1. Managing Tenant Covenants and Condition
Lesson 5

2. Definition of Covenants
A covenant (in the context of a lease) refers to any promise in a lease or agreement for lease
They are the rights and obligations of the landlord and tenant in a lease

3. Types of Covenants
Express Covenants - Clauses written in the Tenancy Agreements
Implied Covenants - Implied under the common law
Express covenants contained within a lease will override the covenants that might otherwise be implied by common law

4. Implied Covenants for Tenants
Payment of rent
No assigning or subletting
To pay for own usage of all utilities bills
No alterations
Use for permitted purposes
Not to commit waste (take reasonable care of the premises) *Except for fair wear & tear

5. Implied Covenants for Tenants
Types of Waste
Permissive waste - Not taking care of the premises
Voluntary waste - Intentionally making structural change
Equitable waste - Cutting down of trees without consent of the landlord
Ameliorating waste - Making an upgrade of the premises without consent from the landlord

6. Positive and Restrictive Covenants
1. Positive Covenant - an obligation to take action
E.g. a landlord’s positive covenant - requirement to paint the exterior of the building at least every five years or to ensure the maintenance and repair of the exterior and infrastructure of the building.
E.g. a tenant’s positive covenant - requirement to maintain the interior of the property, and to pay the rent and service charge in accordance with the lease
2. Restrictive Covenant - an obligation NOT To Do
E.g. not causing a nuisance at the property

7. Charter Trust Vs Davies [1997]
Breach of Covenants
Charter Trust Vs Davies [1997]
(Quite Enjoyment)
The Landlord was liable when he failed:
to take steps to prevent a tenant of a shopping centre from blacking out windows and putting tables and chairs outside to the annoyance and inconvenience of other tenants in the same shopping centre

8. Covenants VS Conditions
Covenants differ from conditions, which hold that:
the lease cannot take effect until a condition is fulfilled (condition precedent); or
the lease will terminate should a condition on which it is granted cease to apply (condition subsequent)

9. Covenants VS Conditions
Conditions are often informally referred to as outs, because a failure by one party to satisfy its conditions enables the other party to get out of the contract.
For this reason, conditions are often vigorously negotiated.

10. Bridge to Lease
The offer might compel tenant to sign landlord’s standard lease
Landlord will want to prevent Tenant from negotiating changes to Lease
Tenant will want ability to negotiate change

11. The Tenant Covenant
Goal of landlord: have maximum ability to recover against Tenant and its principal(s)
Financial statements of corporation
Security agreement
Personal guarantees from principals
Security against assets of principals
Letters of credit
Security deposit
Prepaid rent

12. The Tenant Covenant
Goal of Tenant: Avoid personal liability, if possible
Use a corporation (preferably single purpose)
Avoid guarantees / indemnities: If possible, limit by time or limit by amount
Letter of credit as alternate security

13. Term, Extensions and Renewals
Initial term usually 3 to 5 years for retail, office and commercial
Longer initial term on full building (build-to-suit)
Monetary risk of longer term lease – tenant is “locked in”
Shorter term lease - tenant can reduce relocation risk through extension/renewal options

14. Use of Premises / Conduct of Business
Landlords define “permitted use” narrowly
Change of use might require consent – can affect tenant’s ability to sell business
Controls on “classiness” of use
Landlord will usually set hours of use, for retail leases
Landlord may require “continuous use” - esp. in retail

15. Insurance Landlord and tenant each insure Typically:
Landlord insures building
Tenant insures own (interior) premises and contents
Landlord will require extensive insurance by tenant
Fire / damage
Liability

16. Maintenance and Repairs
Landlord
Landlord only liable as expressly set out in lease
Landlord usually responsible for structural repairs – Should not be recoverable as an operating cost
Landlord usually responsible for general non-premises repairs/maintenance – Recoverable as operating cost

17. Maintenance and Repairs
Tenant
Usually limited to the (interior) premises
Tenant should ensure no obligation to repair structure
Restoration obligation on lease expiry/termination

18. Assignment vs Sublease
Transfer
Assignment vs Sublease
Lease assignment - transferring a tenant's rights and obligations to a new tenant
Lease subletting - a more flexible arrangement that involves a lessee allowing an additional tenant to use the leased space, often on a temporary or short-term basis
If lease silent, no restrictions but most leases tightly control lease transfers

19. Transfer Typical transfer control provisions include:
Landlord’s consent for assignment;
Landlord’s approval of financial strength and character of assignee;
Payment of legal fees (if any) for the assignment of lease;
The original tenant to remain liable after the transfer

20. Transfer Tenants should beware:
“Unreasonable and arbitrary withholding” of consent
Long list of tests to meet
Take-back right by landlord
No change of use on transfer

21. Default and Termination
Landlords have extensive common law rights though most leases expand on common law rights
Right of entry on default
Default will not necessarily result in termination
Landlord has no obligation to re-lease
Landlord can claim rent for balance of lease

22. Tutorial

23. Case Study Sample Letter of Offer & Lease Agreement