When drafting or negotiating leases, the best advice to give to your client is to always consider the questions WHO, WHAT, WHERE, WHEN, WHY and HOW in connection with every issue that is relevant to the offer to lease or the lease. These questions are particularly important when providing legal advice in connection with determining what approvals and permits are required, WHO or which municipal or other governmental body controls the issuance of the required approvals and permits, WHERE are applications to be submitted to, HOW does the process work and are there appeal processes in place if an applicant is unsuccessful, WHEN can one apply for the approvals and permits, and WHY are approvals and permits required. Various permits and approvals are required not only for the initial development of a site, such as official plan amendment or site plan approval applications, but they are required right through the development stage, such as building and signage permits, and to facilitate the occupation and operating of many businesses, such as occupancy and liquor licensing permits.
The first question is to consider WHAT approvals and permits are necessary and required. If a tenant is leasing premises in a building or a shopping centre that is not yet constructed, or on lands that are under construction, then it is critical to ensure that conditions precedent be negotiated into the lease to ensure that the lands comply with the official plan, that the site plan for the development be approved and that all building and other relevant permits can be obtained within a specified time frame. Larger tenants obviously have more influence than smaller tenants in negotiating the ability to comment on and potentially control certain aspects of the approval process and to possibly amend the approvals and permits being applied for. A larger tenant would want to have the right to review and approve all approvals and permits before they are submitted to the appropriate body for approval. Permitting a tenant to comment on, and possibly change, an application can not only potentially delay the approval process but may result in disagreements between the landlord and tenant such as, how the lands are being developed, where the buildings, structures and roadways are being sited on the lands, and the location of pylon signs. Nevertheless, it is often better to have these discussions as early as possible so that both the landlord and tenant are happy with the overall proposed development.
Larger tenants may want to also have the right to review and approve any amendments to the site plan and the site plan agreement that occurs from and after the signing of the lease to ensure that changes to the site plan do not adversely affect the tenant’s business. A classic example of this is if a landlord is not able to obtain approval to an exit onto a municipal road or highway that results in the landlord having to realign the ingress and egress points to the property and possibly realign the drive isles and location of the buildings within the property. This is of particular concern to tenants whose premises have a drive-thru. Significant changes to access points to a shopping centre can fundamentally affect the traffic flow to the shopping centre and affect the use of drive-thru lanes within that shopping centre. Many tenants rely on a significant amount of their business from their drive-thru lane. Consequently, those tenants may not be prepared to approve certain changes to the location of entrances to the shopping centre that inhibit, restrict or impair access to their premises.
It is advantageous for a tenant to request the right to not only oversee the landlord’s development plans, site plan and site plan agreement, but it is also relevant in connection with all other permits and approvals that are required and necessary to construct the various buildings and improvements on a given shopping centre that may affect a tenant’s business. Building and occupancy permits, signage permits (including pylon sign approvals), and patio and drive-through permits can also have a significant impact on the ability of a tenant to open and operate. A building permit is of course the most obvious permit that is required and can also take the most time to get approved with certain municipalities.
If the landlord has undertaken to construct the building within which the premises will be located then it is critical for a tenant to attempt to have some control over, not only the initial submission of the building permit, but also to any changes that might be made to the building permit. I had a client who was informed by its landlord that the local municipality had asked that the front door entrance to the premises be moved from one end of the premises to the other. While no rentable area was lost, the change in location of the entrance would have resulted in a significant impact on how my client designed the interior space in the premises, and would have also adversely affected the visibility, signage and pedestrian traffic into the premises. In that situation my client refused to approve the change and the parties when back to the local municipality to work out a resolution that was more amenable to my client and did not require a complete redesign of the interior space of the premises.
An occupancy permit is critical to the ability of a tenant to open and operate its business in the premises. From a negotiating perspective, it is beneficial for a tenant to tie the rent commencement date to the issuance of its occupancy permit to ensure that the tenant is not required to pay rent before it can be open and operate its business in the premises. While this may appear to be an obvious point, there are many leases that don’t connect the dots and fail to include a condition precedent in favour of the tenant in this regard.
Pylon signage can often be the main draw into a shopping centre or plaza. For some locations where tenants don’t have street visibility, if a landlord isn’t able to obtain the approvals and permits required to erect a pylon sign(s), a tenant’s business can suffer severely. Depending on the visibility of certain buildings to local roads and highways and the design and height of exterior store signage, the ability of a tenant to have its signage displayed on the pylon sign in a given shopping centre can be critical to its survival and financial success. Accordingly, it is advisable to tie the obligation of the landlord to obtain any required pylon signage approvals and permits to the tenant’s obligation to pay rent under the lease.
Most municipalities require permits be obtained to erect and display all exterior signs. Permits are also sometimes required for signs that extend into municipal sidewalks. There are a number of considerations when investigating a particular municipality’s signage permit requirements such as maximum size restrictions, location, dimensions, colour(s), protrusion onto sidewalks and public areas and illumination. Some landlords and tenant have established and printed a sign criteria that clearly sets out all of the relevant factors relating to signage for a given shopping centre or tenant premises as the case may be. To the extent that a landlord or tenant has an established signage criteria it is highly recommended that the sign criteria be reviewed as soon as possible in order to ensure that any required approvals and permits are applied for and obtained as expeditiously as possible. Problems and concerns in connection with the signage criteria should be addressed and resolved as early as possible during negotiations so as not to delay the approval process. The above-noted comments are relevant to pylon or monument signs as well.
There are other types of permits, approvals or licenses that people often overlook and don’t consider, such as patio permits. If the ability to operate patio seating for customers of a tenant is an important factor in that tenant’s business, then once again, it is advisable to make it a condition in the lease to tie obtaining the permit and/or license to operate the patio in with the obligation to pay rent under the lease. It is important to note that many municipalities have various requirements that must be met in order to qualify for patio permits such as signage, railings, smoking restrictions, noise attenuation requirements, hours of operation, etc. Accordingly, be sure to determine any pre-requisites to apply and qualifying for any required permits and to apply for all required permits as soon as possible.
Once the question of which permits and approvals are required, the next question is WHO will be responsible to apply and pay for the required permits and approvals. The answer to this question is strictly a business decision. It often depends on who will be carrying out the work to construct, install or who will be benefiting from the permit or approval being applied for. Depending on the strength of the negotiating covenant of the tenant, a larger tenant may want to have some element of control over approving the initial submission and any changes or modifications to the initial or any subsequent submissions. Some landlords don’t want their tenants to deal with the local municipality because they don’t want to take a chance that the tenant may strain the relationship that the landlord has with the local municipality.
To ensure that the critical dates in a lease are met, it is highly important to establish a timeline that sets out the parties’ respective obligations to prepare plans, submit applications, review and approve plans and submissions and consent to changes and modifications and to obligate a party to use all commercially reasonable efforts to obtain the necessary permits, approvals and licenses. Without clearly delineated timelines, there is a greater probability of the required permits, approvals or licenses not being obtained in time which may delay the completion of either or both of the landlord’s and the tenant’s work, which in turn can result in delayed possession and rent commencement dates.
The answer to the question, WHEN should applications be submitted and pursued for permits and approvals is, as soon as possible due to the volume of applications and the staffing levels in certain municipalities. In addition, one never knows if its application will be refused and if the applicant will be forced to appeal the decision to the Ontario Municipal Board or if the application or submission will have to be modified and resubmitted for approval.
Since obtaining permits and approvals from an arm’s length third party is something that neither the landlord or the tenant has control over, it is imperative to insert contingency provisions into a lease to deal with the possibility that a given permit or approval may either not be obtained or may not be obtained within the time frame set out in the lease. When drafting a lease in which the possession date is often dependent upon obtaining permits and approvals, it is wise to consider inserting a provision that allow certain time periods to be extended, penalties for not obtaining permits and approvals within scheduled time frames, liquidated damage rights and/or termination rights. Liquidated damage provide a remedy to one or the other party for the failure of the other party to perform a particular act or acts under the lease. For example, a typical liquidation clause in a lease entitles a tenant to a specified sum of money for every day that a permit and/or approval is not obtained or construction does not commence or is not completed. A liquidation clause is a very powerful motivator to encourage a landlord to find ways to expedite the approval process if it is even possible. Sometimes, if a required permit can’t be obtained and the intent of the lease is frustrated, then there may be no other option but to terminate the lease, in which event the parties can either walk away or one party can be compensated for the lost opportunity cost depending on who was responsible to obtain the permits and approvals.
WHERE permits are to be submitted may not always be as obvious as one thinks. To the extent that approvals and permits are required, it is always advisable to use professionals such as planners, architects and municipal lawyers to prepare and submit the required applications. While landlords and tenants may think that their submissions simply have to be to the local municipality, depending on the location and use of the premises, applications may have to be made to a variety of other governmental authorities and agencies. For example, the Ministry of Transportation grants access permits for ingress and egress onto provincial highways, the Ministry of the Environment grants permits to store hazardous substances and local conservation authorities grant permits to construct when a property is near a body of water.
HOW one submits an application for a permit or an approval depends on the individual policies and procedures of each governmental authority that oversees the issuance of the given permit or approval. It is critical to understand not only the process, but the timing, of obtaining a given permit or approval so that the appropriate lease language can be drafted regarding the party’s respective expectations and obligations.
In conclusion, when negotiating and/or drafting an offer to lease or lease always consider if any permits and/or approvals are required, and if so, then consider the questions WHO, WHAT, WHERE, WHEN, WHY and HOW. Below are a few sample lease provisions that have been taken out of specific leases that deal with the issues discussed above that might be of assistance when drafting offers to lease or leases.