In this challenging economic climate many commercial tenants are finding it increasingly difficult to continue to pay their monthly rent obligations. When determining what your options are as a commercial tenant, the primary document to look to is your commercial lease. Unlike other provinces, Alberta currently does not have a Commercial Tenancies Act or similar legislation in force. This article will provide commercial tenants with a brief overview of options generally available to them; however, this list is not meant to be exhaustive. Each commercial lease is different, so it is essential that commercial tenants carefully review their specific commercial lease.
So Sue Me
When facing potential default under a commercial lease, a commercial tenant should first consider its corporate structure and assets. If the commercial tenant is a shell corporation and/or does not have any assets of value, the commercial tenant may choose to walk away from its commercial lease obligations. The landlord will have the option to sue the commercial tenant for the rent owed for the unexpired portion of the commercial lease, less any rent collected by the landlord from re-letting the leased premises. However, this is a futile exercise if the commercial tenant does not have any assets of value.
Two important factors when considering this option are:
- Have any corporate or personal guarantees been provided under the commercial lease? Often the landlord will require guarantees in order to prevent a commercial tenant from walking away from its lease obligations. If guarantees were provided, the enforceability of the guarantee should be considered as there are specific requirements under Alberta’s Guarantees Acknowledgment Act. Also, consider the financial situation of the guarantor and whether it has any assets of value. In the event of default, the landlord will be able to sue the guarantor for the outstanding debt of the commercial tenant.
- Has the commercial tenant recently transferred any assets out of the business with the intent to defeat, hinder, delay or prejudice the landlord’s security position? Every gift, conveyance, transfer, delivery or payment of: goods, chattels, bills, bonds, notes or securities, dividends, premiums or bonuses in any bank, corporation or any other property, real or personal, made by the commercial tenant at a time when the commercial tenant is in insolvent circumstances, is unable to pay its debts in full, or knows that it is on the eve of insolvency, may be considered a fraudulent preference pursuant to the Fraudulent Preferences Act. In the event the landlord obtains a judgement against the commercial tenant, the landlord may be able to satisfy its judgment from the fraudulently transferred assets and/or the proceeds from the assets.
Assign and/or Sublease the Lease
Most commercial leases will include a standard assignment and/or sublease clause permitting the commercial tenant to assign and/or sublease the commercial lease to a third party. Commercial leases will generally stipulate that landlord’s approval of the proposed assignee and/or sublessee needs to be obtained; however, such approval usually cannot be unreasonably withheld. The commercial tenant is also often responsible for all costs associated with the assignment and/or sublease, including but not limited to a fee for landlord review and approval of the proposed assignee and/or sublessee, as well as associated landlord legal fees. If the commercial tenant is able to find an approved assignee and/or sublessee, as long as the assignee and/or sublessee agrees to take over all obligations and responsibilities under the commercial lease, including but not limited to paying the specified rent, the commercial tenant may, under certain circumstances, no longer be liable for payment of rent. However it is important to note that most commercial leases stipulate that notwithstanding the landlord agreeing to an assignment and/or sublease of the lease, the original commercial tenant shall continue to remain fully liable for all terms and conditions listed in the commercial lease until such time as the commercial lease term has expired. Accordingly, when picking an assignee and/or sublessee, it is important that the commercial tenant picks an assignee and/or sublessee that it knows will be able to meet the obligations listed under the commercial lease.
Negotiate a Break-Early Fee
Depending upon the demand for the leased premises and how confident the landlord is that it will be able to find a new tenant, the landlord may be willing to negotiate a break-early fee. A break-early fee is a lump sum payment. The amount of the break-early fee will vary greatly depending upon the commercial tenant’s specific circumstances. In exchange for the break-early fee, the landlord will agree to release the commercial tenant from all of its obligations under the commercial lease. This option may be attractive to a landlord who is confident that it will be able to re-let the leased premises fairly quickly.
Historically, a breach of one covenant by the landlord generally does not entitle the commercial tenant to breach one of its covenants. For example, if the landlord fails to meet its cleaning obligations under the commercial lease, the commercial tenant is generally not permitted to withhold its rent, unless the right to withhold rent is specifically provided for in the commercial lease. However, courts have gradually moved towards the position that some landlord covenants are so fundamental to a commercial lease that a breach may release the commercial tenant from its commercial lease obligations. In the event the commercial tenant believes that the landlord has committed a fundamental breach, we recommend that the commercial tenant should discuss this fundamental breach with legal counsel prior to withholding rent.
Discussed above are four options that are generally available to all commercial tenants. However, as emphasized above, each commercial lease is different and it is essential that a commercial tenant carefully review its own specific lease and/or obtain assistance from legal counsel to see what rights, obligations and remedies are listed in it. Furthermore, to equip a commercial tenant with greater rights and remedies, we strongly encourage commercial tenants to involve legal counsel prior to signing a binding offer to lease or lease.