One critical factor in the success of a multi-tenant retail centre is the ability to entice tenants occupying different niches in the consumer product market to foster an ecosystem of goods and services attractive to the target consumers. The permitted use provision is a critical tool available to the landlords of multi-tenant retail centres in planning such an ecosystem and reserving certain uses for certain tenants. A recent Ontario Court of Appeal decision reminds us the importance of including explicit exclusions in the permitted use provision of leases if the landlord intends for such uses to be excluded or reserved for other existing or potential tenants.
In 2249778 Ontario Inc. v. Smith (Fratburger), 2014 ONCA 778, the appellant owns a strip mall and leases two units in the mall to the respondent, who operates a fast-food restaurant. At issue is whether the permitted use provision in the lease allows for the installation of an ATM. The Court of Appeal concurred with the application judge’s finding that the installation and operation of an ATM did not change the fast-food restaurant’s purpose of the premises and therefore was a permitted use under the lease. Furthermore, the Court noted that “the lease did not define fast-food restaurant; was silent on other equipment and business tools such as cash register and a debit terminal that are critical to a fast-food restaurant and implicitly included in the permitted use of the premises…[and] it is open to parties to a commercial lease to specifically include the installation and operation of an ATM as a prohibited activity in the lease.”
The lesson of this cautionary tale for landowners is that, in drafting or reviewing the permitted use provision to mall leases, one should keep in mind the big picture of the intended ecosystem. Otherwise, you may find yourself contending with new and interesting business combinations on your premises that disrupt your master plan.