By Gregory M. Prekupec & Rahul Gupta

Introduction

Despite commercial leases providing the set terms of the relationship between the landlord and tenant, either party may either, wish or to, or must, exit such arrangement prior to such set time frame. Regardless of whether such termination is voluntary or involuntary, both landlord and tenant must consider a variety of factors while proceeding.

Why Terminate Early?

There are a number of reasons which may inform a landlord or tenant’s desire to terminate the relationship early, such as mass destruction, expropriation, loss of financial viability, default of lease covenant(s), and so on.

In the same breath, the parties may wish to mutually terminate the lease agreement, which is often referred to as a surrender. In such a scenario, the tenant returns, or surrenders, its interest in the lease and any remaining options to renew to the landlord.

Termination by Landlord

1. REASONS A LANDLORD MAY WISH TO TERMINATE EARLY

As mentioned above, there may be a variety of reasons why a landlord may wish to terminate the lease early. Additional examples are if, upon the assignment of the lease during the sale of the tenant’s business which occupies the leased premises, the landlord wishes to commence fresh relations with the incoming tenant, which may be done if, for instance, the established rent is significant below market rates and needs to be increased. In such instance, the landlord would terminate the lease with the outgoing tenant and prepare a fresh lease with the commencement dated the same as the closing date for the underlying transaction.

2. SECURITY DEPOSIT

Regardless of the reason for which the lease is terminated, the landlord must determine its rights and obligations with any security deposit it is holding. This is opposed to an assignment of a lease where the incoming and outgoing tenants adjust for the security deposit the landlord is holding. As such, counsel must refer to the relevant provincial legislation to determine whether the landlord must return all or some of the same, and if the landlord can use the deposit to offset any rent arrears.

3. RIGHTS UPON TERMINATION

Upon a tenant’s default under the lease, a landlord may wish to pursue its rights under the same, which may include early termination. However, a landlord may wish to consider its additional rights.

I. Acceleration

Rent acceleration is the landlord demanding the immediate repayment of all rent arrears from the tenant. This provides the landlord the legal ability to take such amount and enforce the same against the tenant through legal proceedings. Due to the high likelihood that rent acceleration may compel a tenant into bankruptcy or insolvency proceedings, or would otherwise significantly impair the tenant’s business operations, a landlord may only look to this remedy upon the breakdown of the relationship with the tenant or a loss of faith in the tenant’s ability to return the business to financial viability; assuming the only reason for the emergence of the rent arrears was an inability to pay.

II. Injunctions

Injunctive relief is the process of obtaining the court’s order to compel an action or omission of the counterparty. In a leasing scenario, a landlord may wish to seek such relief to compel the tenant to cure any default(s) it may have caused under the lease agreement.

III. Additional Rent

Depending on the wording of the underlying lease agreement, any costs which the landlord incurs to enforce its rights under the lease can be charged back to the tenant as additional rent, exclusive of an additional administrative fee on such amount.

IV. Re-Entry

A landlord may be able to access the leased premises and seize the tenant’s assets to settle any arrears. However, a landlord would be prohibited from doing the same should it decide to terminate the lease.

Considerations

A landlord would need to conduct appropriate due diligence to satisfy itself of any concerns which may arise before terminating the lease.

I. Third Party Consent

If title to the underlying property is encumbered, the landlord would need to review all mortgage documentation to determine if the mortgagee needs to consent to early terminations.

II. Environmental Damage

Depending on the tenant’s conduct, the landlord may need to evaluate the environmental state of the premises to determine if the tenant caused any harm. Should any issues arise, the landlord may require the tenant remedy the same by enforcing its indemnity within the lease.

III. Co-Tenancy

If the premises is within a larger complex, the tenant may require such complex be adequately leased, or certain tenants remain within the complex. As such, the landlord’s default for the same may provide other tenants additional leverage for lower rent or may motivate them to also terminate their leases early.