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Do You Have A Good Lease?

Here’s the problem. A lease is written at a particular point in time, but it describes a complex relationship between at least two parties that continues for many years. Circumstances change every day. Some circumstances are predictable, others are not. Every provision of every lease may be appropriate, inappropriate, or of no consequence at a given point in time depending on varying factors.

Consider British Petroleum (BP) & the Gulf of Mexico oil spill disaster. BP, Anadarko and Mitsui were collectively the “tenant” under a lease with the U.S. Federal Mineral Management Service as “landlord”. The “premises” was roughly nine square miles of ocean floor under the Gulf of Mexico. The “rent” included an initial bonus payment of $34 million, plus ongoing royalty payments once commercial oil production began. No rent would be payable if a well never became productive. As we now know, one well proved to be a high-volume producer that the tenant, unfortunately, lost control of. The result: oil spewed into the ocean instead of into commercial production. Now the lease language, originally intended to relieve the tenant of any obligation to pay rent before commercial production began, was interpreted to mean that although the tenant owned a proven high-volume well, it did not have to pay rent until it regained control. In addition, because no one ever envisioned this loss of control, the lease indicated that the tenant was under no obligation to pay the cleanup cost of the oil spill. This cost, by default, belonged to the landlord.

Consider your own lease. Your circumstances are different now than when you signed your lease. The implementation of the Harmonized Sales Tax is just one example. Just as neither landlord or tenant in the BP disaster anticipated an oil spill, no-one expected or predicted HST 10 years ago, and your rent increased by five per cent as of July 1, 2010.

Be aware of potential problems but know how to look for the opportunities.

Lease termination. Perhaps you have the ability to terminate your lease at any time for certain reasons. This clause is typically included in a lease to protect the tenant should unforeseen circumstances arise. Considered from a different angle, this clause can interfere with a landlord’s ability to finance against its property. When this happens, the landlord needs to ask the tenant for the favour of removing this clause. This provides the tenant with an unexpected and welcome leverage position.

Use and exclusivity. In your lease, your use and exclusivity clauses were originally designed to prevent a competitor from locating at the same property. Considered from a different angle, a prospective tenant could approach your landlord with an offer to lease space at the property for a use you have control of through your lease but are not using. If you agree to amend your lease and allow the new tenant into the property you are in a position to ask the landlord for a concession you really need.

Premises size. Perhaps the only space that was available when you built your new practice was larger than you wanted, but you anticipated that you would grow into it over time. Time has passed and now you find yourself paying far more rent that you had budgeted for because production is nowhere near what you had anticipated. It may be possible to turn this into a profitable situation if you can find a colleague to share the space with you, or “sell” the space back to the landlord.

As a tenant, you need to actively manage your ever-evolving position relative to your unchanging lease. Your lease will not always address every situation, but as your position changes over time, new opportunities that could benefit you may present themselves. When your lease is being negotiated look for opportunities to install options that address as many “what ifs” as possible. A consultant who works with leases every day will know what options can offer the best protection and will have experience with many “what if” scenarios. As time passes, regular review and interpretation of your lease clauses in light of your current circumstances can provide you with opportunities you never anticipated.

Written by
Ian D. Toms

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