on 8.5×14″ paper and asks how much your review will cost. You wonder why it is necessary for landlords to use quite so many words, but, as is apparent from Parsons Precast Inc. v. Sbrissa (2013) 36 R.P.R. (5^th) 1 (Ont C.A.), incomplete leases can result in unexpected consequences.

 

Dispute

The landlord leased commercial premises to the tenant from 2004-2007. The lease was renewed for two further two-year terms and terminated in 2011. The lease was on a “net net basis” and was a “completely carefree net lease to the lessor.”

 

The lease called for the tenant to pay rent plus an additional common area charge estimated at $2.50 per foot per year with subsequent adjustment made once the charges were known. In 2010, the landlord notified the tenant it owed $14,500 as its proportionate share of a $76,000 cost that the landlord incurred to completely repave the parking lot.

 

The tenant was not keen on paying this charge, particularly since it anticipated vacating the premises one year later. Accordingly, the tenant brought an application to interpret the lease.

 

Lease

The relevant provisions of the lease are set out below.

 

“The lessee will repair according to notice in writing (reasonable wear and tear …excepted).

 

The lessee … shall be responsible for all expenses of any nature and kind with respect to the premises rented by it and further shall pay its proportionate share of all expenses arising from the lessor’s operation of the building in which the demised premises are located, including … repairs, and common area maintenance expenses.

 

The lessee .. shall pay to the lessors additional rent as follows: a proportionate share of all costs and expenses incurred by the landlord in maintaining, operating, cleaning, insuring, and repairing the property …”

 

The landlord maintained that these provisions allowed him to pass on to his tenants the entire cost of replacing the parking lot, even though the replaced parking lot was 19 years old and the reasonable life expectancy for the new parking lot was 20 years.

 

Application

 

The application judge made the following rulings:

 

1.         The parking lot was part of the common areas.

2.         Replacements (e.g. light bulbs, air filters etc.) can be referred to as maintenance or repair until they are so substantial in their nature and in expense that they cannot reasonably be considered an item of repair or maintenance.

3.         Although the tenant was responsible for repair, reasonable wear and tear was excepted. The parking lot, at the end of its life cycle, was not something that the tenant had a responsibility to repair.

4.         Maintenance, as defined in ordinary and legal dictionaries, refers to the concept of “keeping the property up.” The parking lot was not “kept up”; it was replaced.

5.         The tenant was not liable to pay for its proportionate share of the replacement cost.

6.         Even if the tenant were liable to pay, “common sense would require that this tenant’s proportionate share of the paving cost ought to be amortised over a period of 20 years.” The tenant would be liable for about two years of the 20.

 

Appeal

The landlord was not happy with that decision and appealed. The Court of Appeal in a short endorsement dismissed the appeal (with costs of $8,000). It agreed that there were grey areas between repair and maintenance on the one hand and capital expenditures on the other. It held that the application judge did not err in interpreting the lease, an interpretation that accorded with the parties’ reasonable expectations.

 

We assume that the landlord fought as hard as he did, not because of the $14,500 that he expected to receive from the tenant, but because the other tenants might have looked at this application as a test case. Accordingly, the landlord had $76,000 plus legal costs at stake.

 

Comment

Most of the leases that we see, and certainly our standard lease, provide for capital expenditures to be allocated to the tenants, but on an amortised basis. For this landlord, the difference between a sophisticated and unsophisticated lease was substantial.