Nobody wants to get involved in a lawsuit. Especially one that starts with the judge proclaiming, “The parties have been engaged in a hotly contested dispute over the question of Additional Rent to be paid under a lease” (C.C. Tatham & Associates Ltd. v. 2057870 Ontario Ltd, [2012] O.J. No. 5557).
Reading both the Superior Court and Ontario Court of Appeal’s decisions that ended the hotly disputed question of Additional Rent would be of great value for any leasing agent.
I recognize, however, that reading pages of legalese isn’t everyone’s favourite pastime, so here’s a summary.
The scenario
You present your tenant-client, Jay, with a carefree Offer to Lease, otherwise described as a triple net lease. The location is great and the Base Rent is reasonable. You tell Jay that a triple net lease means he’ll be responsible for the Base Rent as well as Additional Rent.
Additional Rent, you further explain, means that the tenant assumes all expenses of operating the property, including both fixed and variable expenses and any common area maintenance that might apply. The landlord, however, is responsible for structural repairs.
After months of negotiating Tenant Improvements terms and Tenant Audit Rights (an important right that allows the tenant to review the landlord’s Additional Rent calculations), the Offer to Lease is finally signed. A week later, so is the final lease. The tenant improvements go off without a hitch, Jay moves in and you don’t hear from him until….
Jay exercises his Tenant Audit Rights and discovers that his Additional Rent also includes a management and administrative fee. Fees which were never listed in the Offer or the Lease. He claims that you misled him and gave improper advice. He’s filing a complaint against you with your provincial regulators.
What happened?
Did you advise him inappropriately? According to the C.C. Tatham & Associates Ltd. decision, you may have done nothing wrong. It all depends on what the Additional Rent clause in the Offer to Lease and Lease actually says.
Generally, Additional Rent captures all of the costs associated with maintaining and running a building. Base Rent, on the other hand, is intended to provide a profit to the landlord. Since landlords are in the business of making money, it makes sense that they want an additional source of income to cover costs not captured by Base Rent.
It doesn’t make sense, however, when landlords try to make an additional profit by “padding” the Additional Rent clause. Especially when the tenant had no idea those costs existed because they were never discussed or explicitly listed in the lease.
What should you do?
Before the C.C. Tatham & Associates Ltd. case, landlords used broad and general language to describe Additional Rent. They would then argue that the language used to describe Additional Rent was so general and so broad that it must include the “padded” (surprise) cost. Your client Jay will be thrilled to know that this tactic is no longer enforceable, thanks to the C.C. Tatham & Associates Ltd. decision.
The Additional Rent clause in this case stated that the tenant pays its share of all reasonable expenses, costs, fees, rentals, disbursements and outlays that pertain to the property and building. This includes expenses incurred in the complete maintenance, repair and operation of the building and the premises.
The landlord in this case pointed to this broad language and asserted that management and administrative fees were clearly part of the costs associated with maintaining the building and premises. The landlord has to hire someone to manage the service contracts and negotiate other related agreements; clearly, another cost of maintaining the building and, therefore, a cost that must fall under Additional Rent.
The courts disagreed with the landlord and concluded that it’s not enough to simply agree that a lease is net free or use broad language to imply that administrative and management fee costs are part of Additional Rent. Rather, costs must be explicitly listed as part of the Additional Rent. If they’re not listed, then they’re unlikely to apply.
Since these costs were never mentioned or listed in Jay’s case, you can send him to a lawyer to deal with his dispute with the landlord and confidently tell him that you did no wrong (unless, of course, you told him to not see a lawyer, as this violates all sorts of laws and regulations that govern real estate agents and brokers).
The best defence to an angry client, however, is to always prevent this problem from even occurring by doing the following:
- Document! Always ask the landlord to put in writing exactly what the Additional Rent does and doesn’t include. Is it good enough that the landlord verbally asserted that administrative and management fees are not included in the Additional Rent charges? No! Add these assertions straight into the Offer and the Lease.
- Request Tenant Audit Rights: Ensure that your client has the right to audit the landlord’s Additional Rent costs (Tenant Audit Rights). This will help uncover any inconsistency and padding. Without this right, the landlord is unlikely to hand over its accounts.
The C.C. Tatham & Associates Ltd. case is a great reminder that millions of dollars can be wasted and reputations and relationships ruined due to miscommunication and failing to write down the details. It’s also a great reminder that tenants should never hesitate to ask – they might discover something to which they never agreed!
This article offers general comments on legal issues and developments and is not intended to provide legal opinions. Readers should seek professional legal advice on the particular issues that concern.
Natalka Falcomer is a lawyer, real estate broker and Certified Leasing Officer who started her real estate career in private equity. She created, hosted and co-produced a popular legal call-in show on Rogers TV and founded and recently sold Groundworks, a firm specializing in commercial leasing law. She is currently the Chief Real Estate Officer of Houseful.ca, leading the development and expansion of the company’s personalized home buying and selling experience for the Canadian market. She sits as an advisor on NAR REACH Canada and is the former multi-year board member of the Ontario Trillium Foundation.
