Authors: Saravan Veylan and Anna Schlagintweit
In British Columbia, the terms of a commercial lease are determinative in most circumstances; except where the Commercial Tenancy Act (British Columbia) or other legislation applies, the form and content of a commercial lease are largely determined by the parties to the lease – and vary widely.
These days, it is not uncommon for a commercial lease to provide for an initial term of five to 10 years, often with rights of extension or renewal as well as significant obligations on the tenant regarding payment of basic rent and additional rent and indemnities in favour of the landlord.
Over time, circumstances may change such that the commercial realities differ from those present at the time the parties entered into the lease.
For example, during an economic slowdown or downturn, a tenant may seek to avoid or terminate its obligations under a commercial lease to save costs or mitigate losses. On the other hand, during an economic boom, a landlord may seek to avoid or terminate its obligations under a commercial lease to enable it to develop the property for a higher and better use, or to secure a tenant at a higher rental rate.
In either case, it is important to understand the potential risks associated with terminating a commercial lease where there has been no breach by the other party, and consider such risks alongside any potential benefits.
In attempting to terminate a lease without cause, the terminating party may find itself in breach of the lease, and liable for breach of contract. In addition to remedies at common law (which would likely include monetary damages), the lease will likely provide for remedies in favour of the non-breaching party in the event of a breach. Additionally, if the tenant is the breaching party and the lease provides for an indemnifier, the landlord may seek recourse from the indemnifier in the event of a breach.
Considerations for terminating a commercial lease without cause
Where termination of the lease is sought and the other party to the lease is not in breach, consider whether the lease provides for any right of termination.
In some cases, a lease will provide for a right of termination by either party on notice, or upon the happening of a certain event. If so, consider whether the circumstances at play may fit within the scope of any such provision(s). Where notice is required, it is important to strictly comply with any provisions governing notice in the lease.
If the lease does not provide for any termination right, terminating the lease would likely constitute a breach of contract. In considering the risks associated with breaching the lease, some relevant factors include, but are not limited to, the amount of rent payable under the lease; the amount of time remaining in the term; and the remedies provided in the lease for breach of contract, and at common law.
If the lease does not provide for any termination right, consider whether an alternative course of action may be preferable to breaching the lease.
For example, a tenant may consider seeking a rent deferral agreement with the landlord, or to assign the lease or sublet a portion or all of the premises.
When considering assigning or subletting a lease, it is important to review the applicable provisions of the lease, and ensure strict compliance with any requirements, such as obtaining the landlord’s prior written consent. Additionally, tenants should be mindful of whether a request for a transfer of the lease gives the landlord any right to terminate the lease.
On the other hand, a landlord may consider exercising any relocation or redevelopment right provided in the lease, or canvassing with the tenant whether they are willing to accept a buy out of the lease.
Negotiations with the other party to the lease should be handled delicately, as it may not be advantageous for the party seeking to terminate the lease to reveal its position to the other party.
If you are a commercial landlord or tenant seeking to terminate a commercial lease, contact the authors to connect with a member of our Vancouver real estate practice group. Our experienced team can help you identify and navigate the potential risks associated with terminating a commercial lease and find a way forward.
The MLT Aikins real estate practice group is here to assist with all real estate and development matters, including matters involving real estate litigation.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.