Stepping back in time - additional rent re-adjusments and a changein the landlord

Rent reconciliations by landlords are common and many net leases provide for them after a calendar or fiscal year. However, properties often change hands in the midst of lease terms and the lease obligations going forward in addition to its rights, devolve to the new owner.

In a net lease, the proper charging and allocation of operating costs by the landlord and the payment of operating costs by the tenant are two critical lease obligations, the failure of which can result in a lease default, and a loss of money paid (in terms of overpaid rent by a tenant) or rent payable (in terms of underpaid rent to the landlord).

When a property is sold and the leases are assumed by a new owner and a subsequent or outstanding rent reconciliation indicates the tenant was overcharged for its share of operating costs and is owed money by the landlord, the issue becomes who is liable to repay that money to the tenant – the prior landlord, the new landlord or both?

In the 1996 Ontario case of Canada Trustco v. Mundet Industries, a 1996 O.J. No.3746, the court had to address that issue. In that case, the tenant had allegedly overpaid GST to the landlord. The landlord sold the property and the tenant sued both the prior and new landlord for reimbursement of the “overpaid” GST. The new landlord brought a motion for Summary Judgment on the tenant’s claim arguing the tenant had no claim against the new landlord.

The Court reviewed the assignment documents between the prior and new landlord as well as the tenant’s estoppel certificate that it had given to the new landlord as part of the sale closing documents and held that, the GST overpaid prior to closing was only a personal claim of the tenant against the prior landlord. The new landlord was not liable for payments it did not receive.

The Court in Mundet reviewed and applied the reasoning from a 1995 Alberta decision, Devon Estates Ltd. v. Royal Trust Co. et al., [1995] 2 W.W.R. 293. In that case, Royal Trust as lender took possession of the premises when the owner defaulted and served a request to attorn on the tenant [i.e. it required that the tenant pay rent to the lender going forward until the lender could find a buyer of the property and become the new landlord]. The tenant applied to the court for reimbursement of overpayments of operating costs [that were the subject of an arbitration then underway with the prior landlord].

The tenant’s position was that:

• the rent overpayments should be deducted from future rent payable; or alternatively;
• that Royal Trust, or its successor in title, should be responsible to reimburse the tenant for the rent overpayments;

Royal Trust agreed that it was responsible to reimburse the tenant for any rent overpayments received by Royal Trust after it took possession however it was not for rent overpayments made before that time, none of which it received. The Court agreed with Royal Trust and the decision was followed in Mundet.

The Lessons:

1. A tenant will only have a personal claim for recovery of overpaid rent from a prior landlord after a sale of the property absent language in its lease (see point 3, below) providing for recovery against whoever the landlord is at any time;
2. The sale agreement between the prior landlord and new landlord will deal with the past and future obligations of the parties under leases the new owner is assuming and generally, the prior owner remains liable for the pre-closing lease obligations and the new owner takes responsibility for the lease obligations arising from and after closing.
3. The transfer section in a lease usually provides that on a transfer by the landlord, it only remains liable for its obligations to closing and not afterwards. If the tenant has leverage in the lease negotiations, it should amend the clause by providing for prior claims to be enforceable against the new owner together with a set-off right for the amount or the equivalent rent free period;
4. The Tenant should mention its claim in its estoppel certificate given to the new owner if one is requested by prior to closing.
5. If rent is owed by a tenant to the landlord post-closing after the rent reconciliation statement for the pre-closing period has been completed, the sale agreement will typically prevent or severely limit the prior landlord’s ability to recover under-payments of rent from a tenant after the sale so the prior landlord will not be able to collect [and the buyer will be reluctant to adjust the purchase price for monies it may not be able to recover from the tenant unless the parties can agree on a holdback of part of the purchase price pending resolution of rent re-adjustment claims].
6. Deliver timely reconciliation statements on an annual basis.

Disclaimer: This article is for general information purposes only and not intended as or to be relied upon for legal advice. Consult with a lawyer for your unique situation.

[*If there is a general real estate or leasing related question you would like to see addressed in a future article in “The Legal Corner”, please contact me directly by e-mail at dgold@robapp.com with your suggestion. Not all requests can be accommodated.]

As published in Property Biz Canada on February 28, 2013