Canada: Real Estate Law

Contents

1. New City of Toronto Comprehensive Zoning By-law

2. Going "Green" in Your Lease

3. Toronto's Green Roof By-law

5. The Landlord and The Troubled Tenant: The Curious Case of Tenant Assistance

New City of Toronto - Comprehensive Zoning By-law
By Kim M. Kovar

On May 22, 2009, the City of Toronto released its first draft of a new Comprehensive Zoning By-law for the amalgamated City. This By-law will repeal and replace the comprehensive Zoning By-laws of the six former municipalities, harmonizing standards and implementing the City's new Official Plan.

The draft By-law is available for public review and comment at http://www.toronto.ca/zoning.

While the By-law affects all lands in the City, landowners who have obtained zoning amendments or minor variances in the past few years or who have development plans should pay particularly close attention to this City initiative. Owners need to ensure that any relevant site-specific zoning amendments are being carried forward intact, and that changes to underlying definitions of relevant terms, which is part of the harmonization exercise, are not impacting development permissions.

As well, the new By-law contains no provisions at this time to grandfather previous minor variance approvals. If a landowner has obtained a minor variance and is constructing in accordance with that approval at this time, once completed the construction will enjoy protection as a legal non-conforming use. However, if planned construction has been delayed, and if the provisions of the former Zoning By-law which were varied are amended by the new By-law, previously granted variances may no longer be sufficient and landowners may need to reapply.

The City intends to introduce the new Comprehensive By-law to the Planning and Growth Management Committee in the fall of 2009 and have tentatively scheduled By-law enactment by City Council at its meeting on November 30 and December 1, 2009.

The City will be holding a series of public open houses to review the provisions of the new By-law with interested stakeholders. This process provides an important opportunity to seek clarification and provide feedback. Those who own or develop land in the City should review the By-law in order to assess its potential impacts on their property or business. If questions or concerns exist, owners must make those concerns known to City Council, in accordance with the provisions of the Planning Act, in order to protect their interests.

For further information, please do not hesitate to contact any member of the Aird & Berlis LLP Municipal and Land Use Planning Group. Details can be found on our Municipal and Land Use Planning web page, by clicking on Members.

Going "Green" in Your Lease
By Lloyd F. Cornett

We last wrote about greening commercial leases in the November 2007 issue of this newsletter. Since then, much has occurred to warrant another look at this topic.

There has been a lot of news recently about "greening" commercial buildings. For example, Bill 150, The Green Energy and Green Economy Act, 2009 (the "Act") was passed into law by the Ontario Legislature on May 14, 2009, only 80 days after the Bill received first reading. In addition to repealing or amending several other existing laws to facilitate energy conservation and the development of new "green" energy production, the Act will require owners of certain buildings (including residential properties) to provide prescribed information relating to energy consumption and efficiency to prospective purchasers or tenants, and will also require prescribed building owners "to prepare an energy conservation and demand management plan". The government would then have the power to require the owner to implement the plan.

The City of Toronto (like many other municipalities across North America and, indeed, around the world) is also stepping up its efforts to require buildings to become greener. The Toronto Green Standard, formerly known as The Toronto Green Development Standard, was adopted by City Council in December 2008 and will be implemented in September 2009. It will require or encourage sustainable performance standards to be met with respect to the development of certain new projects. On May 27, 2009, Toronto became the first municipality in North America to adopt a by-law which will require many classes of new buildings to have "green" roofs. (See accompanying article by Sandra Dos Santos)

In addition, the City, the Province, the federal government and other governments at all levels across the country either have, or are considering, regulations requiring their owned and leased property to meet certain standards of sustainability. Many building owners who have existing governmental tenants or who hope to attract such tenants to their properties in the future may find themselves out of the running because their real estate does not meet the green standards which the governmental entities are setting.

Many owners and occupants of new and existing buildings around the world are also voluntarily adopting and implementing sustainability standards for their real estate. Applications for registrations under LEED, BOMA BESt, BREEAM, Energy Star and other rating programs are increasing exponentially. There is a growing body of evidence that green buildings have higher rents, higher occupancy rates, lower operating costs and higher sale prices than traditionally-built buildings and many occupiers are demanding green buildings with the expectation of increased employee productivity, decreased employee absenteeism and turnover, and lower occupancy costs. Green buildings are increasingly perceived by both owners and tenants as being good for business. Those who ignore this trend risk having their properties eventually become "dinosaurs."

The combined "carrot and stick" effects of the commercial desirability of green real estate and new governmental regulation and incentives (with more anticipated) are forcing landlords and tenants of commercial properties to recognize the changes and challenges and to rethink the lease documents which govern their roles, responsibilities and long-term relationship. It is no longer good enough to rely on existing lease forms. When leasing space, all parties need to consider how the lease document will impair or facilitate their green goals, keeping in mind the long-term nature of many leases and the practical certainty of continuing major changes in the legal, political, social, environmental, design and business climate in which owners and occupants of buildings will have to manage their businesses and their property.

Albeit somewhat slowly, the North American real estate community has begun to understand the need for corresponding changes to their lease documents. Organizations such as the Building Owners and Managers Association (BOMA) and the Real Property Association of Canada (REALpac) have recognized this and have recently published "green" office lease forms, which are adaptations of standard lease documents previously published by them. (For more information, go to www.boma.org and click on "Store" and then "Leasing", or go to www.realpac.ca and follow the "Standards" hyperlink then "National Standard "Green" Office Lease for Single Building Projects").

Why is a green lease necessary? Simply put, because existing non-green lease forms are not designed for a "green" world and typically contain many terms which may prevent or inhibit the achievement of landlords' and tenants' sustainability goals. Additionally, and importantly, they do not include provisions necessary to adequately address issues such as:

While it is beyond the scope of this article to describe all of the matters which a review of existing lease forms with a view to making "green" modifications might address, some key focus areas are (i) operating costs, (ii) permitted use, (iii) casualty and insurance, (iv) tenant improvements and alterations, (v) maintenance and repair, (vi) removal of tenant improvements and fixtures, (vii) landlord access, (viii) waste management, (ix) signage, (x) utilities, (xi) assignment and subletting, (xii) rules and regulations, and (xiii) default and remedies.

Leases are long-term agreements which, once signed, are difficult to change unless the parties mutually agree to do so. They need to evolve to reflect the changes which have already occurred, and which will continue to occur in the future, with respect to the design and operation of buildings so that they will meet the sustainability demands and requirements imposed upon both landlords and tenants. Landlords completing a new development have the opportunity to create a new "green" standard lease form, tailored to the particular goals of the landlord, prospective tenants and the nature of the building. Renewals of leases are more problematic, as they are often predicated upon the terms of the existing leases and therefore there is limited scope to introduce green lease provisions where the other party is unwilling to do so (although some leases provide that renewals will be "on the landlord's then standard form" – which creates an opportunity to incorporate green lease language). Even if neither party has a right to compel the other to agree to amend the lease to incorporate green provisions, the landlord and tenant may nevertheless adopt their own green objectives and take action to implement changes in those areas which are within their own control. In the long run, however, landlords and tenants will likely conclude that they have no choice, and it is in their mutual best interests, to work closely together in this regard, and there is no time like the present to begin the task of identifying existing lease documents and creating new forms, which will facilitate rather than impede the realization of both parties' legitimate "green" objectives.

Toronto's Green Roof By-law
By Sandra I. Dos Santos

In keeping with the current trend of "going green", on April 14, 2009, the City of Toronto announced its intention to adopt the proposed Green Roof By-law ("Draft By-law"). As part of Mayor David Miller's "green" initiative that has put the environment front-and-centre on the municipal agenda, Toronto has become the first city in North America to mandate green roofs on most new buildings and set standards for their construction.

Due to strong opposition from the development industry and from other sectors, the Draft By-law was referred back to the Planning and Growth Committee ("Committee") for further review and consultation. On May 6, 2009, councillors on the Committee endorsed a revised Draft By-law that was much more expansive in nature than what was originally proposed. The Draft By-law was passed by a nearly unanimous decision on May 27, 2009, as By-Law Number 583-2009 ("By-law"). The By-law was enacted pursuant to Toronto's new green roof construction powers granted under s. 108 of the City of Toronto Act, 2006 and any contravention of a provision of the By-law will constitute and offence, and if convicted, a party may be liable to a maximum fine of $100,000.

The By-law will apply to all new building permit applications made after January 31, 2010, and it requires that every new building or building addition constructed with a gross floor area of 2,000 m² or more be built with a green roof in accordance with the Toronto Green Roof Construction Standard. The proportion of roof area devoted to a green roof is dependant on the square footage of the building or building addition and it can range anywhere from 20 to 60 percent of available rooftop space. Available roof space is the total roof area excluding areas designed for renewable energy, private terraces and residential outdoor amenity space (to a maximum of 2 m² per unit).

The By-law lowers the minimum square footage that would require a green roof from the initial proposal of 5,000 m² and mandates that residential buildings with a height of 20 metres or higher be built with green roofs. In addition, certain exemptions previously provided are no longer available, namely exemptions for public or separate school buildings, industrial buildings and non-profit housing. Industrial buildings, however, are only required to construct a green roof covering 10 per cent of a new building's roof, and only to a maximum of 2,000 m². The By-law also provides a reprieve to the industrial sector until January 31, 2011, to allow city officials to explore alternative options for the industrial sector, such as white roofs, that would achieve the By-law's goals.

As the By-law was enacted under the City of Toronto Act and not the Planning Act, a party wishing to reduce the green roof coverage requirement must apply to the Chief Planner for a variation or apply to City Council for an exemption. There is no recourse to the Committee of Adjustments or to the Ontario Municipal Board on this issue. If an application for a variation is approved by the Chief Planner or an exemption is approved by City Council, the applicant is required to make a cash-in-lieu contribution for the reduced area based on the average actual cost of construction. Currently, the cost is deemed to be $200.00 per m². All funds collected as cash-in-lieu of construction of a green roof are to be segregated and directed to the Eco-Roof Incentive Program which provides funding for existing commercial, industrial and institutional buildings seeking to retrofit a green or cool roof.

The development industry has been a strong critic of the By-law. Developers, while not opposed to the concept of green roofs, are concerned that the By-law is simply unworkable in its current form. The Building Industry and Land Development Association proposed a pilot project instead of a full-scale by-law and advocates for the construction of green roofs to be voluntary. Other developers have argued that other technologies such as reflective roofs, wind turbines and solar panels may address the City's environmental concerns and be better suited for some projects rather than the City's "one-size-fits-all" approach. In addition, the increase in costs for developers will range from $18 to $28 per sq. ft. and the result may be a net increase of hundreds of thousands of dollars for major projects. That is a significant cost during an economic downturn with a price sensitive market. In addition, the By-law is silent with respect to financial incentives, direct or indirect, for new developments. In the long term however, green roofs may enhance the value of the building and translate into better yields allowing developers to recoup at least some of the higher front-end costs.

Another critic of the By-law, the Roman Catholic Archdiocese, has argued that the expense of installing a green roof would be too onerous for the Catholic Church, and presumably other faiths that rely on collections and donations for building projects. But it's not just the issue of costs that is a concern; it's also a factor in the design as traditionally the architecture in places of worship doesn't lend itself to flat roofs.

The benefits in implementing green rooftops in Toronto should be noted. As roofs make up 21 per cent of Toronto's surface area, some benefits include, without limitation, the reduction in air conditioning costs and in the urban heat island effect, the improvement in air quality and storm water management, enhanced biodiversity, aesthetic improvement of the urban landscape and an increase in property values. Such benefits have not been lost on other jurisdictions. While Toronto might be considered a pioneer in North America for mandating the construction of green roofs and establishing applicable construction standards, many jurisdictions internationally have long-standing policies on such initiatives, including Germany, Japan, Switzerland, and Austria. Certain jurisdictions have used indirect financial incentives such as storm water taxes, instead of direct subsidies, to encourage the implementation of green roof policies. This indirect approach is believed to work better than mandating green roofs through regulations or other means since property owners act voluntarily when there are clear economic gains. Moreover, whereas subsidies are a one-time financial advantage, waste water levies are a more permanent incentive thereby making long-term maintenance more tenable.

As a result of its green roof initiative, the City of Toronto has won the Federation of Canadian Municipalities' FCM-CH2M Hill Sustainable Community Award, which recognizes municipal leadership in sustainable community development and gives national recognition to projects that demonstrate environmental excellence and innovation in service delivery. At this time, it is unclear whether the City of Toronto, in response to concerns from various sectors, will devise a financial assistance program for the construction of green roofs and how much of a constraint on development the additional costs of such construction will be. The question becomes what works best in the long-term – the carrot of financial incentives or the stick of regulation? It's clear that environmentally, we have to move in that direction, but at what speed and at what cost?

The Landlord and The Troubled Tenant: The Curious Case of Tenant Assistance
By Steven Pavlides

Long periods of sustained commercial and office rental increases have come to an end in most Canadian cities. Tenants enduring financial difficulties in the current economic downturn are increasingly looking towards landlords for temporary or permanent rental concessions through rent reductions, abatements or deferrals.

While no landlord wants to grant rent concessions, the current downturn will force some landlords to make the difficult and inevitable determination that it is better to receive reduced rent from a struggling but operating tenant than it is to have no rental income and vacant premises.

The following are points for consideration by the landlord when negotiating tenant assistance agreements with a troubled tenant:

Abatement or Deferral: The tenant will undoubtedly request that rental payments abate, either by the full amount or by some negotiated portion, during the agreed upon rent relief period. The landlord should resist giving up the rent that was negotiated for in the subject lease whenever possible and instead, insist that a portion of the rent be deferred during the rent relief period for later payment. The amount of deferred rent can be used as an incentive against the tenant's default of any of its obligations under the lease. Upon any default of the tenant's obligations contained in the subject lease the portion of deferred rent should accelerate and become due and payable.

Review Financial Statements: Whether or not the subject lease requires financial reporting by the tenant to the landlord, the landlord should make it a requirement for consideration of the tenant's request for rent relief that the tenant provide the landlord with audited financial statements and reports for the past several reporting periods. The reasons for the requirement are two-fold. First, the landlord will be able to assess and confirm the tenant's claim of financial difficulties. Second, the landlord will be able to determine the appropriate amount of rent relief that the tenant may need to weather the current economic downturn.

Relief Period: Rental reductions or deferrals should be viewed as temporary and should only apply for a short period of time.

Default: The tenant assistance agreement should expressly provide that the tenant must not be in default of either the subject lease or the tenant assistant agreement itself. The agreement should provide that upon the tenant's default of any of the provisions of the subject lease or the tenant assistance agreement the following should occur: rental concessions terminate; the deferred or reduced amount of rent should become due and payable; and the rent provisions contained in the subject lease are immediately reinstated.

Clawback of Tenant's Personal Rights: In consideration for the landlord giving up or modifying its right to collect rent in the subject lease, which right was fairly negotiated during rosier economic times, the landlord should demand concessions from the tenant, whenever and wherever possible, with respect to certain rights the tenant may have obtained from the landlord during those same negotiations. The landlord should seek to eliminate or modify exclusive use and co-tenancy provisions, renewal and lease termination rights and exclusions from operating costs. The landlord should also seek to impose regular financial reporting by the tenant and require the payment of a security deposit if not so required under the subject lease.

The landlord should also look to impose termination rights should the following occur:

• the tenant fails to pay the minimum/base rent (save and except for the deferred/reduce rent) or percentage rent, if applicable, or additional rent when required, or if the tenant defaults in the performance of its other obligations under the subject lease or the tenant assistance agreement;
  

• the tenant or any officer, director, shareholder, employee, agent, associate or affiliate of the tenant makes any of the terms of the tenant assistance agreement known to any other tenant of the building or project;
  

• the tenant becomes bankrupt or insolvent or any of the situations described in the subject lease that deal with bankruptcy, insolvency and fraudulent conveyances occur;
  

• the subject lease is terminated, cancelled, repudiated or disclaimed in conjunction with any tenant bankruptcy or receivership proceedings or any reorganization whereby the tenant seeks relief or protection from its creditors;
  
  

• there is a transfer of all or any part of the subject lease or of all or any part of the tenant's interest in the premises; or
  

• on thirty (30) days' notice if the landlord wishes to terminate the relief period for any other reason, which should be at the landlord's sole, absolute and unfettered discretion.
  

Confidentiality: As noted above, a strongly worded confidentiality provision is an absolute necessity.

Adjustments: In return for the landlord agreeing to defer rent, the tenant should agree that the landlord shall not be required to make any year-end adjustments to operating costs, etc., in favour of the tenant. Instead any credits owing to the tenant based on those adjustments should be applied to deferred/reduced rent amount.

Much like in past economic downturns there will be tenants that are lost to bankruptcy in the current downturn. However, providing temporary rental concessions may help troubled tenants ride out the storm.

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.