The saying “change is the only constant in life” is one that certainly applies these days, in the field of commercial leasing. As a result of this, an increasingly common change in the area of commercial leases is the interpretation of redevelopment clauses. Landlords often want to redevelop their buildings to modernize, improve, and ultimately increase the rental potential and underlying value of their assets. Tenants, on the other hand, want the security of knowing that their tenancies will not be interrupted except in select, agreed upon circumstances. Regardless of whether you are a commercial landlord or tenant, it is important to structure redevelopment clauses very carefully, taking into account any future desired redevelopments and renovations.
Three important components of any redevelopment clause are: (1) the right to redevelop; (2) the right to relocate a tenant; and (3) the right to terminate a tenancy. This article highlights things to look for when dealing with these components.
The right to redevelop
The starting point when dealing with a proposed redevelopment is to determine whether the landlord has the right to redevelop the property. If the lease contains a redevelopment clause, it is important to carefully consider how broad of a redevelopment right is conferred by the clause. Proposed redevelopments that go beyond the scope of the redevelopment right conferred under the lease can be challenged by a tenant who wishes to remain in the rented premises. A redevelopment clause that simply allows for alterations will not provide landlords with the same latitude to redevelop as a clause that allows for demolition. The specific words chosen will determine the breadth of the redevelopment rights under the lease.
When drafting a redevelopment clause, it is important to remember that the more a tenant is impacted by the proposed redevelopment, the more specific and detailed the clause needs to be. For example, in the case of Michael Santarsieri Inc. v. Unicity Mall Ltd.,[1] the lease provided that the “Landlord reserves the right to change the size and dimensions of the buildings, the number and locations of the buildings…” The court found that this was not clear enough and did not contemplate demolishing and replacing the common areas.
It is also important to consider whether there are any other restrictions that may be impacted by the redevelopment. Some things to watch out for include (but are not limited to) parking, nuisance provisions, operating costs, visibility, signage, access, service interruptions, and no-builds.
The right to relocate a tenant
If a landlord wants to redevelop, it also needs to determine whether it can relocate a tenant during the proposed project. If a landlord wants to relocate a tenant, the lease must specifically allow for this. When determining relocation rights, counsel must consider whether the right conferred is permanent or temporary, whether timing and notice periods are specified, and exactly what circumstances will give rise to the relocation right (i.e. redevelopment, demolition, reconstruction, renovation, alteration, etc.). Relocation rights can be confined to the current site, or can allow the landlord to relocate the tenant to other sites, with the new premises to which the tenant shall be relocated being of various sizes and configurations.
The importance of carefully choosing the words in a redevelopment/relocation clause can be seen in Millenium Veterinary Hospital Corporation v SR&R Bay Ridges Ltd (“Millenium”).[2] The lease in Millenium provided that:
“12B. The Landlord shall have the right at any time, notwithstanding anything contained herein, to relocate the Leased Premises, provided that the new location of the Leased Premises be similar in dimension and that the rent for the Leased Premises shall remain unchanged. Should the Landlord give the Tenant written notification of the relocation of the Leased Premises after the Tenant has commenced or completed the installation of partitioning or other improvements, the Landlord will furnish the Tenant with similar partitioning and other improvements of equal quality. The relocation of the Leased Premises shall not affect any of the other clauses or conditions of the Lease.
12C. In the event that the Landlord desires to construct an indoor mall at the premises known as the Bay Ridges Plaza, the Landlord shall deliver written notice of the said intention, and 180 days from the mailing of the aforesaid notice, or at such earlier time as a new lease agreement between the parties is executed, this herein lease becomes null and void. The Tenant upon receipt of the aforesaid notice has the first right and option to lease the currently demised premises from the Landlord under a new lease arrangement at the then current market rental.”
The landlord took the position that it could relocate the tenant to premises in a different shopping centre. However, the Court of Appeal (which seems to have referred to 12B as 12(a) and 12C as 12(b)) held that the landlord was only permitted to relocate the tenant to other premises within the shopping centre, and was unable to relocate the tenant to premises in a different location situated outside of the existing shopping centre complex. This demonstrates how important it is to outline exactly and in detail the right that you want in the event of a redevelopment. If you want to be able to relocate a tenant to another location, whether within the perimeter of the existing development or outside thereof, you need to explicitly state that the relocation provision set out in the lease provides for this right, on the part of the landlord.
The right to terminate a tenancy
If a landlord is unable to relocate a tenant during a redevelopment, it must be determined whether it can terminate the tenancy in order to give effect to the proposed redevelopment. In order for a landlord to terminate a tenancy, this must be explicitly provided for in the lease. While drafting a redevelopment clause that allows for termination, drafters should consider timing and notice periods, the specific circumstances that will give rise to the termination right (i.e. redevelopment, demolition, reconstruction, renovation, alteration), as well as restoration obligations, payments to the tenant to compensate for unamortized costs and loss of future profits, and potential relocation rights to another centre or first opportunity rights to lease space in the new development (among other things).
Cases that consider the scope of termination rights conferred by a redevelopment clause highlight the importance of choosing the wording of such a clause very carefully. Courts will give effect to the agreement as written, so it is important that landlords explicitly account for any foreseeable redevelopment possibilities.
In Corporation First Capital (Wilderton) Inc. v. Metro Richelieu Inc. (“FC Wilderton”)[3], the landlord sent the tenant a notice of the landlord’s intent to terminate the lease due to its desire to redevelop the shopping centre. The case dealt with the right of a landlord to terminate the lease in the event of a redevelopment. The tenant ultimately refused to leave the premises, stating that the redevelopment clause was invalid and unenforceable. The tenant grounded its argument in its claim that the term “redevelopment” was imprecise, subjective and indeterminate, because it could include a multitude of activities ranging from the renovation of the building to its partial or total demolition. The Superior Court rejected the tenant’s argument, stating that although a redevelopment project may take many forms, this did not mean that the concept of redevelopment was so ambiguous that the parties could not understand its meaning in the context of the lease. Rather, it was reasonable to conclude that the right of termination would arise when the landlord wished to undertake significant work, such as demolition or reconstruction of the premises.
Meridian C C Intl Inc. v. 2745206 Ontario Inc. (“Meridian”)[4] highlights the importance of choosing the words in a redevelopment clause very carefully. The lease in Meridian contained a clause which allowed the landlord to terminate the lease on 180 days’ notice if the landlord desired to remodel or demolish any part of the premises “to an extent that renders continued possession by the tenant impracticable.” When the landlord tried to enforce the termination clause, the tenant resisted and sought a ruling that the termination was invalid. The Superior Court found that the landlord was entitled to exercise the termination clause. However, the Court of Appeal held that the Superior Court had failed to deal with the factual question of whether the landlord’s proposed renovations rendered continued possession of the tenant impracticable as stipulated in the lease, thus resulting in an error of law. Accordingly, the tenant’s appeal was allowed, and the case was referred back to the Superior Court.
Meridian is a prime example of the importance of choosing the wording of a redevelopment clause very carefully. If a commercial landlord anticipates a substantial redevelopment and wants to reserve the right to terminate the tenancy, it is important that the landlord set out the specific circumstances that will allow it to do so.
Meridian’s emphasis on specificity was recently solidified by the Court of Appeal in Bennett Law Chambers Professional Corporation v. Camcentre Holdings Inc. (“Bennett”)[5]. The court in Bennett was, once again, required to consider the validity of a notice of termination. The lease in question contained a provision allowing the Landlord to terminate the lease upon six months’ notice if the landlord planned to “substantially redevelop or reconstruct the Project to the extent that vacant possession of the Leased Premises is necessary or expedient or to demolish the building of which the Leased Premises form a part.” The termination provision also provided that such notice of termination would only be valid if the Landlord obtained “all requisite permits and authorizations for the commencement of such redevelopment, reconstruction or demolition.”
As a precondition to demolition, the Landlord was required to remove asbestos from the building, which does not require a permit but would require vacant possession. Because of this, the demolition was not set to begin until after the 6-month notice period. Towards the end of the notice period, the Tenant discovered that the Landlord had not obtained any permits for demolition, and refused to vacate. The Court of Appeal (in a 2-1 decision) agreed with the application judge’s determination that as the landlord could have obtained a conditional permit prior to the asbestos removal and the end of the notice period, the landlord had not terminated the lease in accordance with the redevelopment clause.
This decision provides further guidance from the Court Appeal in the interpretation of commercial redevelopment clauses. It highlights the importance of choosing the language in a redevelopment clause very carefully, as courts will consider the preconditions set out and will ensure that the agreement will be closely followed as agreed to at the time of signing.
Conclusion
Although the cases discussed in this article come from a handful of provinces, the legal principles outlined are relevant to, and applied by, courts across Canada, both in Quebec and the common law provinces. The lesson to be taken from these decisions is that all lease agreements must clearly specify the redevelopment rights that the parties want to be conferred upon them.
The concepts underlying multi-use developments and the repurposing of underused properties have contributed to a greater incidence of redevelopment, renovation, relocation and early termination provisions being found in commercial leases. Rather than being required to approach tenants “cap in hand” with a redevelopment proposal, hoping to convince the tenant to go along with the landlord’s project (as opposed to being required to “work around” the tenant), a properly drafted redevelopment clause in an executed lease would provide the landlord with the necessary level of flexibility it desires. Whether the redevelopment right should apply immediately, after a certain number of years, or only during renewal/extension periods, are matters for discussion and negotiation. As well, the prerequisites to the exercise of the redevelopment right, be they permit application or approval, zoning changes, or otherwise, must be considered. And, from the tenant’s perspective, it is important for it to ensure that its rights, whether in respect of its existing location, a proposed new location, financial compensation for early lease termination, or otherwise, be adequately protected.
In any event, a lawyer should be consulted before proceeding with the redevelopment, because, as the song by David Bowie goes, in order to “turn and face the strange”, a plan should be set up to deal with the proposed “changes.”
Should you have any questions or concerns, please feel free to reach out to a member of Miller Thomson’s Transactions & Leasing Group.
[1] Michael Santarsieri Inc. v. Unicity Mall Ltd., 2000 MBQB 202
[2] Millenium Veterinary Hospital Corporation v SR&R Bay Ridges Ltd., 2008 ONCA 264
[3] Corporation First Capital (Wilderton) Inc. v. Metro Richelieu Inc., 2016 QCCS 1926
[4] Meridian C C Intl Inc. v. 2745206 Ontario Inc., 2022 ONCA 12
[5] Bennett Law Chambers Professional Corporation v. Camcentre Holdings Inc., 2022 ONCA 658
