Managing Tenant Covenants and Condition Lesson 5

Definition of Covenants A covenant (in the context of a lease) refers to any promise in a lease or agreement for lease They are the rights and obligations of the landlord and tenant in a lease

Types of Covenants Express Covenants - Clauses written in the Tenancy Agreements Implied Covenants - Implied under the common law Express covenants contained within a lease will override the covenants that might otherwise be implied by common law

Implied Covenants for Tenants Payment of rent No assigning or subletting To pay for own usage of all utilities bills No alterations Use for permitted purposes Not to commit waste (take reasonable care of the premises) *Except for fair wear & tear

Implied Covenants for Tenants Types of Waste Permissive waste - Not taking care of the premises Voluntary waste - Intentionally making structural change Equitable waste - Cutting down of trees without consent of the landlord Ameliorating waste - Making an upgrade of the premises without consent from the landlord

Positive and Restrictive Covenants 1. Positive Covenant - an obligation to take action E.g. a landlord’s positive covenant - requirement to paint the exterior of the building at least every five years or to ensure the maintenance and repair of the exterior and infrastructure of the building. E.g. a tenant’s positive covenant - requirement to maintain the interior of the property, and to pay the rent and service charge in accordance with the lease 2. Restrictive Covenant - an obligation NOT To Do E.g. not causing a nuisance at the property

Charter Trust Vs Davies [1997] Breach of Covenants Charter Trust Vs Davies [1997] (Quite Enjoyment) The Landlord was liable when he failed: to take steps to prevent a tenant of a shopping centre from blacking out windows and putting tables and chairs outside to the annoyance and inconvenience of other tenants in the same shopping centre

Covenants VS Conditions Covenants differ from conditions, which hold that: the lease cannot take effect until a condition is fulfilled (condition precedent); or the lease will terminate should a condition on which it is granted cease to apply (condition subsequent)

Covenants VS Conditions Conditions are often informally referred to as outs, because a failure by one party to satisfy its conditions enables the other party to get out of the contract. For this reason, conditions are often vigorously negotiated.

Bridge to Lease The offer might compel tenant to sign landlord’s standard lease Landlord will want to prevent Tenant from negotiating changes to Lease Tenant will want ability to negotiate change

The Tenant Covenant Goal of landlord: have maximum ability to recover against Tenant and its principal(s) Financial statements of corporation Security agreement Personal guarantees from principals Security against assets of principals Letters of credit Security deposit Prepaid rent

The Tenant Covenant Goal of Tenant: Avoid personal liability, if possible Use a corporation (preferably single purpose) Avoid guarantees / indemnities: If possible, limit by time or limit by amount Letter of credit as alternate security

Term, Extensions and Renewals Initial term usually 3 to 5 years for retail, office and commercial Longer initial term on full building (build-to-suit) Monetary risk of longer term lease – tenant is “locked in” Shorter term lease - tenant can reduce relocation risk through extension/renewal options

Use of Premises / Conduct of Business Landlords define “permitted use” narrowly Change of use might require consent – can affect tenant’s ability to sell business Controls on “classiness” of use Landlord will usually set hours of use, for retail leases Landlord may require “continuous use” - esp. in retail

Insurance Landlord and tenant each insure Typically: Landlord insures building Tenant insures own (interior) premises and contents Landlord will require extensive insurance by tenant Fire / damage Liability

Maintenance and Repairs Landlord Landlord only liable as expressly set out in lease Landlord usually responsible for structural repairs – Should not be recoverable as an operating cost Landlord usually responsible for general non-premises repairs/maintenance – Recoverable as operating cost

Maintenance and Repairs Tenant Usually limited to the (interior) premises Tenant should ensure no obligation to repair structure Restoration obligation on lease expiry/termination

Assignment vs Sublease Transfer Assignment vs Sublease Lease assignment - transferring a tenant's rights and obligations to a new tenant Lease subletting - a more flexible arrangement that involves a lessee allowing an additional tenant to use the leased space, often on a temporary or short-term basis If lease silent, no restrictions but most leases tightly control lease transfers

Transfer Typical transfer control provisions include: Landlord’s consent for assignment; Landlord’s approval of financial strength and character of assignee; Payment of legal fees (if any) for the assignment of lease; The original tenant to remain liable after the transfer

Transfer Tenants should beware: “Unreasonable and arbitrary withholding” of consent Long list of tests to meet Take-back right by landlord No change of use on transfer

Default and Termination Landlords have extensive common law rights though most leases expand on common law rights Right of entry on default Default will not necessarily result in termination Landlord has no obligation to re-lease Landlord can claim rent for balance of lease

Tutorial

Case Study Sample Letter of Offer & Lease Agreement