Estoppels Are No Substitute For Lease Due
Diligence
By: Sonja K. Homenuck
We all take some comfort on the acquisition of commercial real estate when the purchaser is able to obtain a reasonable number of estoppels [covering a good portion of the rentable area of the building(s) being purchased]. But what happens if a tenant asserts something in an estoppel but the tenant is incorrect? Can a tenant later take a different position? Or perhaps the bigger question is can you rely on the statement made in the estoppel? Not if you could have determined the correct state of affairs from doing proper due diligence of the lease documentation. This is what the British Columbia Supreme Court held in a recent case discussed below. The case also reminds us of the important distinction between renewals of a lease and an extension of the term of a lease, and is an important case to consider for anyone involved in lease due diligence or in dealing with estoppels.
In Vancouver City Savings Credit Union v. New Town Investments Inc., 2008 Carswell BC 2525, New Town Investments Inc. (the "Landlord") was the assignee of a commercial lease originally entered into by Park Georgia Properties Ltd. ("Park Georgia") as landlord and Vancouver City Saves Credit Union (the "Tenant") as the tenant. The term of the lease was ten years and it granted three renewal options to the Tenant, each for a five year period. Park Georgia and the Tenant entered into an agreement to renew the lease which contained a number of changes to the original lease (the "2002 Agreement"). Sometime thereafter the Tenant provided an estoppel to the Landlord upon the Landlord's purchase of the subject property from Park Georgia which indicated that the Tenant had exercised the first renewal right (so only two renewal periods remained). Further, the Tenant later gave written notice exercising its second renewal option.
During the process of attempting to document the second renewal term, the Tenant took the position that the term earlier referred to in the estoppel as the first renewal term (and documented in the 2002 Agreement) was not in fact a renewal term, but was an extension of the term (which would mean that all three renewal terms were still preserved at that point). The Tenant relied on the wording of the 2002 Agreement as using the words "extension" throughout (not "renewal") as well as the fact that the extension term ran for a different period of time than the five year renewal period would have run (though not a significantly different period). The Landlord disagreed and the parties wound up in court on this and other lease interpretation issues.
The Court restated the long-held common law position that a renewal and an extension are two different concepts at law. In doing so the Court quoted the definitions of those terms from Black's Law Dictionary, 8th ed., which defines an "extension" to be a continuation of the same contract for a specified period, and a "renewal" as the re-creation of a legal relationship or the replacement of an old contract with a new contract, as opposed to an extension.1
Further, the Court held that the term had been previously extended by the 2002 Agreement, rather than renewed, due to the wording of the 2002 Agreement and therefore all three renewal options remained (and therefore the notice provided to exercise the second renewal option really exercised the first renewal option and two further renewal options remained).
Although the Landlord sought to rely on the fact that the Tenant had referenced the first renewal term in its estoppel and in subsequent correspondence, the Court quoted Massawippi Valley Railway v. Reed (1903), 33 S.C.R. 457 (S.C.C.) at p.470 that "subsequent conduct cannot be used to interpret an agreement when the words of the written agreement are clear and unambiguous." The Court in the present case found the wording of the 2002 Agreement to be clear and that the term was extended and therefore the statement in the estoppel to the contrary and the exercise of the notice provided to exercise the second renewal option, both of which were incorrect, could not be used as subsequent conduct to overcome the clear wording of the 2002 Agreement.
It is a scary proposition for purchasers that they may not be able to rely on the contents of an estoppel, however in this case, a proper inspection and interpretation of the lease documentation by the purchaser should have revealed that the term had been in fact extended by the extension agreement entered into by the parties and therefore all three renewal terms remained (rather than two renewal terms). If the lease documentation available for due diligence had not been clear, the Court may have held the Tenant to the statements made in the estoppel.
The Court did distinguish cases where a purchaser could not determine a matter from reviewing lease documents alone, but went on to hold (as per existing common law) that the "Estoppel Certificate cannot have the effect of altering the terms of the Lease."2
In some transactions, a vendor wishes to only provide a purchaser the actual lease agreements, but not the tenant correspondence, etc., however the entire tenant file is important for due diligence purposes and a purchaser should insist on obtaining all documents, correspondence and materials in respect of tenant files. It is not clear what a court would hold in the event that clear documentation existed that was not made available to a purchaser, which contradicts a tenant's statement in an estoppel. Although it would seem unfair to not hold a tenant to its misstatement in an estoppel where the purchaser did not have documentation to review to discover the misstatement, it would also seem unfair to hold a tenant to a mistaken statement in an estoppel that could have been discovered if all lease documentation and correspondence had been available and properly reviewed. However, it is more in the purchaser's control in negotiating the agreement of purchase and sale to ensure that all lease documentation and tenant files will be provided. The best way for a purchaser to protect itself is to insist on all lease documentation and tenant files be delivered and to have them inspected and reviewed diligently, together with the estoppels. It may be prudent to involve a commercial leasing lawyer in your due diligence and in dealing with estoppels where the stakes are high. For instance, where a purchaser wants to ensure that demolition rights in favour of the landlord are enforceable and when they can be exercised if a future redevelopment of the subject property is planned.
Is The Municipal Devil You Know Better Than The
Provincial Devil You Don't?
By: Mark Piel
Renewable energy infrastructure projects are a top policy priority of the current Provincial government as both the political and economic climate suggest the early part of the 21st century will be the time government and industry reconsider the sustainability of existing energy infrastructure. Infrastructure projects which use wind, water, biomass, biogas and biofuel, solar energy, geothermal energy, and tidal forces for the production of energy may one day replace what are presently considered more conventional sources of energy. Renewable energy infrastructure projects, like all infrastructure projects, involve a number of legal considerations, from securing project financing through to managing labour relationships during post-construction management of the infrastructure asset. Acquiring the necessary land use approvals in order to begin construction is a key part of planning most infrastructure projects. Privately funded infrastructure development typically require municipal land use approvals through the land use planning process provided by the Planning Act.1 However, with the Green Energy and Green Economy Act, 2009 2 the Province has set in motion significant changes to the existing land use approval process for renewable energy infrastructure projects. Chief among these changes is removing from municipal jurisdiction the approval of renewable energy infrastructure projects in favour of a Provincial approval process.
The Green Energy and Green Economy Act, 2009 enacts the Green Energy Act, 2009 3 and amends the Planning Act. While these amendments have yet to come into force, they significantly change the applicability of the Planning Act to renewable energy infrastructure projects. "Renewable energy undertakings" will be defined in the Planning Act and means a "renewable energy generation facility, a renewable energy project, a renewable energy testing facility or a renewable energy testing project."4 The Green Energy and Green Economy Act, 2009 also incorporates into the Planning Act the meaning of the "renewable energy generation facility," "renewable energy project," "renewable energy testing facility" and "renewable energy testing project" as they are defined in the Green Energy Act, 2009.5
Under the Green Energy Act, 2009, the lieutenant-governor-in-council has the broad authority to make regulations that remove barriers to and promote opportunities for the use of renewable energy.6 Based on a review of the amendments to the Planning Act, those "barriers" include the municipal government decision-making process; the Green Energy Act, 2009 effectively removes renewable energy developments from municipal jurisdiction with the intention of replacing the municipal approval process with a provincial approval process.
"Renewable energy undertakings" will no longer be subject to the following land use planning instruments:
- Provincial policies;7
- Provincial plans, with the exception of the Niagara Escarpment Plan;8
- Municipal official plans;9
- By-laws and orders under Part V of the Planning Act, including demolition control by-laws, zoning by-laws, interim control by-laws, minor variances, and Minister's zoning orders, and zoning by-laws under the City of Toronto Act, 2006;10 the site plan approval process under both the Planning Act and the City of Toronto Act, 2006.11
In addition, "renewable energy undertakings" are now exempt from the subdivision control and part lot control provisions of the Planning Act. Lands outside a registered plan of subdivision or a part or block of lands within a registered plan of subdivision may now be acquired for the purpose of a "renewable energy generation facility" or a "renewable energy project" provided the acquiring party provides a declaration that the land will be used for the purpose of a "renewable energy generation facility" or "renewable energy project."12
The extent to which the Green Energy and Green Economy Act, 2009 exempts "renewable energy undertakings" from the municipal approval process raises questions regarding two of purposes of the Planning Act, namely, to provide for a land use planning system led by provincial policy and to provide for a planning process that is fair, open, accessible, timely and efficient.13 For example, under the Planning Act, planning decisions at all levels of government must be consistent with provincial policy statements and conform with provincial plans.14 The Green Energy Act, 2009 includes no such requirement.
With respect to the public consultation process under the Planning Act, landowners looking to develop renewable energy undertakings may be pleased to hear their projects will be exempt from a local consultation process that often becomes mired in "NIMBY" politics. As to what the Provincial approval process will look like, time will only tell as the lieutenant-governor-in-council has yet to enact the necessary regulations. The Ministry of the Environment and the Ministry of Natural Resources have made available for public comment proposed content for renewable energy approval regulations15 and the former Ministry is contemplating requiring private landowners to consult with the public within a 1.5 kilometre radius of the proposed development, the applicable municipality, the Ministry of the Environment, and Aboriginal Peoples on behalf of the Crown.16 Therefore, the possibility for politics to affect the approval process remains.
These recent amendments are not the first time the Province has exempted energy projects from the reach of the Planning Act.17 As with most legislative amendments of this kind, there are trade-offs which proponents of renewable energy undertakings should be aware. By removing renewable energy undertakings from the reach of the Planning Act, the Province has withdrawn a proponent's right to appeal a decision to refuse a development proposal to the Ontario Municipal Board on the basis of land-use planning grounds. Appeals are not entirely absent under the new regime. The Green Energy and Green Economy Act, 2009 also amends the Environmental Protection Act 18 by providing a right to appeal to the Environmental Review Tribunal (ERT) in the event the Director refuses to issue a renewable energy approval.19 Third party rights of appeal have also been added to the Environmental Protection Act. On such appeals, the ERT must consider whether the renewable energy project under appeal will cause serious harm to human health or serious or irreversible harm to plant life, human life, or the natural environment.20
Municipal councillors may be breathing a sigh of relief now that Provincial Ministries will be the approval authority for "renewable energy undertakings"; the political cost to having the authority to approve the location and site plans for renewable energy infrastructure perhaps outweighs the political benefits, even during a time when the political appetite for renewable energy is high. It remains to be seen whether private developers will breath a similar sigh of relief once the Province enacts the new approval process regulations for "renewable energy undertakings".
Can The Holder Of A GSA Exercise Real Property
Remedies?
By: Paul Shantz and Ron Matheson
On occasion a lender may discover that a borrower owns real property which was not previously disclosed to it and therefore not subjected to a specific mortgage registered under the Land Titles Act or (increasingly rarely) under the Registry Act. In the context where most registrations now are made through the pre-populated statements available under the Teranet electronic system, the absence of a conventional form of charge, mortgage or debenture with a specific charge and a legal description of a parcel of real property may appear even more problematic. However, sometimes a careful reading of other security documents which do not consist of typical forms of real estate security may unearth additional remedies for a secured lender.
A General Security Agreement ("GSA") may be drafted broadly enough to provide the lender with a security interest in all of the real and personal property of the debtor, even if the real property is not specifically described by an attached legal description. In this case, a notice of the GSA may be registered on title to the real property by way of a Notice under Section 71 of the Land Titles Act, since the lender has an unregistered interest in the property.
Registration of the Section 71 Notice can be done without the sometimes difficult task of obtaining a signed authorization and direction of the borrower. When registered, the Notice will caution all potential purchasers or encumbrancers that the lender claims an interest in the real property. As such, this may be a useful and cost effective tactic to prevent the transfer of title and/or dilution of the borrower's equity to the lender's detriment. However, this step is essentially only preventive and the process of realization upon the real estate by sale is necessary to satisfy the debt secured by the GSA.
In the event that there has been a bankruptcy of the debtor, the lender could approach the trustee in bankruptcy to complete a sale of the real property. Assuming that the trustee accepts the position of the lender that it has a security interest in the real property, then upon completion of the sale the lender would be entitled to the proceeds of sale as a secured creditor. However, the completion of the sale and the distribution of the proceeds would be affected by any prior registered interests or any writs of execution outstanding against the debtor.
If this option is not available, the question arises whether the registered GSA can be relied on to conclude a sale of the real property through a mortgage power of sale scenario. Unfortunately there is no clear answer to this question.
Normally the GSA would not contain the language granting remedies against real property in the same manner as a registered mortgage or charge, nor will it contain the legal description of the real estate. However, where principal money is secured "by a mortgage of land", and such mortgage does not contain a contractual right of exercising a power of sale, Part II of the Mortgages Act, R.S.O. 1990, c. M.40 applies to provide for a statutory power of sale which may be exercised, albeit on slightly different time frames for default and notice of sale than those allowed under a contractual right of power of sale.
However, notwithstanding this proposed manner of exercising a power of sale, the staff at the relevant Land Registry Office may take the position that absent a court order or clear direction from senior staff, title will not be transferred or certified under the Land Titles Act based upon the usual statements in an electronic instrument, or statutory declarations in a paper registration. Therefore whatever the definitive legal answer, resolving this issue could involve considerable delay and expense.
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Footnotes
1.Vancouver City Savings Credit Union v. New Town Investments Inc., 2008 Carswell BC 2525, paragraphs 13 and 14, quoting Black's Law Dictionary, 8th edition.
2. Ibid, paragraph 26.
1. R.S.O. 1990 c.P.13.
2. S.O. 2009, c. 12.
3. S.O. 2009, c. 12 , Sched. A.
4. Supra note 2, Sch. K, s. 1.
5. Supra note 3, s. 1.
6. Ibid., ss. 5(1).
7. Supra note 2, Sch. K, s. 3.
8. Ibid.
9. Ibid.
10. Ibid.
11. Ibid.
12. Ibid., Sch. K, s. 2(1), (2).
13. Supra note 1, ss. 1.1(b), (d).
14. Ibid., ss. 3(5).
15. Ontario Ministry of Natural Resources, Draft Approval and Permitting Requirements Document for Renewable Energy Projects, online: http://www.mnr.gov.on.ca/272327.pdf; Ontario Ministry of the Environment, Proposed Content for the Renewable Energy Approval Regulation under the Environmental Protection Act, online: http://www.ene.gov.on.ca/envision/env_reg/er/documents/2009/010-6516.pdf .
16. Ontario Ministry of the Environment, Proposed Content for the Renewable Energy Approval Regulation under the Environmental Protection Act, online: http://www.ene.gov.on.ca/envision/env_reg/er/documents/2009/010-6516.pdf at 5/24 – 7/24.
17. Supra note 1, ss. 62, 62.0.1.
18. R.S.O. 1990, c. E.19.
19. Supra note 2, Sch. G, s. 7.
20.Ibid., Sch. G, s. 13.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
