Canada: Subtenants: Protecting Your Legal Status

(To the reader: Please note that many of the legal references and analysis below are specific to the laws of the province of Ontario. If you require further information specific to your jurisdiction, please communicate with one of our commercial real estate group coordinators in your region.)

Given the downturn in the economy and the resulting downsizing by many companies, the commercial leasing market will likely experience an increase in available subleased premises. While this influx could potentially represent an economic windfall, potential subtenants need to be aware of their legal status with respect to their sublet premises prior to signing their sublease.

By the very nature of the tri-party relationship, subtenants are exposed to the risk of having their right to sublease the premises automatically extinguished as a result of the head lease for the premises being terminated. In most circumstances, the sublease is dependent upon the head lease and cannot exist without it. Accordingly, to off-set this risk of early termination, a subtenant needs to be cognizant of existing statutory protections and diligent in negotiating protections in his sublease..

Limiting Risks Of Early Termination

Although it is difficult for a subtenant to completely protect its sub-tenancy, there are ways to minimize the risk of early termination:

  1. Contractual Accommodation By The Landlord

    Ideally, a subtenant can successfully negotiate a guarantee from the landlord so as to allow the subtenant continued occupation of its premises on the same terms and conditions as in the sublease in the event the head lease is terminated. However, landlords are often reluctant to provide such a guarantee without some incentive for the concession.

    On the other hand, a landlord will often agree to a reasonable notice provision by which a subtenant must leave the premises upon termination of the head lease. While not ideal, this provision gives the subtenant the time required to either negotiate a new lease directly with the landlord or find other premises with minimized disruption to its business.
  2. Statutory Protection

    The Ontario Commercial Tenancies Act, rso 1990, c.L.7 (the "CTA") also provides two significant statutory rights and protections to subtenants who are affected by a tenant's breach of a head lease.

    1. Pursuant to Section 21 of the CTA, a subtenant may apply to Court for an order allowing it to retain the premises in the event the landlord terminates the head lease. The Court is given discretion regarding which terms should apply to this continuing tenancy. To date, courts have normally imposed the terms of the head lease on the subtenant so as to not unfairly affect the landlord in making decisions under this section.
    2. Section 39(2) of the CTA provides for similar protection when a head lease is disclaimed or assigned by a trustee in bankruptcy. In this situation, the subtenant may normally assume the head lease at the rental rate that is the greater of (a) the rent paid by the tenant under the head lease and (b) the rent paid by the subtenant under the sublease. Nevertheless, the Court still maintains the right to change the terms of the lease.

    In most circumstances, landlords will require subtenants to waive their statutory rights and protections found in sections 21 and 39(2) of the CTA as a condition of granting the subleases. While subtenants will try to resist such waivers, landlords will be reluctant to negotiate or modify the subleases' waiver clauses in order to protect their rights to terminate the sublease and access the entire premises where the tenant has declared bankruptcy or has otherwise breached the head lease.

Limiting Risks Of Statutory Waivers

Where a landlord insists that the sublease include a waiver of sections 21 and 39(2) of the CTA, the associated risks to the subtenant's quiet enjoyment of the sublet premises can be limited as follows:

  1. Notice Of Head Tenant Default. The subtenant can negotiate that the sublease include a provision whereby the landlord agrees to provide the subtenant with written notice of any default by the tenant under the head lease together with a right to cure the breach within a reasonable period of time. The subtenant is then given the ability to keep the head lease in good standing or to negotiate a new lease directly with the landlord.
  2. Direct Payment of Rent To Landlord. The subtenant can negotiate that the rent payable pursuant to the terms of the sublease be paid directly to the landlord, thereby reducing the risk of any potential diversion of funds away from the landlord and increasing goodwill between the landlord and subtenant.
  3. Financial Security From Head Tenant. As a condition of executing the sublease, the subtenant may require the tenant to post financial security to be used in the event the head lease is terminated as a result of tenant default or bankruptcy. The amount of this security should equal the reasonable costs necessary for the subtenant to relocate to new premises.

Subtenant Due Diligence

While a carefully crafted sublease goes a long way to protect a subtenant's legal status in the tri-party relationship, it is equally important for the tenant to perform its due diligence prior to entering the sublease arrangement. Accordingly, the subtenant should:

  1. analyse all the agreements that make up the head lease (i.e. the head lease itself and any amendments, estoppel certificates, non-disturbance agreements and any additional covenants and restrictions) and ensure the sublease will not be subject to a problematic head lease;
  2. ensure the tenant has sufficient financial strength to perform its obligations under the head lease; and
  3. ensure a non-disturbance agreement has been granted to the tenant pursuant to the terms of the head lease. Current economic conditions will likely result in an opportunity to sublease premise at a reduced rental rate.

However, potential subtenants need to be mindful of the legal and practical pitfalls of the tri-party relationship created by a "boilerplate" sublease. Like all agreements, the sublease needs to be crafted to satisfy the needs of the parties involved. Therefore, potential subtenants should consult with a lawyer before entering into any sublease transaction.

About BLG

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
 
In association with
Related Topics
 
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