The demand for space is dwindling, as companies scale down their operations, reduce their workforce, and cut back inventories. Struggling retailers are looking for concessions from landlords. Property owners are squeezed for cash and many are worried that a lost tenant or a few rent defaults could put them out of business.

It’s a time of insecurity and anxiety — and therefore a time when all parties are acutely aware of their legal risks, rights, and obligations. Lease documents that may have been signed with scant attention in good times are now being scrutinized carefully, as some parties are concerned they can no longer meet the terms of their agreements and others want to enforce their rights. It’s a time when landlords and tenants look to lawyers and the law for advice and solutions. And it’s a time for lawyers to readjust and refocus their practices to deal with problems that seldom surfaced during the boom years of real estate.

This look at commercial leasing today examines the tensions lawyers are grappling with in Ontario’s highly stressed commercial leasing market, as well as a timely move to update the 19th century legislation governing commercial leasing in British Columbia.

Ontario: Landlords and tenants pulling on the lease

As an expert in commercial leasing and mediation, Harvey Haber now has an opportunity to exercise all his skills. As he and other real estate lawyers point out, today’s depressed market conditions are compelling many landlords and tenants to come up with new deals or compromises that will allow both to stay in business. “Once tenants realize they’ve got a problem, they should take their financial statements and meet with their landlords. They should say, ‘My problem is really your problem because if I go out of business you’ll be out your money,’” says Haber, a partner at Goldman Sloan Nash & Haber LLP in Toronto. “There’s nothing wrong with saying to the landlord, ‘I can’t pay you. Can we make a deal? If you want to go ahead and sue me, go ahead.’”

Tenants may well be surprised at how willing a landlord will be to negotiate, says Susan Rosen, a partner in the Toronto office of Gowling Lafleur Henderson LLP. She notes that landlords are not only anxious to keep their cash flow going, but are also concerned about the impact on other tenants if neighbouring businesses close shop. And, in today’s market, she adds, “there may not be other people knocking on the landlord’s door to take the space.”

So what kinds of deals are tenants striking up with their landlords? Robyn Kestenberg, a partner at Minden Gross LLP in Toronto, says she is seeing deals involving rent abatement and rent deferrals. She says some landlords are also making new arrangements concerning the security that they are requiring from tenants, allowing tenants to use trade fixtures, for example, to secure additional loan financing, even though this had originally been prohibited under the terms of the lease.

“It’s important for lawyers to recognize the business realities and be practical, rather than looking at the terms of the lease alone. The lease may give you legal rights, but, at the end of the day, it doesn’t necessarily give you the result your client is looking for,” says Kestenberg.

Rosen says some landlords and retail tenants are now making deals involving percentage rents. This hitherto seldom-used arrangement involves reducing rents so they cover the landlord’s basic costs with a proviso that the tenant will pay a percentage of sales as business picks up again.

Joseph Grignano, a consultant in the Toronto office of Blake Cassels & Graydon LLP, observes that sometimes tenants may do the math and come to the conclusion that they just can’t honour the terms of their lease. “I don’t want to be advocating defaults, but it’s really a cost-benefit analysis,” he says. In these circumstances, he adds, “the quickest, cheapest, best option” is for the tenants to figure out what the damages would likely be if they were sued for defaulting on the lease and cut the landlord a cheque for that amount.

Grignano also warns clients about the risk of “midnight moves.” He says trying to remove your inventory and other property from the building so your landlord can’t seize it is obviously illegal and could result in significant liabilities, not only for the tenant, but also for anyone who helps with the move.

While market conditions are forcing everyone to negotiate as much as possible, there are limits and there are situations where landlords would rather take the risk of looking for a new tenant than make a deal, says Kestenberg, noting that a frustrated landlord will sometimes tell her, “I’d rather have the space than have to deal with this guy anymore.”