<b><i>In the Spotlight:</i></b> How to Break a Commercial Lease

The Tenant's Lawyer Should:

• Read the Lease from start to finish.
• Examine each Rider, if any, very carefully.
• Look for conflicts between the terms of the Lease and the terms of any Rider.
• Determine whether there are any provisions in the Lease or in any Rider that give the Tenant the right to terminate its Lease.
• Confirm whether the zoning laws permit the intended use. It has been held (in Canada) that the Tenant was permitted to treat the Lease as terminated where a Tenant relied on its Landlord's assurance that the zoning by-laws would permit a used car business on the Premises, and the zoning by-laws had been amended so as not to permit a used car business on the Premises, and the Landlord was aware that the Tenant relied on its assurance. ( Chung v. Merrikhi [2004] O.J. No. 1676 (Ontario Superior Court of Justice ' Small Claims).
• Ask who prepared the Lease; it makes a difference.
• Make sure the essential elements in a Lease are set out: 1) the Premises ' they must be clearly defined and ascertainable; 2) the Parties ' they must be correctly named; 3) the Rent ' all types of rent, minimum (or basic or net), percentage and additional must be clearly expressed; 4) the Term ' the commencement and expiry dates must both be clear or readily ascertainable; and 5) all other material terms of the contract not incidental to the Landlord and Tenant relationship, including any covenants, conditions, exceptions or reservations must be clearly stated.
• Ask if an attorney's advice was obtained to negotiate the Lease.
• Ask if there are any deletions or cross-outs in the Lease.
• Ascertain if the Landlord failed to meet any conditions precedent.
• Determine if there was an Offer to Lease. If so, was it made subject to such terms as are mutually agreed to between the Landlord and the Tenant? Is it possible to argue that it was merely an agreement to agree and therefore unenforceable?
• Ask if there has been a fundamental breach of the Lease by the Landlord permitting the Tenant to terminate.
• If the Tenant is described as “X, as a trustee without personal liability, on behalf of a company to be incorporated,” and if the Tenant does not incorporate, the Landlord has nothing.
• If the Tenant is merely a shell company, with no assets, the Tenant can simply walk away from the Lease.
• If the Tenant is declared a bankrupt, and has no assets whatsoever, the Landlord is left with nothing because its preferred claim under the Bankruptcy Act is valueless.
• Talk to the Landlord to try and get out of the Lease, or to assign or sublet.

From a Landlord's Viewpoint:

If the Landlord's attorney prepared the Lease and is fully familiar with it, then the Landlord's attorney should carefully read any revisions, amendments or Riders made by the Tenant's attorney to the Lease, to see if there is any conflict between the provisions of the Lease and the provisions of such revisions, amendments or Riders.

• The Landlord's attorney should examine each of such Riders carefully.
• If it is a strong Landlord's Lease, it is going to be difficult to break.
• Look for any conditions that have not been met by the Tenant.
• Look for any rent or non-rent defaults.
• Seek Distress for non-payment of rent.
• Seek a Writ of possession if necessary.
• See if the Lease contains the Landlord's right to terminate upon a request by a Tenant to transfer its Lease.
• See if the Lease contains any other rights of the Landlord to terminate the Lease, e.g., in the damage and destruction clause, or in the exculpatory clause.
• Determine whether the Landlord has the right to terminate the Lease if the Tenant does not effect a certain percentage of its sales in each year.
• If the Landlord did not prepare the Lease, see if the six essential elements are included in the Lease.
• If it is an Offer to Lease, see if it provides that the Lease is to be subject to such terms as are mutually agreed to between the Landlord and the Tenant, because it may simply be an agreement to agree and therefore unenforceable.
• If the Landlord has terminated the Lease for non-payment of rent and the Tenant has been successful in court to set aside that termination, the Landlord should seek an Order from the Court at the same time asking that if the Tenant defaults again in rent, the Lease is terminated and the Tenant must then vacate the Premises.
• The Landlord may put the Tenant into bankruptcy if the Tenant corporation has no assets, so that the Trustee in Bankruptcy can terminate the Lease, in which event the Landlord would regain possession of the Premises, unless the Trustee in Bankruptcy re-lets the Premises to a third party.
• The Landlord may accept an early termination of the Lease for X dollars, or it may agree to the Tenant assigning or subletting the Premises.

The attorneys for both the Landlord and Tenant should make sure that they have done their due diligence in ensuring that the Tenant is in fact in default under its commercial Lease.

Harvey M. Haber, Q.C., LSM, JD , a former long-time member of this newsletter's Board of Editors, is a Senior Partner at Goldman Sloan Nash & Haber LLP in Toronto.