Oct 7, 2014
So You Want to Be a Tenant - Have You Done Your Due Diligence ?
By: Darrell Gold
Tenants often sign offers to lease without the benefit of prior legal advice and certain due diligence. If they are not experienced with leasing, they can put themselves and their business at great risk. By carrying out a few simple searches either on their own or more commonly through legal counsel, they can minimize and even eliminate those risks.
Presented below are a few due diligence searches that proactive tenants and counsel should consider carrying out before entering into a binding offer to lease or lease. Keep in mind that you must be practical in determining which searches you want to carry out (as time and expense are involved) so you must assess the “risk” to you of not doing the searches.
For example, if you are a prospective small tenant in a major established shopping centre or office building you may decide to rely on the existence of hundreds of other tenants at the property to determine that the risk of a serious issue being present that will affect your tenancy does not warrant incurring the time and cost of doing some of the searches below and may also jeopardize your deal.
1. Sub-search/full search of title
a. Does the landlord own the property?
You must be sure you are entering into an agreement with the owner of the property. A simple sub-search of title in the land titles office where the property is located will confirm whether the party you are dealing with is the registered owner. These can be done on-line by a lawyer for a small cost.
If the party contracting under the agreement is not shown as the registered owner then you need to ask how that party has authority to act on behalf of the owner and the contract should provide a statement to that effect. For example, large property managers typically have the capacity to act for and bind the owner on leases pursuant to property management agreements.
b. Are there other interests you need to be aware of?
A title sub-search will also provide you with information about other interests in the property which could affect your pending interest including other leases with rights of first refusal or options on your space, easements and encroachments (if plans are registered on title).
If you are entering into a ground lease where you or the landlord will be building the premises, then a full search of title is needed so you understand all the rights and limitations that affect the property and can determine if they will have any effect on what you propose in terms of construction of a building or your use.
If title issues are present, it is possible some of them can be addressed through leasehold title insurance (as I wrote about in my Oct. 16, 2013 article) so that your deal may still proceed.
c. Is the property accurately described?
The sub-search of title will also determine if the property is accurately described in the agreement. That is important for the purpose of preparing a legal description where a notice of lease will be registered and also for ensuring you know the limits of the property boundaries and what is/is not included in the property.
2. Corporate name search
a. Is the landlord’s name correct?
Even if the parry to the agreement is the registered owner of the Property it does not mean the name is the proper name of the landlord. For example, “ABC Inc.” is not the same as “ABC Ltd.”. If you enter an agreement with ABC Inc. and ABC Inc. does not exist, you may not have a valid lease (or the party that signed on behalf of ABC Inc,. may be liable for the landlord’s lease obligations).
A simple corporate search through an on-line service (e.g. Cyberbahn or Oncorp) will confirm whether the name you were given is accurate and if not, you must advise the landlord and have the agreement amended to show the proper name before signing, which may also require an amendment on title to correct the name.
b. Does the landlord exist?
Even if the name is correct, the company may have been involuntarily dissolved and will not be able enter binding agreements. For example, an Ontario corporation can be involuntarily dissolved by the Ministry of Government and Consumer Services for failure to comply with: Corporations Tax Act, Employer Health Tax Act, Fuel Tax Act, Gasoline Tax Act, Land Transfer Tax Act, Retail Sales Tax Act, Tobacco Tax Act, or the Ontario Securities Act, a filing requirement under the Corporations Information Act or for failure to pay a required fee under the Business Corporations Act, (Ontario).
The Business Corporations Act allows for administrative revival of the corporation where it has been “involuntarily dissolved” but there are costs involved in doing so. If the company does not exist, the parties need to address why and who can contract as the landlord.
The on-line services noted also allow you to order for a fee a Certificate of Status (Ontario corporation)/Certificate of Compliance (federal corporation), which confirms the date of incorporation and certifies that the corporation being searched exists as of the date of the certificate.
3. Zoning search
a. Is the property zoned for your intended use?
You can contact the local municipality to determine the zoning and confirm your intended use will comply. If it will not you risk not being able to operate your business yet still be bound by a lease including the payment of rent.
b. Are there other zoning concerns?
A search of the zoning by-law can also disclose other potential issues for you such as parking and signage rights, qualifications and limitations as well as occupancy limits (important in the case of a restaurant or bar).
A tenant with leverage can obtain a representation and warranty from the landlord that the proposed use and parking required are in compliance with the applicable zoning by-law but it is prudent to confirm that yourself.
4. Environmental searches:
Where you will be a single-tenant user for the entire premises or a major portion of it, (before you commit to a lease and construction of a building), you should know the state of the property and whether contamination exists. If contamination exists, you must determine if remediation is required. That can add significant time and cost.
A lease will typically provide that you are responsible for any contamination on the property. You should limit your exposure to contamination caused by you or those for whom you are liable but certainly not to pre-existing contamination.
To minimize risk:
a. You can require the landlord to cause a qualified consultant to carry out an environmental site assessment (Phase I and possibly Phase II). This can be costly (see my June 25, 2014 article).
b. You can also carry out a search of the records at the Ministry of Environment (p. 112) and under the Environmental Site Registry to determine if a Record of Site Condition has been filed in connection with the property.
Other searches for consideration
Depending on the nature of the property you are leasing – office, retail, industrial, the purpose for which you are leasing it, i.e. the use, the amount of your investment, the degree of risk and exposure (e.g. you are one of many tenants at an established property v. you are developing vacant in-fill lands), the length of the term, where the property is located, the age of the property, and of course your leverage, there are other searches that may be wise to carry out including: a search of the municipal Fire Department for Compliance/Work Orders; a search with the City of Toronto under the Ontario Heritage Act where alterations are planned; a search of elevating devices (elevators/escalators) with the Technical Standards and Safety Authority and a search for electrical compliance with the Electrical Safety Authority (Record search application / Request for inspection form) to list some of the most common ones. (City of Toronto list of regulations that govern construction in the Province of Ontario)
Leasing a site for your business involves more than just locating the right site and negotiating the business deal. There are due diligence steps to consider and carry out to avoid surprises once the deal is firm. At the inception, consider what your investment will be over the lease term and assess the risks with counsel. Only then will you be able to properly determine what due diligence is warranted. Should your due diligence reveal issues of concern, the deal can often be structured or re-structured to address them. In the worst case, you walk away and can move on to another deal.
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 firstname.lastname@example.org with your suggestion. Not all requests can be accommodated.]
As published in Property Biz on October 7, 2014.