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Commercial Leasing: A-Z DO’s & DON’Ts, CLAUSES TO LOOK FOR AND NEGOTIATING TACTICS AND STRATEGIES By: Sylvan Schneider LL.B. SCHNEIDER AVOCAT INC.

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Presentation on theme: "Commercial Leasing: A-Z DO’s & DON’Ts, CLAUSES TO LOOK FOR AND NEGOTIATING TACTICS AND STRATEGIES By: Sylvan Schneider LL.B. SCHNEIDER AVOCAT INC."— Presentation transcript:

1 Commercial Leasing: A-Z DO’s & DON’Ts, CLAUSES TO LOOK FOR AND NEGOTIATING TACTICS AND STRATEGIES By: Sylvan Schneider LL.B. SCHNEIDER AVOCAT INC.

2 What Is A Commercial Lease Business transaction involving two parties regarding land/property: Business transaction involving two parties regarding land/property: ex: Business developer of commercial space, purchaser of a business, seller of property AND tenant ex: Business developer of commercial space, purchaser of a business, seller of property AND tenant Contract (Highway properties Ltd. vs. Kelly Douglas & Co. (1971) S.C.R. 562) Contract (Highway properties Ltd. vs. Kelly Douglas & Co. (1971) S.C.R. 562) Involves financial consequences and remedies under the law Involves financial consequences and remedies under the law

3 Letter of understanding/ offer to lease: Outlines the general points of a lease:  the parties must be named  there must be a clear description of the leased premises;  the commencement/expiration of the term must be set out;  the duration of the term must be determinable;  the rent must be agreed upon (percentage, basic, additional);  all material terms of the contract not being matters incident to the relation of the landlord and tenant, including covenants, exceptions or reservations must be set out. NOTE: AN OFFER TO LEASE IS NOT SUSCEPTIBLE TO REGISTRATION AND CANNOT BIND A SUBSEQUENT PURCHASER OF THE PROPERTY See: (Industries Ultratainer Inc. vs. Rosenberg ) (Sobeys Quebec Inc. vs Canada Inc.) First Step: Offer

4 2 ND Step: THE LEASE Binding agreement upon the parties Binding agreement upon the parties Contract Contract Legal ramifications, consequences and remedies under the law Legal ramifications, consequences and remedies under the law

5 Landlord considerations: Financing: Landlord may want an offer to lease in order to permit it to move forward with its development plans. Landlord may include a provision to have Standard form of lease: Landlord may include a provision to have the tenant sign the landlord’s standard form of lease and consequences for not doing so. Business decision of landlord to attach its Business decision: Business decision of landlord to attach its standard form of lease standard form of lease If time permits and it is appropriate in the Saving time and money: If time permits and it is appropriate in the circumstances, then it is advisable to go straight to a lease to save time and money circumstances, then it is advisable to go straight to a lease to save time and money Do’s and Don’ts

6 Tenant Considerations: Essential terms: Verify that all of the essential terms are agreed upon Extraordinary/special rights: Include all special/extraordinary rights such as: Renewal rights, expansion rights, options to purchase and exclusivity rights etc.) Legal counsel/advisor: If possible, have the lawyer review the agreement prior to signing, particularly when you DO NOT have a real estate agent or broker acting on your behalf in the negotiations. Bargaining power: When the tenant has bargaining power, INSIST upon it. Landlord’s standard form:NEVER agree to sign the landlord’s standard form without the right to negotiate or amend the form Do’s and Don’ts

7 Gross Gross  In addition to minimum base rent, tenant will pay the landlord a stipulated amount per month based on the proportionate share of the escalation of the expenses over and above the expenses and/or taxes paid in the previous year Net/Net (most leases today) Net/Net (most leases today)  Landlord passes the risk onto the tenant and tenant is responsible for all charges and costs related to the operation of the premises in addition to minimum base rent Net/Net/Net Net/Net/Net  Same as Net/Net but the Tenant is also responsible for costs of structural repairs Types Of Leasing

8 Minimum Base Rent Minimum Base Rent  specific amount based on the area of the leased premises premises Additional Rent Additional Rent  calculated on a proportionate share basis and includes payment of such items as:  operating costs (“CAM”): (Include a right to inspect/ audit clause of landlord’s records with respect to operating costs)  Taxes  administrative fees Rent

9 Landlord shifts the risk and shifts the cost of insurance premiums onto the Tenant for all damages, loss or claims arising from the leased premises through exculpatory, indemnification and insurance clauses Indemnification: Tenant will be liable regardless of whether the Landlord was negligent or not and afford protection of the Landlord from third party claims. (i.e slip and fall in a store)   Tenant will be required to obtain appropriate insurance coverage for such liability   Insurance company will indemnify the Landlord for all costs and losses arising from the third party claim Indemnification & Insurance clauses

10 Tenant should attempt to have the Landlord agree not to claim against it for loss in excess of the liability limits the Tenant covenants to carry. The Tenant should force the Landlord to make a claim to its insurer rather than just pursuing the Tenant for recovery Tenant consideration

11 Insurance/Subrogation EXAMPLE: Damage to the premises caused by tenant: $5 million Damage to the premises caused by tenant: $5 million Tenant’s insurance: $1 million Tenant’s insurance: $1 million Landlord sues Tenant for recovery of monies ($4 million) Landlord sues Tenant for recovery of monies ($4 million) Note: Landlord’s claim is not limited or capped to tenant’s insurance policy insurance policy Landlord can claim the extra $4 million from the tenant Landlord can claim the extra $4 million from the tenant

12 3 Possible Solutions: Waivers of Subrogation Opinion from Insurance company Capping Landlord’s insurance claim (i.e capping Tenant’s liability) Insurance/Protection

13 Landlords ensure the solvency of their tenants by verifying their credit (credit history, credit reports), bank letters of credit, security deposits, pre-payment of last month’s rent, guarantees and indemnities Financing And Security

14 Security deposit should be available to the Landlord to compensate it for damages incurred as well as unfulfilled obligations (i.e. Tenant refuses to complete repairs to the premises which Landlord ends up doing) Security deposit should be available to the Landlord to compensate it for damages incurred as well as unfulfilled obligations (i.e. Tenant refuses to complete repairs to the premises which Landlord ends up doing) Landlord should be entitled to retain the security deposit until it can confirm that the Tenant surrendered the premises in an appropriate state as per the Lease Agreement Landlord should be entitled to retain the security deposit until it can confirm that the Tenant surrendered the premises in an appropriate state as per the Lease Agreement Landlord Considerations

15 Resist payment of a security deposit/last month’s rent where possible (rare occurrence) unless you have an ongoing relationship with Landlord and that you are financially sound Resist payment of a security deposit/last month’s rent where possible (rare occurrence) unless you have an ongoing relationship with Landlord and that you are financially sound Notice should be given to the Tenant prior to the Landlord using the security deposit funds Notice should be given to the Tenant prior to the Landlord using the security deposit funds Demand that the Landlord pay interest at a stipulated rate each year on all security deposit funds and last month’s rent Demand that the Landlord pay interest at a stipulated rate each year on all security deposit funds and last month’s rent Tenant Considerations

16 Landlord may ask for a guarantor (“Caution’) to guarantee and compensate the Landlord for unfulfilled obligations in the event that the tenant is in default Landlord may ask for a guarantor (“Caution’) to guarantee and compensate the Landlord for unfulfilled obligations in the event that the tenant is in default Guarantees

17 Difficult and onerous to enforce. The Landlord will likely have to commence litigation to get the guarantor to perform Difficult and onerous to enforce. The Landlord will likely have to commence litigation to get the guarantor to perform Landlord must exhaust remedies with tenant prior to making any demand on the guarantor (Secondary obligation) Landlord must exhaust remedies with tenant prior to making any demand on the guarantor (Secondary obligation) Preference is to obtain an indemnity, as opposed to a guarantee Preference is to obtain an indemnity, as opposed to a guarantee Landlord Considerations

18 While the Tenant may be agreeable to providing a guarantee, it will need a party willing to act as a guarantor While the Tenant may be agreeable to providing a guarantee, it will need a party willing to act as a guarantor Insist on a limited time frame or limited financial liability for the guarantee Insist on a limited time frame or limited financial liability for the guarantee (i.e The guarantee is only effective for the first two (2) years of the lease term if the Tenant is not in default or the guarantee being limited to $50,000) Tenant Considerations

19 Alternative to a guarantee: A landlord prefers an indemnity agreement over a guarantee provided by the Tenant Alternative to a guarantee: A landlord prefers an indemnity agreement over a guarantee provided by the Tenant Broader form of security Broader form of security Drafted as a separate agreement Drafted as a separate agreement Indemnitor assumes the liabilities of the Tenant and agrees to compensate the Landlord for all liability it incurs. Indemnitor assumes the liabilities of the Tenant and agrees to compensate the Landlord for all liability it incurs. Unlike a guarantee, the liability of the indemnifier is not contingent upon a Tenant’s failure to perform or default under the Lease Unlike a guarantee, the liability of the indemnifier is not contingent upon a Tenant’s failure to perform or default under the Lease Indemnity Agreement

20 Right of Landlord Financial stability of Tenant sufficient to pay rent and other leasehold improvements Financial stability of Tenant sufficient to pay rent and other leasehold improvements Conduct and character compatible with the present and prospective tenants of other space in the building Conduct and character compatible with the present and prospective tenants of other space in the building Costs involved in administrating the premises and the leases Costs involved in administrating the premises and the leases Right of Tenant Right to downsize, restructure, or refinance the business Right to downsize, restructure, or refinance the business Restricts the Tenant from selling the business/ change of control and/or any other transfers thereby restricting the Tenant’s ability to operate the business effectively and successfully Restricts the Tenant from selling the business/ change of control and/or any other transfers thereby restricting the Tenant’s ability to operate the business effectively and successfully Assignment And Subletting

21 Landlord Considerations Should be broadly drafted to include all types of transfers Should be broadly drafted to include all types of transfers Landlord should reserve the right to terminate the lease in lieu of consenting to a proposed transfer/ assignment/ subletting of the Lease Landlord should reserve the right to terminate the lease in lieu of consenting to a proposed transfer/ assignment/ subletting of the Lease Reserve the right to increase the rent upon any Transfer/ assignment/ subletting Reserve the right to increase the rent upon any Transfer/ assignment/ subletting Transferor/ Assignor is not released from its obligations under the Lease Transferor/ Assignor is not released from its obligations under the Lease Tenant remains primarily liable after any exercise of a renewal by the transferee Tenant remains primarily liable after any exercise of a renewal by the transferee Assignment And Subletting

22 Tenant Considerations Where the Landlord’s consent to the assignment is required, it must do so acting reasonably. Any reference to the Landlord being able to unreasonably withhold consent should be deleted. Where the Landlord’s consent to the assignment is required, it must do so acting reasonably. Any reference to the Landlord being able to unreasonably withhold consent should be deleted. Certain permitted assignments without the consent of the Landlord include: Certain permitted assignments without the consent of the Landlord include: 1.Change of control of tenants who are public corporations; 2. Transfers to franchisees; 3.Transfers to affiliates or subsidiaries, family members or to a purchaser of a company; 4.Change of control for the purposes of amalgamation or reorganization of the company; 5.Finance purposes; Assignment And Subletting

23 Tenant Considerations Avoid Landlord termination rights Avoid Landlord termination rights Lease should contain a right to share space with a licensee, concessionaire or other third party where it will take up a certain percentage of the floor area (i.e less than 20%) Lease should contain a right to share space with a licensee, concessionaire or other third party where it will take up a certain percentage of the floor area (i.e less than 20%) Try to obtain a release from the Landlord in cases of assignments Try to obtain a release from the Landlord in cases of assignments Try to retain a profit in cases of a sublease Try to retain a profit in cases of a sublease Assignment And Subletting

24 Monetary Defaults Non-Payment of rent: Notice will be given to tenant before the Landlord exercises its rights and remedies under the law Non-Payment of rent: Notice will be given to tenant before the Landlord exercises its rights and remedies under the law Action for Rent: Landlord may claim for damages for future losses without terminating the lease Action for Rent: Landlord may claim for damages for future losses without terminating the lease Terminating the lease: If the cost-benefit is no longer worthwhile to have a defunct tenant, the Landlord may terminate the lease Terminating the lease: If the cost-benefit is no longer worthwhile to have a defunct tenant, the Landlord may terminate the lease Defaults

25 Non-Monetary Defaults If a tenant is in default to perform an obligation, then the Landlord would prefer the tenant to comply with its obligations pursuant to the Lease. If a tenant is in default to perform an obligation, then the Landlord would prefer the tenant to comply with its obligations pursuant to the Lease. In the event of a default, the Landlord may attempt to ask for specific performance from the courts In the event of a default, the Landlord may attempt to ask for specific performance from the courts Defaults

26 3 ways 1. Physically re-take possession of the premises by obtaining possession of the premises and ensure that the tenant is deprived of its use (i.e change locks) 2. Commence a court action for possession of the premises 3. Enter into a written termination agreement where the parties agree that the tenancy has been terminated NOTE: A Landlord should not accept rental arrears after termination of the lease the lease Termination Of Lease

27 Highway Properties Case: The Court held that the lease could be terminated and the Landlord may still recover damages for losing the benefit of the Lease over its unexpired term and that the Landlord could claim for damages for loss of future rent for the unexpired term of the Lease (less the actual rental value of the premises over the term). Case Law: Termination

28 If reluctant to sign a long-term lease and you are unsure whether your business will be successful or you might not need so much space. If reluctant to sign a long-term lease and you are unsure whether your business will be successful or you might not need so much space. Landlord may impose a right to terminate if the tenant does not reach certain level of gross sales Landlord may impose a right to terminate if the tenant does not reach certain level of gross sales Tenant has a right to terminate if a particular store ceases to carry on their business in a shopping centre Tenant has a right to terminate if a particular store ceases to carry on their business in a shopping centre Early Termination Clause

29 Goal: Eliminate or reduce the competition in a retail space within that market area Goal: Eliminate or reduce the competition in a retail space within that market area Exclusive rights to apply also to any successor or assignee in order to increase the value of the lease if the tenant later seeks to sell its business Exclusive rights to apply also to any successor or assignee in order to increase the value of the lease if the tenant later seeks to sell its business Exclusive Rights Clause

30 Failure to implement certain clauses or protect your rights and obligations could be costly in the future. Failure to implement certain clauses or protect your rights and obligations could be costly in the future. Lawyers need to be aware of the implications of the lease provisions and the proposed structure of the transaction Lawyers need to be aware of the implications of the lease provisions and the proposed structure of the transaction Conclusion Of Certain Clauses

31 Negotiating Tactics and Strategies

32 1.Understanding the needs of the parties  Identify your needs  What is the minimum acceptable terms?  What is the price spread?  What is the opposing parties needs?  Are there any compromises to be made? Negotiating Tactics And Strategies

33 What is the time frame? What is the time frame? Is the time frame realistic to close the deal? Is the time frame realistic to close the deal? Setting The Agenda And Timetable

34 Your office or theirs?? Your office or theirs??  shows a sign of strength Sometimes advantageous to concede and go to their offices Telephone conference calls Telephone conference calls  organize a time for the call  Be in command of the subject matter Face to Face meetings Face to Face meetings  Learn from the other’s facial expressions and body language  rarely do people get up and walk away from face to face Where to Negotiate

35 Before Introducing the proposal Present all the reasons that brought you to the proposal Present all the reasons that brought you to the proposal Invite the other side to correct you: This will establish a dialogue Invite the other side to correct you: This will establish a dialogue Establish the facts beforehand Establish the facts beforehand Negotiating Tactics And Strategies

36 Be Unequivocal Be direct and unequivocal in what you Be direct and unequivocal in what you want even if it is controversial want even if it is controversial Be honest Be honest Negotiating Tactics And Strategies

37 Responding to Counter-Proposals If the other party offers a reasonable compromise, you should promptly accept it If the other party offers a reasonable compromise, you should promptly accept it If the other side makes an unsupportable proposal, resist the temptation to criticize and reject it- try instead to re- work and re-focus on the proposal If the other side makes an unsupportable proposal, resist the temptation to criticize and reject it- try instead to re- work and re-focus on the proposal Silence is golden Silence is golden Negotiating Tactics And Strategies

38 Avoid making statements Ask questions instead of making statements Ask questions instead of making statements Questions allow the other side to respond with information Questions allow the other side to respond with information Listen carefully to the information and evaluate the information Listen carefully to the information and evaluate the information Negotiating Tactics And Strategies

39 Avoid flat out rejections Never state an ultimatum unless you truly mean it Never state an ultimatum unless you truly mean it Never resort to threats; Warnings are far more legitimate Never resort to threats; Warnings are far more legitimate Negotiating Tactics And Strategies

40 2.Confronting negative tactics A. Prior Offer Tactic “We already have a better offer”. If you cannot match it, simply say: “That is a great offer, if I were you I would take it.” There is no sense now in continuing to negotiate. If they continue to negotiate with you, you instantly know that there is no better offer. Negotiating Tactics And Strategies

41 B. When the other side will not negotiate “Either take it or leave it”  Talk about the reasons for their refusal to negotiate and ask what facts have been relied upon.  If the facts are incorrect, suggest that there is a need to determine whose facts are correct Negotiating Tactics And Strategies

42 C. Confronting Confrontations Confrontation is a ploy to seek control of the meeting.  You should view this as a negotiation tactic on the other side’s part to make you look for a compromise or find a solution Negotiating Tactics And Strategies

43 D. Confronting Rudeness “raises his voice, rude, you receive a threat…etc.”  Tell the person that you are prepared to resume discussions when he/she returns to civility  Tell the person that “I do not respond well to threats- I negotiate based on merits.”  Last resort: walk out Negotiating Tactics And Strategies

44 E. Do not Bid Against Yourself “You have to do better than that”  require a counter-proposal and until one is presented stand firm on your original proposal Negotiating Tactics And Strategies

45 F. Don’t respond to extreme positions  Negotiators often start with extreme positions in order to lower your expectations. The theory is that the parties will end up splitting the difference.  Ask for reasoning and merits of the other side’s position Negotiating Tactics And Strategies

46 G. Negotiate only with your counterparty  Ensure that the person to whom you are negotiating has the full authority to compromise  If there is any doubt, no commitment should be made  Adjourn the meeting until the other side can produce someone who is able to make a binding decision Negotiating Tactics And Strategies

47 Always end off on a cordial note whether the negotiations fail or not. Negotiating Tactics And Strategies

48 ANY QUESTIONS??? SCHNEIDER AVOCAT INC. Sylvan Schneider, LL.B Sherbrooke West Suite 210 Montreal, Quebec, H3H 1E8 Tel:(514) Ext. 112 Fax:(514) Thank-you


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