September 29, 2021 | Christianah
It is prevalent for commercial leases to require that certain conditions be met before the tenant is obligated to take legal possession of the premises. These provisions articulate how certain third party risks are allocated between the landlord and tenant in cases where a premise needs to be materially reconfigured for the new tenant’s use. Today’s blog post will discuss these provisions and their importance to both parties.
A key element of commercial lease transactions is that the landlord and tenant need to agree on the date that tenant is to take possession. Furthermore, often the landlord will give the tenant a fixturing period to complete the works necessary for its business to open. However, unforeseen circumstances may arise, which can cause a delay in either the landlord or tenant’s work.
The most commonly negotiated conditions include:
A tenant requires a building permit before beginning any construction work in its leased space. This permit ensures that the construction complies with the provincial or municipal codes governing such projects. Since obtaining a building permit is a prerequisite to starting construction work, it would be impractical for a tenant to take possession of the property and commence the fixturing period without first getting the building permit. Therefore, it would be a reasonable for a tenant to negotiate that it should receive its building permit before possession and its fixturing period commenced. The landlord can also protect its interests by providing that the tenant should proceed diligently to obtain the building permit in order to avoid unnecessary delay on the tenant’s part.
This condition provides that a landlord should complete its work before expecting the tenant to begin its own. A tenant can negotiate that it would not take possession until the landlord’s work is “substantially complete.” The parties can clarify what would amount to substantial completion to avoid ambiguity and disagreements on this clause. Conversely, if the landlord’s work is trivial, it should state that the work would not prevent the tenant from taking possession and beginning its fixturing period.
It’s also crucial for both parties to provide for what would happen when the conditions to possession have not been met. It would be improper to expect a party to wait indefinitely, hoping that the other party would fulfill its requirements. Landlords may negotiate that the tenant pays a penalty where the delay is on its part. Tenants may also negotiate a termination right if the landlord is significantly delayed in meeting its conditions.
Drafting a lease agreement involves a lot of expertise, and the omission of conditions precedent to possession could lead to avoidable delays and significant costs to either parties.
If you have questions about possession rights in commercial tenancies, kindly book a free consultation with Northview Law by following this link or contact us at 905-857-4890. We look forward to hearing from you soon.