Canada: Facing The "Big Unknown"

Last Updated: April 23 2014
Article by Max Maréchaux

New Building Issues

Negotiating offers and leases for new space in an existing building requires careful consideration of a number of issues such as landlord's work, possession date(s), fixturing period(s), improvement allowances and remedies (if any) in the event of delay, along with all the other lease issues dealt with by landlords, tenants and those that represent them in commercial lease transactions. The big unknown factor is the possession date. In most cases, the experience and expertise of those involved can reduce the unknown element to an acceptable range that gives both parties sufficient flexibility without inflicting financial hardship on either.

The big unknown, however, gets even bigger if the building has not been built and the only thing to look at is a handful of concept plans and specifications. Three to four years is the average time it takes for a downtown high rise office building to be constructed in major urban centers. Delays of all kinds, both before and during construction, are a very real possibility. The "what happens if" question is frequently asked in the context of negotiations and, in the process, the various risks associated with delays have to be identified and allocated between landlord and tenant. This must be done in the context of all the other issues and concerns that need to be addressed in the course of a lease negotiation. This article highlights some of the major issues that should be addressed in a new building situation.

Plans and Specifications

The more detailed and concise the plans and specifications are, the less likelihood there will be of unwanted and unintended results. These should be reviewed by architects, designers and other expert consultants to ensure that all the requirements, as far as they can be determined in advance, are included.

Milestone Dates

It is critical to have a schedule setting out at least the important dates of various phases of construction, such as demolition, completion to ground level, concrete top off, curtain wall completion and so on. Providing for such milestone dates is one thing but negotiating what remedies are available in the event milestones are not achieved is quite another. From a landlord's perspective, its ability to obtain financing may be compromised if tenants have a right to terminate in the event milestone dates are not achieved. Tenants, on the other hand, need to look out for themselves to ensure that they are not forced out of their existing premises before their new premises are completed.

Outside Dates

In addition to milestone dates, there should be at least two outside dates. The first outside date would be a date by which construction must begin and the other outside date would be a "drop dead" date by which the new building must be completed. The failure to meet an outside date would give rise to the tenant's right to terminate, usually within a specified period of time.

Inspection Rights

The tenant should have the right to enter the construction site at reasonable times, at its sole risk, to view the progress of the development and to fine tune its specific plans and specifications for its premises.

Change Orders

There should be a mechanism in place whereby a tenant can request a change to certain parts of the landlord's work that directly affect the tenant's premises. This should include a method to determine the cost and a process to address any delays resulting from the change order.

Expansion/Contraction Rights

In view of the fact that a tenant's needs may vary over the course of construction (3 to 4 years on average), it is not unusual for a tenant to negotiate the right to acquire additional space or reduce its space requirements by a certain percentage. This flexibility obviously benefits the tenant but, from the landlord's perspective, it limits its ability to market the remaining space in the new building.

Possession Date(s)

As indicated at the outset, this is the big unknown. This should not, however, detract from setting a target or estimated date as well as an acceptable delay period for both parties. For larger tenancies, it is quite common to have staggered possession dates so that a tenant would take possession of its premises in two or more tranches. If that is the case, the corresponding fixturing periods would start and end at different times. In order to avoid confusion and overlap, there should be a sufficient notice period of any anticipated possession date, pre-possession date inspections and pre-possession date remedial work (if any).

Deliverable Condition

In a perfect world, the landlord's work would be fully (or at least substantially) completed, there would be no deficiencies, there would be no landlord's materials or workers in the premises, all building systems would be fully functional, including the elevators and so on. In reality, however, that is seldom the case. The concept of "substantial completion" can be modified to a less onerous requirement of "deliverable condition," which is a term that the landlord and tenant can define in a manner acceptable to both of them. For a tenant to be able to do any work, it needs, at a minimum, the building to be fully enclosed (with the possible exception of an opening or "zipper" to accommodate construction elevator service), heat (especially in case the building was under construction in Canada in the winter of 2013-2014!), utility services and other basics to enable the tenant to carry out its work.

Deficiencies

There should be an efficient method of dealing with deficiencies. During a pre-possession date inspection, the deficiencies should be listed and reviewed with the landlord. They may be serious enough to delay the possession date. Alternatively, the tenant should have the right to take possession even though the deficiencies have not been remedied, so long as this does not affect the landlord's obligation to remedy. Once the tenant has taken possession, there should be a time limit within which the tenant can require the landlord to remedy deficiencies (subject to any warranties that may have been negotiated).

Dispute Resolution

While most leases include arbitration and mediation provisions, these do not readily lend themselves to resolving disputes arising during the course of construction. Consider naming a qualified expert (and one or more additional experts as back-up) to call on for a quick final and binding decision in the event of any dispute arising. The main point is that the resolution should be done quickly so as not to compound the problem further with delays.

Delay Liability

The normal argument is that the landlord (who is in charge and control of construction) should be responsible for delays, unless caused by force majeure or by the tenant. That said, the outside dates referred to earlier should not be subject to force majeure. The definition of force majeure should also be closely considered so that lack of funds, reasonably foreseeable shortages of materials or other events are not included.

Delay Remedies

The right to terminate may be appropriate in certain circumstances, such as failure to meet an outside date. In many situations, however, termination rights provide relatively little, if any, comfort to a tenant who needs new premises. The more effective remedy would be damages. There could be one or two days free rent for every day of delay, for example. This provides the landlord with a powerful incentive to complete its work. Just as important is the tenant's continued ability to carry on its business. If the only means by which this can be accomplished is to extend the term of the tenant's existing lease, then this remedy should be available and any difference in the rent should be paid by the landlord. In these circumstances, the landlord will want to ensure that it controls the negotiations regarding the extension of any existing lease. In addition, it may be necessary for the tenant to relocate to different premises or to swing space and these added costs need to be considered. On the one hand, the tenant wants comparable premises with comparable improvements and other amenities. On the other hand, the landlord does not want these additional costs to get out of hand or be unreasonable.

Lease negotiation in a new building situation raises many issues. How these issues are resolved and how the risks are allocated depends, in large measure, on the bargaining strength of the parties. Awareness and a full appreciation of the risks are the first steps in planning for contingencies and reducing the big unknown factors as much as possible.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Max Maréchaux
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions