The last thing any commercial tenant wants is to see their hard earned cash go right down the drain — literally. Nevertheless, tenants often take water and sewer systems for granted when leasing rural properties, and by this I don't mean leasing a farm, but a store, restaurant or office in a rurally located shopping mall or building.
In these circumstances, I suggest tenants need to address 7 key questions regarding well and septic before making an offer to lease on a rural commercial property. While rural properties can present a variety of unique issues to both landlords and tenants, the focus of this article is on the special concerns arising from water and sewer services.
1. How is the property serviced?
Anyone considering leasing a rural property must be concerned with how the property is serviced with respect to water and sewer. Some rural properties are fortunate to have both municipal water and sewer connections available. Many rural properties, however, rely on private well and septic systems to meet these basic service requirements.
Rural properties with municipal water and sewer connections can largely be addressed in the same manner as if the property were a typical urban commercial property. Traditional commercial lease provisions concerning operating costs, maintenance, and repair obligations will generally be sufficient in such instances.
But if the property depends on private well or septic system, it raises some special concerns that may not be covered in a standard form of lease. Many city dwellers have never had consider how the drinking water gets to the tap or how waste water is disposed of - meaning well and septic systems can be a complete unknown.
2. What are the specifics of the well and septic systems?
The details of well and septic systems may have important implications. For example, the type of well on the property can impact both the quantity of water available for use and water quality. Wells generally fall into one of three types: dug wells, driven well points, and drilled wells.
For septic systems, the type of septic system is of a lesser concern since the components are generally more standardized. The size of the tank is usually the main variable to be aware of as smaller tanks will need to be pumped out more frequently, meaning higher operating costs.
Tenants self-managing the leased property should also be concerned about the exact location of these systems. In case of an emergency or undertaking improvements to the property, it is imperative that you know the location of the water pump, pressure control switch, pressure tank(s), any water treatment systems, the septic tank and the drainage field.
Whether it is you or the landlord who is managing the property, you will want to be assured that the systems were designed, constructed and remain in compliance with all regulatory requirements. Well and septic systems in Ontario are required to meet certain setback and other minimum design requirements. For example, septic systems with daily flows of less than 10,000 litres are regulated under the Ontario Building Code and systems with daily flows of more than 10,000 litres require approval from the Ministry of Environment ("MOE"). Before signing an offer to lease, you will need to do some measure of due diligence in this regard, including asking the landlord for proof of MOE approval or a well certificate. You will also want to amend the offer to lease to include a representation from the landlord that the water and sanitary systems servicing your leased premises are in compliance with all statutory and other applicable standards. If the landlord declines to do so, you may wish to consider getting a qualified professional to investigate and inspect the property to confirm that these systems are in legally compliant.
3. Quantity — Can the well meet your water usage requirements?
Well water quantity is typically measured in two ways: (1) flow rate and (2) well recovery rate. People will often mistakenly only consider the flow rate. The flow rate is the rate at which water can be extracted or pumped out of the well. While this is certainly an important consideration, the more important measurement is the well recovery rate. The well recovery rate is the rate at which the well water replenishes as water is being pumped out. It is the well recovery rate which ultimately determines how much water can be pumped out of a well in a given time period.
As part of your due diligence, ask for a copy of the well certificate. It will normally stipulate these performance specifications at the time the well was constructed. Talk to other tenants of the property (or the previous tenant) to confirm that they have not experienced any water shortage issues. Finally, include in the offer a covenant from the landlord that throughout the term of your lease, the flow and well recovery rates will not dip below your requirements.
4. Quality — Is the well water potable?
The drinkability of the water will also be of primary concern. Unlike properties with municipal water service, rural properties with well service can often require additional water treatment equipment to produce potable water.
Always ask the landlord to provide a current water potability certificate confirming the water is safe for human consumption. These certificates are usually issued by the local health authority after conducting a water test. The testing date on the certificate needs to be current. There are a number of potential water contaminants that can seep into the ground and impact water quality. Road salt, fertilizers, chemicals, solvents, gasoline and oil are some of the many common sources of ground water contamination. If the potability certificate is more than six months old, you will want to ask the landlord to have the water re-tested at an independent lab before signing the offer to lease. If the landlord declines, you may want to consider performing the test at your own expense. Again, you will want to amend the offer to include a representation by the landlord that the well water is and will remain potable and safe for human consumption both at the time of the offer and throughout the term of your lease.
5. Who will be responsible for the maintenance, repair, and replacement (when required) of the well and septic systems — and at whose cost?
The unique cost structure associated with private well and septic systems compared to municipal water and sewer services should make this an area of concern to any tenant leasing a rural property.
Unlike with residential leases, where the landlord and tenant's respective repair obligations are stipulated by statute, neither the common law nor the Commercial Tenancies Act address the parties' respective repair obligations. As such, these obligations need to be specifically detailed in the lease.
Generally speaking, commercial leases are absolutely net. That is, they permit the landlord to recover all of its maintenance, repair and replacement costs from the tenants including a management fee (typically 15%) on these costs. As such, in an absolutely net lease the landlord is financially motivated to perform these obligations. That being said, the lease should still obligate the landlord to do these repairs. In rural properties, however, we still routinely see semi-gross leases being used. A semi-gross lease is more akin to a residential lease in that the rent is all inclusive with the exception of certain costs – typically the realty taxes and hydro. Under a semi-gross lease there is a clear financial disincentive to the landlord assuming these obligations as every cent the landlord is required to spend to maintain the property erodes its rental income. As such, although you should always include in the lease promises by the landlord to maintain, repair and, as necessary, replace the well and septic systems in good working order as would a prudent owner, these promises are imperative if you are signing a semi-gross lease.
6. Are the systems in good working order?
As a natural follow up to who bears the responsibility for maintenance, repair, and replacement of the systems, you will also want to seek the landlord's assurance that these systems are in good working order. Depending upon the scale of your investment, you may wish to request to see a detailed maintenance log for both systems. If these records are not available, proceed with caution and consider arranging to have the systems inspected by a qualified professional at your own expense. As noted above, amend the offer to include a representation by the landlord the systems are in good working order and that to the best of the landlord's knowledge, no major repairs or replacements are required or scheduled over the term of your lease. Lastly, if you are leasing the whole of the property, require the septic tank be pumped out at the landlord's expense, before the commencement of your lease.
7. Who will be responsible should any environmental issues arise in connection with the septic system?
A failing septic system can contaminate ground water and pollute nearby waterways. At a minimum, you will want to request and review the landlord's site assessment reports to confirm there are no known environmental concerns. The treatment of environmental liability in the lease is regretfully beyond the scope of this article but suffice it to say that these issues are of even greater concern when dealing with rural properties.
With urban dwellers moving further away from city centres, commercial businesses are sure to follow and with them issues particular to the idyllic country setting.
Part of why I love my practice is the unique considerations that go into every deal. Rural properties present a variety of unusual concerns. Private well and septic systems are just one example. While this article is not intended to be a complete guide, I hope these seven questions will provide some guidance when leasing a rural property.
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.