Managing Tenant Covenants and Condition

1. Managing Tenant Covenants and Condition Lesson 5

2. 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

3. 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

4. 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

5. 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

6. 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 obligationNOT To Do • E.g. not causing a nuisance at the property

7. 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

8. 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)

9. 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.

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

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

18. 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

19. 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

20. 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

21. 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

22. Tutorial

23. Case StudySample Letter of Offer&Lease Agreement