Caught by the “Net Lease” Clause?

September 1, 2011

It is difficult to find a landlord’s form of commercial or industrial lease that does not contain a “net lease” clause of some description.  These clauses are usually worded to provide that the rent is absolutely net and carefree to the landlord” and that all expenses, unless expressly provided otherwise, are the responsibility of the tenant.  What is the effect of such a clause?  Set out below are a few recently reported decisions where the net lease clause concept was considered.  There are some principles that can be derived from these decisions.  First and foremost, net lease clauses are not ignored or overridden as unfair or inequitable.  Courts generally assume that net lease clauses were negotiated and included in the lease as part of the business deal between landlord and tenant. That said, the courts tend to interpret these clauses strictly in the same manner as they would interpret any other clause in a lease or contract.  Landlords cannot use net leases clauses to override or circumvent other provisions in the lease.  From the landlords’ perspective, these clauses can, in certain circumstances, be helpful to interpret the lease.  Tenants, on the other hand, do not have anything to gain from a landlord’s net lease clause.  Without sufficient bargaining power either to remove or substantially qualify the net lease clause, tenants (and in particular, their solicitors) need to review the lease carefully to ensure all rent and other obligations are clearly and fully covered to avoid nasty surprises.  For those of you who enjoy detail, please read on.

In C.C Tatham & Associates Ltd. v. 2057870 Ontario Inc. (Ontario Superior Court of Justice, 2011) a landlord tried to argue (unsuccessfully) that management fees should be implied if there is a net lease clause.  The lease did not provide for any management fee, but it did provide that it was a “completely carefree lease to the landlord.”  While holding that there is no substantial difference between an “absolutely net lease” and a “net/net” lease, the court ruled that this does not mean the tenant is responsible for the payment for the performance of duties that would normally be done by a landlord in its own interest.

In OGT Holdings Ltd. v Startek Canada Services Ltd. (Ontario Superior Court of Justice, 2009) the landlord had the option to require the tenant to pay property taxes either by way of  proportionate share or by way of separate assessment.  The landlord elected separate assessment.  Many years later, the landlord determined that charging the tenant a proportionate share would improve the landlord’s property tax recovery arguing that this is consistent with the net lease concept.  The court did not allow the landlord to switch to proportionate share stating that “it would be inequitable and contrary to well-established law”, to allow the landlord to retroactively change its election to the tenant’s detriment.

In 1645111 Ontario Ltd. v. 1169136 Ontario Inc. (Ontario Superior Court of Justice, 2008) the landlord replaced the roof and tried to charge the cost of roof repairs to the tenant, again on the basis that the lease contained a “completely carefree net lease for the landlord” clause.  The lease also provided that the landlord shall be responsible for, at its expense, the maintenance of the structure of the buildings including, but not limited to, the roof, exterior walls and heating system. The landlord argued that the roof was a “common area” requiring the tenant to pay its proportionate share.  The court ruled that the landlord’s obligation to maintain the roof at its expense cannot be circumvented with the net lease clause.

Editor’s Note:  We are now publishing Leasing Times quarterly on a more in-depth basis.  As always, your comments and questions are welcome.


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