Canada: Considerations In Canadian Commercial Leases

Leasing practices in the United States and Canada are similar in most respects, including the standard forms utilized for commercial office, retail and industrial properties. However, there are some principles which are different in Canada from those in the United States, the most important of which are outlined in this article.

In Canada, agreements to lease (letters of intent or accepted offers to lease) may be enforceable in accordance with their terms without the necessity of entering into a formal lease unless the parties otherwise provide in their agreement. In order to be enforceable, the agreement must be in writing, be executed and delivered by the landlord and the tenant, and specify the location, size and condition of the space, term duration, commencement date, basic rent and additional rents. For example, to be enforceable, it is not essential that matters such as repair and insurance obligations and restrictions on assignment and subletting be included, each of which is of fundamental importance to a landlord/investor. As a result, is important for the agreement to specify an intention to utilize the landlord’s standard form lease, the timing of its execution and the consequences if the formal lease is not so executed.

In bankruptcy, courts of law in Canada have been reticent to allow landlords to keep proceeds of letters of credit or security deposits in priority to unsecured creditors on the basis that a letter of credit or security deposit is stated to secure lease obligations and/or to be applied against rent not paid and that upon a disclaimer of lease in a bankruptcy, the obligation to pay rent ceases. As a result, landlords are even more diligent in evaluating the covenant of a prospective tenant and avoiding excessive tenant inducements at the commencement of the term.

Capital employed by the landlord in Canada is subject to a federal capital tax and, as well, in some provinces is subject to a provincial capital tax. The federal capital tax is to be phased out over the next five years. Although some landlords (such as pension funds) are exempt from the payment of capital tax, those required to pay it attempt to pass this cost on to tenants as part of operating costs. These taxes can total as much as $2.00 per square foot per annum and therefore the landlord’s rights to recover them are important. Like administrative or management fees in operating costs, there must be specific provision allowing recovery or it will not be permitted.

Otherwise known as GST, this 7% federal sales tax is relevant to commercial leases as it is imposed upon rent payable by tenants, including basic rent, operating costs and taxes. It would not be payable on utility charges payable by the tenant to the utility supplier where the tenant is separately billed by the utility supplier and non-payment by the tenant could not result in a lien against the interest of the landlord. The GST paid by the tenant (if registered for GST purposes and exclusively involved in commercial activities) is subsequently recoverable by the tenant but the Landlord is obliged by the taxing authorities to collect it.

In the United States, real property taxes are imposed at the state and city level. In Canada, real property taxes are imposed at the provincial level and vary from province to province as do tax assessment principles. For example, since 1997 in the Province of Ontario, the imposition of business taxes (a tenant obligation to pay to the taxing authorities) was rolled into the real property tax assessment so that the payment of all these taxes became the obligation of the landlord as property owner. As a result, no separate assessments are provided for individual rentable premises and the allocation of real property taxes in a multi-tenant development becomes the responsibility of the Landlord. These allocation principles must be outlined in each lease and can lead to some difficult negotiations with tenants in mixed use properties.

Other lease provisions found in Canadian standard form leases, including those pertaining to repairs, insurance, restrictions on transfers, subordination and attornment, expropriation and environmental contamination, are similar to those found in the forms used in the United States.

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.