Canada: When Office Tenants Go Dark

Last Updated: April 8 2011

Edited by Manuel Martins

By Laurie Sanderson

Most office leases require the tenant to actively carry on business from their leased premises and prohibit the tenant from vacating or abandoning the premises. It is becoming increasingly common, however, for tenants to object to these provisions and to request the lease include a "go dark" provision.

In a retail situation, it is clearly imperative that the lease includes a continuous use covenant. In an office situation, however, the situation is somewhat different. Firstly, office leases do not typically include the payment of percentage rent. As such, our revenue stream is not dependent on ensuring our tenant maximizes its sales potential.

Additionally, the commercial success of the other office tenants of an office building is not dependent on or impacted by a fellow tenant ceasing to operate. The exception, of course, is the mixed use building that includes tenants offering services to the other tenants of the building, such as a drycleaner, restaurant/cafeteria or photocopy service. For these service providers, the vacancy rate in the building will have a clear impact on their success and the consequent rental value of their premises.

That aside, our typical retail analysis with respect to a go dark request, will not apply to our office tenants. While we may have fewer grounds on which to oppose or deny a request to go dark by an office tenant, there are, however, legitimate concerns which need to be addressed.

Restrict To Office Only Buildings:

As noted above, if there are service tenants in the building whose profitability will be impacted by a reduction in the number of occupants in the building, it will be very difficult to grant a go dark request. Ironically, it will be easier to grant a small tenant the right to go dark than a larger tenant, but it is, of course, the larger tenant that we will be more likely prepared to accommodate.

Ensure Your Lender Does Not Object:

Because the landlord's revenue stream will not be impacted upon by the failure of the tenant to operate and thereby generate sales to pay percentage rent (because none is payable), it is unlikely the lender will object, but this should be included as a condition to the right to go dark in order to ensure we are not offside with the lender.

Make Conditional On No Adverse Impact On Landlord's Insurance:

Whether the tenant vacating the building will impact on your insurance will, for the most part, depend upon on how much of the building is being vacated. If the building is being occupied by a single tenant, the decision of that tenant to vacate the building will be viewed by your insurer as a material change in circumstances. As such, you will be legally required to notify your insurer to this effect.

We can also anticipate that this will drastically increase the insurance premiums payable for this property. As such, as part of the analysis whether to grant the go dark right, we must first confirm that the tenant is both responsible for any increase in the cost of the landlord's insurance, and that it has the financial ability to bear to this cost.

Further, most leases prohibit the tenant from doing anything that will cause a cancellation or a threatened cancellation of the landlord's insurance. Unless the tenant in question is a very small tenant (in which case leaving the building will have no affect on the landlord's insurance), the right to go dark should be made subject to this provision of the lease.

Require Notice:

A decision to go dark is not made in a spurious manner. As such, it should not be an issue for the tenant to be required to give you a significant amount of prior notice that it intends to vacate the premises and the date it intends to do so. The landlord requires this notice period for a number of reasons; one of which is to advise the insurer that part of the building will be vacant.

Confirm That The Right To Go Dark Is Subject To The Tenant Continuing To Pay All Rent When Due:

Not only should the right to go dark be subject to the tenant not being in default at the time of the request, but also that the consent extend only so long as the tenant continues to keep its lease in good standing.

Require Security:

In an office lease, part of the security for the tenant's rent covenant is represented by the landlord's distress right; that is, our right to seize the tenant's assets and sell them for non-payment of rent. By permitting a tenant to vacate the premises and remove its assets, we are forgoing this form of security. Depending upon the strength of the tenant's covenant, the landlord should require the tenant to post hard security (cash) with the landlord in lieu of its distress right.

Grant The Landlord A Right To Recapture Its Premises:

In consideration for granting the go dark right, require the tenant to grant you the option to recapture the premises and terminate the lease without recourse at any time following the date the tenant vacates the premises. The tenant will, of course, require the landlord release the tenant from any further obligation with respect to the lease arising after the termination date. It is, however, imperative that the landlord have the right to recapture the space in order to take advantage of any opportunity that may arise to re-let the premises at favourable rates.

In furtherance of this right, also require the tenant to agree that the landlord and its authorized agents have the right to show the premises to prospective tenants after the tenant vacates. This should not be objected to by the tenant as it is clearly in both parties interest that the premises be re-let. This right should, however, be clearly drafted to confirm that the right to recapture and terminate is at the landlord's sole discretion and without any obligation to do so. The purpose of the provision not being to require the landlord to terminate, but to give us the option to do so in the event that there is an opportunity to re-let the space on favourable terms.



Update on new City of Toronto Zoning Bylaw

By Brian T. Parker

In the September edition of the Real Estate & Urban Development @ Gowlings newsletter we reported at a high level on the new City of Toronto Zoning Bylaw 1156-2010 (the "Bylaw") and the myriad of changes that have been introduced under the guise of "harmonization". The Bylaw, which was approved by Council on August 27, 2010, has since been appealed to the Ontario Municipal Board by over 600 parties, with initial pre-hearing conferences not being scheduled before June, 2011.

It was clear at the time, and even more so now, that many of the changed provisions are not borne out of any related provision in a predecessor Bylaw. A case in point is the new definition of "Gross Floor Area" as it will apply to all non-residential properties across the amalgamated City. The new definition reads as follows:

"means the total area of each floor level of a building, above and below grade, measured from the exterior of the main wall of each floor level, including voids at the level of each floor, such as an atrium, mezzanine, stairwell escalator, elevator, ventilation duct or utility shaft, but excluding areas used for the purposes of parking and loading"

It is clear that gross floor area now includes all void space. This is a departure from the definitions of gross floor area contained in the former bylaws of the amalgamated City which in one form or another, permitted the exclusion of void space from the floor area calculation. The new definition effectively amounts to a down zoning, as total "bulk" of the building will now include previously exempted space.

It is worthy of mention that the gross floor area formula is used to determine other related aspects of a development including the calculation of the amount of density bonus to be paid under Section 37 of the Planning Act, and the cash payment in lieu of providing parkland. The new definition of gross floor area makes these obligations to pay and/or provide, effectively more onerous. The development industry have appealed the definition of gross floor area to the Ontario Municipal Board, among other aspects of the Bylaw.

The new definition will cause those properties that are built to their maximum floor area permission to now exceed that permission; and for those properties that may have had some remaining floor area entitlement under the former definitions, that is now taken up in an amount equal to the total amount of existing void space. In order to reduce the cloud of uncertainty created by legal non-conformity, built into the Bylaw is new gross floor area exemption language which recognizes as permitted, the higher gross floor area value, inclusive of void space. However, there is no Bylaw mechanism to compensate owners for the loss of what would otherwise be as-of-right floor area entitlement. And any floor area entitlement that may remain, must now must be developed under the new, more restrictive definition of gross floor area.

While the City has sought to cure other aspects of Bylaw non-conformity with similar exemption language (e.g. building height and setbacks), not all built form changes under the new Bylaw have been covered off with exceptions. Therefore, the City has developed a series of general provisions in the Bylaw that address legal non-complying buildings. Some care must be taken however, as it is likely that a number of the City's general provisions on non-conformity may fall afoul of 2009 decisions of the Ontario Municipal Board and the Divisional Court in City of Ottawa v. TDL Group Corp., which found that municipalities may not put constraints on property owners' legally non-conforming (and non-complying), or "grandfathered" rights beyond those found in common law. As a result, those sections of the Bylaw are also currently under appeal by a number of appellants.

Drilling down on some of the more contentious details of the Bylaw, as this article, and our preceding September article did, may now be all for naught! In a stunning reversal of position at its meeting on March 24, 2011, the City's Planning and Growth Management Committee (the "Committee") voted unanimously to stop any further work on the Bylaw, and instead, directed its planning staff, in consultation with its legal department, to report directly to Council on April 12th on a bylaw to repeal Bylaw 1156-2010.

Before the Committee on March 24, was a Report by the City's Chief Planner which was recommending even further amendments to the Bylaw already under appeal. Many of the same cast of objectors to the Bylaw the first time around, were there again on March 24, grilling the Committee further about countless problems with the Bylaw that is barely seven months old.

The Committee roundly agreed that it was senseless to further amend a Bylaw that has already been shown to clearly not work. Rather than accepting the Planning Commissioner's recommendation for more changes, the Committee directed staff to further consult with stakeholders and to bring back a revised harmonized bylaw with no greater scope than the new Bylaw, no later than January, 2012.

The unanimous recommendation of the Committee to repeal, and bring back a revised harmonized Bylaw no later than January, 2012, will go to Council on April 12th. In the interim, planning and legal staff are considering a repealing bylaw and the financial implications of this. It is widely expected that Council will vote to repeal the Bylaw and direct legal staff to prepare that Bill on April 12. That direction is somewhat complicated by the fact that Committee, in the same breath, has also recommended that Council sustain the provisions in the Bylaw related to outdoor, and rooftop patios and nightclubs. If and when the Bylaw is repealed, the previous bylaw regime, being the myriad of zoning bylaws of the pre-amalgamated municipalities', will again apply.

The City's Bylaw struggles continue......stay tuned for further updates.



A bottle of Schlitz, please! – Incoming amendments to the Construction Lien Act

By Adam Zasada

The construction and real estate industries have changed immeasurably in the last two decades. Given that the Ontario Construction Lien Act (the "CLA") has remained virtually unchanged for more than 20 years, some might suggest that some renovations to the legislation are long overdue. Some might say that...I'm just sayin'...

With the CLA now almost old enough to buy itself a beer south of the border, the Ontario Legislature recently passed the Open for Business Act, 2010, which includes several changes to the CLA. One of these changes is already in effect and the other three are expected to come into effect in the near future.

While, in the grand scheme of the construction industry the amendments are far from game changers, they will have a real impact on projects where there is equipment being supplied and installed and on condominium developments.

Definition of "improvement"

In 2007, the Court of Appeal upheld a trial judge's ruling that the transporter and installer of a 100,000 square-foot, 500,000 ton automotive assembly line (built off-site, disassembled, transported, reassembled on-site, and fastened to the building with 2,000 to 3,000 bolts) did not have lien rights, because the installation of the assembly line did not fall within the definition of an "improvement"! The Court of Appeal refused to interfere with the trial judge's finding that the assembly line was "portable". I'm not kidding, either. Really, "portable" – that's what the judge decided.1

The construction industry (and more than a lawyer or two) was shocked by the Court's interpretation and so too, it seems, did the Ontario Legislature disapprove because the definition of "improvement" at section 1 of the CLA has (albeit three years later) been amended and now expressly includes the installation of industrial, mechanical, electrical or other equipment on the land where the equipment is essential to the normal or intended use of the land.

It will be very interesting (for construction law nerds like myself, anyway) to see how far the courts will go in extending lien rights to installed equipment.

This amendment came into force in October, 2010.

Condominiums

Under this amendment (new section 33.1 of the CLA), condominium developers will be required to publish notice of their intention to register the condominium declaration in accordance with the Condominium Act in a construction trade newspaper (the Daily Commercial News) five to fifteen days prior to registration.

This amendment will provide unpaid persons having liens notice of the pending registration of the condominium declaration so that they can preserve their lien rights before the lands and premises are legally divided into separate condominium units and title is transferred to homebuyers.

Prior to the registration of the declaration, the condominium improvement can be liened in the normal manner, even if the work of the person having a lien is to parts of the project which, after registration of the declaration, will be common elements. This amendment will provide an opportunity to avoid the much more expensive and time consuming requirement of liening the common elements of a condominium after the declaration has been registered.

This amendment is not yet in effect.

Affidavit of Verification

Prior to these amendments (to sections 34 and 40(1) of the CLA), a claim for lien had to be verified by an Affidavit of Verification which was typically sworn by the lien claimant. In an effort to keep pace (or at least not fall out of sight) with the new(ish) electronic registration system for land titles documents, verifying a claim for lien by Affidavit will no longer be required.

Also, instead of cross-examining the deponent of the Affidavit of Verification, the lien claimant, the agent or assignee of the lien claimant, or a trustee of the workers' trust fund (as the case may be) will be subject to cross examination.

These amendments are not yet in effect.

Sheltered Liens

Under these amendments (to sections 44(9) and 47(2) of the CLA), a lien claimant whose lien is sheltered under a certificate of action that has been vacated from title by Court Order will still be able to proceed with an action to enforce its sheltered lien as if the Order to vacate had not been made.

These amendments were introduced to facilitate the vacating of liens by Court Order while, at the same time, protecting the rights of sheltered lien claimants.

These amendments are not yet in effect.

Footnotes

1. See Kennedy Electric Limited v. Dana Canada Corporation, 2007 ONCA 664 (CanLII) and Kennedy Electric Ltd. v. Rumble Automation Inc., 2004 CanLII 47787 (ON S.C.)

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.

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