Buying a property that has a tenant?

Ontario’s Fair Housing Plan has negatively affected more than just the renting market; it’s also negatively affected the process of buying and selling a property.

Longer Notice Periods and Longer Closings

If you have a client interested in buying a property, but it has a tenant, then make sure to extend the closing date because the required notice days have no doubled in length. In the past, only 30 days written notice was required to terminate a tenancy. Now it’s 60.

Another glitch: the date the tenancy ends must coincide with the end of term or rent period. This could result in a full year passing before your client can move in! For example if the tenant’s lease ends December 1, 2018, then your buyer can’t move until December 1, 2018 even if the closing date is November 1, 2017. And if you’re thinking of “fudging the dates” by giving less notice than is required, don’t! If the termination date is so much as a day off, the notice is invalid and you’ll have to start all over again.

 It Costs More

 Never has a landlord been required to compensate the tenant if the landlord gave proper notice and acted in good faith. No longer so. Section 48.1 of the RTA requires that the landlord compensate the tenant equal to one month’s rent. This amount has to be paid prior to the termination date specified on the N12 notice. This means a tenant can take the money and still refuse to leave!

Change Your Mind? Suffer a Big Fine!

Some realtors have encouraged investor buyers to buy a place and evict a tenant under the pretense that the buyer, or her family member, is moving in. Under the new rules, if the buyer gets caught, she can be fined up to $25,000.00. This fine can also be levied if the buyer decides to move out before twelve months are up following the date of eviction, rent it to her cousin and charge rent or demolish the place.

What to Do?

 Given these rules, it’s important that you get a copy of the tenant’s lease. This way, you can gauge when your buyer can move in and how much she’ll have to pay the tenant to move out.  It’s also important that you always use the updated forms found on the Landlord and Tenant Board’s website as previous forms are no longer valid.

 To avoid extortion by the tenant – a practice whereby tenants demand money in order to move – make sure that your buyer, once she becomes the landlord, files an L2 application and obtains an order terminating the tenancy pursuant to the notice prior to the termination date. Ensure that the order references the payment so that it is documented that you will be providing the tenant with proper compensation. Getting an order in place speeds up the process if the tenant refuses to move following the notice date and prevents the tenant from extorting the landlord by demanding more and more money in order to move out.

While affordability is an issue and the housing reforms attempted to solve this matter, the reforms have disproportionately hurt landlords and those who are scrimping and saving to buy a home. As such, buyer agents, as well as seller agents, must be aware of these financial and practical changes, as these changes can destroy a deal.

Actions speak louder than words. Even if those words are in writing.

Whether or not it’s in the commercial or residential world, negotiating is always a messy process that leaves copious amounts of room for mistakes. Like forgetting to waive a condition or forgetting to add or delete a term in an agreement. The real issue is not just the fact that mistakes happen, but whether or not someone can take advantage of this oversight to get out of bad deal.

 

Can you use a mistake to get out of a bad deal?

 

It’s rare, but the law can actually be applied fairly and sneaky litigation tactics won’t always work. A recent Ontario decision confirmed that the actions of the parties negotiating a deal may overrule what’s written in a contract. Here’s what, where and why:

 

A tenant and landlord entered into an Offer to Lease. There is a condition in favour of the tenant to waive for inspection and a condition in favour of the landlord to waive for financial approval. The deadlines for these conditions have come and gone without anyone fulfilling or waiving these conditions. Yet, the tenant and landlord continue to negotiate the lease terms. In other words, while the legal document – the Offer to Lease – states that the contract is over, no one acts like the contract is over.

 

During negotiations, the tenant and landlord agree verbally and in vague email correspondence that they’ll not strictly apply their legal rights and agree to carry on the negotiation process. No formal amendments are signed, the tenant starts incurring expenses to renovate the unit and the landlord offers no indication that the tenant doesn’t meet the financial standards outlined as the above-referenced condition of the Offer to Lease. That’s until the landlord has a change of heart and, without warning, claims that the Offer to Lease is void because neither party waived their conditions within the prescribed deadlines.

 

The evidence in this case is clear: the landlord is attempting to manipulate the law unfairly and use the contract as a litigation tactic. As such, the tenant sues, claiming that the landlord’s actions speak louder than the conditions of the contract and the landlord cannot benefit from such sneaky behavior. Thankfully, the courts agreed.

 

The Lesson Learned

 

Forgetting to waive a condition doesn’t necessarily mean that a deal is dead or that an agreement is void. Rather, if the parties verbally agree and act like the deal is going forward then the deal is still alive. A cautionary note: while this case means that your client won’t be penalized for your oversights that can happen during a negotiation, this doesn’t excuse sloppy work and it certainly doesn’t mean that you won’t end up with a RECO claim.

 

 

 

Happy Canada Day! – The Renaissance of Renting

 

Home owners – prepare to feel duped. Renters – prepare to feel like Warren Buffet.  Alex Avery, author of The Wealthy Renter and Vertica, an award winning property management group, are using cold hard math to prove that your money is much better off spent in the Canadian stock market than on a mortgage. In other words, you made a bad financial decision if you bought a house rather than rented and invested your money in market. And yes, this is true even though we’ve had a housing boom.

 

Some may argue that Avery’s “hard math” isn’t accurate or that Vertica’s faith in the rental market doesn’t acknowledge the full value of home ownership; they both fail to take into account the intangibles of home ownership. After all, the duped homeowners pay the big sticker price because there’s immeasurable value associated with the pleasure of home security, home ownership, upgraded amenities and living in a neighbourhood that fosters a sense of community. In fact, it’s this very lack of intangibles that demoralizes renters and that perpetuates the stigma associated with renting. That’s until Vertica decided to change the renter’s experience by creating these intangibles via technology and by upgrading its value system by committing all resources to customer service, convenience, cleanliness and community.

 

Sounds nice, but renters don’t have home security!

 

Theoretically, having your name on title as the registered owner gives you, the homeowner, a stronger legal interest in your property than that of a renter. Practically, however, this isn’t the case … just ask any landlord who’s dealt with a delinquent tenant.

 

The new Wynn policies along with our old leasing laws prescribe numerous protections for tenants – from being able to register your interest on title to prolonged notification periods and rigorous hoops to jump through before eviction is possible. In fact, a homeowner who stops paying mortgage payments is likely to experience swifter eviction and longer damaging financial repercussions than a renter who stops paying rent.

 

With the advent of a rental renaissance in Toronto, as demonstrated by Honest Ed’s pledge to develop spacious rental units, the rights of tenants are likely to intensify. This is because the new demographic choosing to rent – high income earning Millennials and cash heavy Baby Boomers – have the financial and positional wherewithal to influence housing policies.

 

While the current state of renters’ rights defies the notion of security through ownership, how does Vertica deal with renter’s woes within Vertica’s control? For example, does Vertica overcome “slumlordism” and cultivate a sense of homeownership pride not typically felt by renters?

 

How to become a good landlord?

 

Vertica is taking a page (or two) straight out of Apple’s innovation and customer service text book: use technology to make the user experience a pleasure and obsess over delivering a positive experience. Unlike the experience of those who rent condos from absentee landlords, Vertica’s tenants don’t have to incur any out of pocket costs or manage the process of finding, screening and waiting around for the maintenance person to arrive anytime between 7 am and 7 pm. Rather, Vertica’s tenants have the convenience of handing off the entire process to a team of professionals. In a few more years, Vertica be launching technology that simply allows its tenants to open up a smartphone or online application to report a maintenance issue. Within minutes, the tenant will know when the issue will be solved by a designated, screened and trusted property manager.

 

Todd Nishimura, Director, Marketing at Vertica Resident Services/GWL Realty Advisors, asserts that the use of technology is not intended to reduce human interaction. Rather, it does quite the opposite. Vertica pays close attention to measuring its team’s effectiveness and the customer satisfaction of their tenants (that Vertica refers to as residents). Doing so revealed that the Vertica property managers and administrative staff too much of their time on non-value add administrative tasks. Such tasks ranged from collecting rent to dealing with tradespeople and following up on maintenance requests.  The solution: use technology where possible to reduce paperwork and eliminate redundancies. And then use the freed up time to interact with tenants, foster tenant relationships, reduce disputes and create a positive home environment.

 

We Don’t Have a Sense of Community!

 

Landlords renting out their condos and neighbours to rowdy renters rightly complain that renters destroy facilities, as well as the sense of community. After all, renters aren’t invested – literally – in the maintenance of the building and they don’t intend to stick around. How is Vertica dealing with this obvious issue? By investing in creating communal events (i.e. summer barbeques, free tickets to local events!), committing to maintaining a clean space and by building communal spaces at each property. Creating a sense of community, combined with offering high end amenities and conveniences such as en-suite washers and dryers, attract those who are choosing a lifestyle that allows for financial flexibility while setting in deep roots; something that’s not offered by home ownership or by Toronto’s flimsy condo rentals.

 

Despite the risk of running a fool’s errand, I predict that the rental market will change as we start to seriously consider the “hard numbers” and as  rental buildings such as Vertica’s become more available. This trend will continue if housing unaffordability – whether it be a detached home or condo –  continues as it has and as developers begin to move away from the “build and dump” condo developments scarring Toronto to build, rent and create communities we so desperately need.

 

How to avoid a Lawsuit

Lawyers are great assets for any real estate agent or realty team. They’ll help you craft a legally acceptable arrangement, but they have their limits. They won’t help you create a good business deal because that’s your job. And if you don’t do your job your client will be stuck with a bad deal and the courts will not strike down an agreement just because the deal, well, “sucks”. But, the courts will uphold a lawsuit against you if you failed to meet your professional duty to provide competent advice!

 

How can you avoid a lawsuit? You’ll have to flip through the 100-page lease and have a strong understanding of every clause. The problem, however, is that you don’t have the time and getting a lawyer involved is very expensive. Yet, you also can’t afford to not know the legal dangers lurking to destroy your deal, client and reputation. The solution? Educate yourself and read on and to learn about one of the most common mistakes arising out of lease deals.

 

Why You Have to Care (and Know!) About More than Per Square Foot Rate

 

The Scenario

 

Your client is an experienced restaurateur and needs a space that’s at least 3,000 sq feet in a trendy Vancouver neighbourhood. The square footage is critical because anything smaller won’t fit the number of seats required for the restaurant to turn a profit. Losing even one table would destroy his business.

 

After months of searching and several deals falling through, you finally find the perfect location at a below market rate. The suite is in a busy strip mall with a gorgeous green space attached and large parking area. As you review the Offer to Lease you know that your client will be pleased because the Offer clearly states that the Rentable Area is approximately 3,020 sq feet.

 

A month later, your client calls. He tells you that his contractor measured the suite and the space is actually 2,500 square feet – he won’t be able to make his business work.  He says you and the landlord intentionally misrepresented the size of the unit and he wants out of the deal! If not, he’ll sue.

 

Is the square footage discrepancy between what your client measured versus what is written in the lease and what he’s paying rent on legal? You bet. May your client try and sue you? You bet.

 

What Happened?

 

Your client assumed that the Rentable Area was the actual size of the unit and you didn’t explain the difference between Rentable and Useable Area.

 

What is the Difference and Why Does the Landlord Do This?

 

Before signing an Offer it is imperative to always warn clients that there can be a big difference between the Useable Area and the Rentable Area. Understanding and telling your client about these differences is imperative because rental rates are almost always based on the basis of Rentable Area. I’ve seen many disgruntled tenants start lawsuits over failing to appreciate this difference and businesses fail because of the unexpected cost of rent.

 

Generally, Usable Area is the space that a tenant can actually occupies and can use, while Rentable Area includes a tenant’s share of space in the building deemed beneficial to the tenant. The tenant doesn’t necessarily have exclusive possession of such space:

 

Rentable Area of the Premises means the area expressed in square feet […] as certified by the Architect or Lad Surveyor of all floors of the Premises (including, without limitation, any Mezzanine Area, Basement Areas and Storage Areas), measured from: (a) the exterior face of all exterior wall, doors and windows […]. The Rentable Area of the Premises includes all interior space, whether or not occupied by any projections, structures, stairs elevators, escalators, shafts or other floor openings or columns, structural or non-structural and […] the area of such recess or entrance for all purpose lies within and forms part of the Rentable Area of the Premises.

 

This clause essentially means that the Rentable Area, unlike the Useable Area, includes the tenant’s share of the building’s common spaces such as lobbies and other non-rentable space such as elevators, mechanical rooms and shared or public bathrooms. The measurements include spaces that no one can physically occupy, such as columns and rooms filled with laundry machines, boilers and HVAC systems.

 

Why does the Landlord make this distinction between Rentable and Useable Area? Because it costs money to run the entire facility, which is open for the tenant’s use and benefit. As such, the Landlord will want to recoup these costs and, sometimes, even make a profit for running the building.

 

What Should You Do?

 

The first method to protect your client and yourself from professional negligence claims is to advise your client to hire an architect to measure the space. The hired professional should not only measure the space, but also help your client determine if his space needs are met. Be sure that the architect or professional has the proper accreditation to provide a Letter of Area Certification and uses a generally accepted measurement standard such as the standard adopted by Building Owners and Managers Association (BOMA). Although the BOMA standard isn’t a standard required by law, it is very well recognized and will enhance the legitimacy of your position during negotiations or if your client has a dispute with the landlord.

 

The second protective measure you should take is to figure out if the Landlord has added a “loss factor” to the Rentable Area calculation. Although not contained in our clause example, above, Landlords may also add an arbitrary “loss factor” which is used to “gross up” the Rentable Area’s size. A “loss factor” is perfectly legal as there is no measurement standard required by law.

 

The final protective measure is to walk through the entire premises. As outlined above, the Rentable Area also includes columns. By doing a walk-through, you may find that there are numerous columns within the premises that are not available for use by your client’s use. If that’s the case ask the Landlord to reduce the Rentable Area calculation by excluding a few of the columns.

 

The best defence against lawsuits, damaged reputations and failed deals is planning and information. With your own facts you’ll have a more informed basis for negotiation and you’ll protect your client from any business-destroying surprises.

 

For more information about the author or leases visit www.groundworksfirm.com.

 

 

DISCLAIMER: This article offers general comments on legal issues and developments of concern to business organizations and individuals and is not intended to provide legal opinions. Readers should seek professional legal advice on the particular issues that concern.

 

The Relocation Clause

You’re a professional. You’ve been trained to understand what your client needs. And you know how to find the best real estate. You and your client are excited, you sign the offers and then close the deal.

What you may not know is that you’ve made a big mistake. The lease your client just signed will ruin their business. And they’ll blame you.

This happens frequently when negotiating and signing offers because, although legal advice is advisable, it isn’t practical. Lawyers give complex, lengthy and expensive analysis and slow the deal process. As a lawyer who built and led a leasing department for a private equity real estate investment firm, I saw how lawyers would frustrate everyone; yet, without legal advice major consequences would follow.

Since a lawyer may not be readily available, it’s best to arm yourself with knowledge and think like a lawyer. To think like a lawyer is easy – be paranoid and always think in “worst case scenario”!

The knowledge part, however, can be more cumbersome. So, we’ll start with one clause at a time, beginning with the most frequently overlooked but potentially dangerous clause.

The Relocation Clause

The Scenario

Your client is a hairdresser and her business depends upon walk-ins. She needs foot traffic generated by pedestrian roads and “name brand” tenants.

You find her the perfect unit. It’s right beside a popular café and that faces a busy sidewalk. You sign the offer, but pay no attention to the lease attached to the offer. After all, the terms are fairly standards and you got your tenant a great rental rate.

Three months later the landlord tells her she is being relocated to the back of building where there is no foot traffic and where there are no “feeder tenants”. After 4 months, she loses her business and you lose a client.

What Happened?

You didn’t see the “Landlord’s Right to Relocate” Clause, which stands on its own or can be buried in the “Control of Building by Landlord” Clause.

What is this Clause and Why Does the Landlord Want it?

The landlord will typically want to retain a lot of rights in its maintenance, management and operation of the building. Moving a tenant is central to a landlord’s management of the tenant mix and its ability to make changes to the building. For example, the landlord may want to attract another tenant or demolish the unit to create a larger space for an existing tenant. Given these objectives, watch out for wording that says:

Landlord has the right, on no less than sixty days’ notice, to relocate Tenant (including its subtenants and all other permitted occupants) to other space in the Centre designed by Landlord of comparable size in which the Tenant must complete the relocation within thirty days after the Landlord’s notice. The new Premises replaces the old for all purposes of the Lease.

[…]

In the event of relocation, the Landlord will pay to the Tenant on an equitable basis, for capital costs incurred by tenant for new Trade Fixtures as a direct result of such relocation.

Let’s consider our earlier hairdresser scenario. This clause gives the landlord the right to move your client with only 60 days notice. Your client has only 30 days to move, which will completely disrupt her business. The landlord, however, has no obligation to reimburse your tenant for this inconvenience.  The landlord only has to pay your client her costs to change the fixtures in the new unit and nothing else. She doesn’t get reimbursed for her loss of business income, her moving costs or her marketing costs letting her clients know about the move.

What Should You Do?

If you’re representing the tenant make sure that you strike out this clause completely. If the landlord has more bargaining power then you, insist that your client be provided a “turn-key” premises in a comparable location, size, configuration and of comparable accessibility. In other words, if your hairdresser client had this wording, she would have to have been moved to another unit that provided the same foot traffic and feeder tenants that her old unit provided.

You should also make sure that your client is reimbursed for any loss of business income, goodwill or other profits because of the relocation. If the Landlord disagrees with subsidizing these costs, then request that any relocation will only occur if your client agrees to the relocation in writing. The client should also request that all costs, including but not limited to, leasehold improvements and moving costs, be reimbursed as a result of the relocation.

For more information about the author or leases visit www.groundworksfirm.com.

DISCLAIMER: This article offers general comments on legal issues and developments of concern to business organizations and individuals and is not intended to provide legal opinions. Readers should seek professional legal advice on the particular issues that concern.

Author Biography

Natalka is a lawyer & licensed real estate sales agent who has a passion to make the law accessible & affordable. She founded, hosts & co-produces a popular legal call in show on Rogers TV, Toronto Speaks Legal Advice, & co-founded Groundworks, a firm dedicated to offering practical legal advice that helps agents, landlords and tenants make more, better & faster lease deals. All work is done by legal professionals for a fraction of the price and time of a traditional law firm.

Why Your Commission isn’t Protected

Imagine this scenario: you and your client diligently review your listing agreement. You add in an expiration date of 6 months and no over-hold. A few days later your realize that the 6 month expiration date was a mistake; you both agreed via email that the expiration date would be 7 months after the date of execution. You ignore this discrepancy, as you believe your client will act in good faith and honour the 7 month expiration date. Now here’s where it gets problematic: the property doesn’t sell after 6 months. Upset with the result, your client decides to sell the property on his own. The property sells in the 7th month. Are you entitled to your commission?

The Answer…..

It’ll be very difficult for you to argue that the listing agreement is valid and enforceable and, therefore, that you’re owed the commission. This is because the principle of certainty underpins the laws requiring agents to accurately draft and record all agreements related to a transaction – from buyer representation agreements to agreements of purchase of sale. If something is unclear, left blank or conflicts with what you agreed to and what you recorded, the contract may not be valid and your commission is at risk. This is particularly true of expiry dates. As Mr. Justice Morden put it in Rhodes and Rhodes Realty Ltd. et al. v. R. Pagani Investments Ltd. et al. (1981), 35 O.R. (2d) 77 (Ont. C.A.):

“if an agreement does not contain a provision which, in one way or another, at the time of the agreement, identifies the expiry date with certainty, then the requirements of the provision have not been met.”

Courts have interpreted the statutory provision requiring a listing agreement to contain an expiry date as seeking “to introduce a high degree of certainty into listing agreements, and to place the onus of ensuring such certainty exists on the broker”. As such, it is imperative to be accurate in your dates, names and pricing. But, that’s not all…

In ReMax Realton Realty Inc. v Seider [1993], the agent provided a listing agreement that included an expiry date. The agent then also provided a Professional Marketing Plan and Warranty that contained a provision allowing the seller to terminate the contract by providing 7 days notice. The seller ended up selling the property privately, despite the listing agreement still being in force.

The seller argued that he was able to sell the property and didn’t owe the agent any commission because the listing agreement is not valid. He argued that the termination provision in the Professional Marketing Plan and Warranty conflicted with the expiry date in the listing agreement. Such conflict raised uncertainty and, therefore, rendered the listing agreement unenforceable.

Thankfully, the judge found that the listing agreement complied with the legislation and was not rendered uncertain by the termination provision in the warranty. This is because the warranty did not alter that expiry date. Rather, the warranty was an entirely separate document:

The fact that the parties to the contract could agree to cancel it if the vendor became dissatisfied with the services of the plaintiff does not detract from the certainty of the expiry date of October 31st, 1989 in both listing agreements.

Despite this positive outcome, this case contains important judicial comments that may be used to invalidate your listing agreement. Ensure that you’ve not only accurately filled in the expiry date of the agreement, but that you also don’t create any accidental side agreements – such as agreements to amend listing agreements via email exchanges and marketing materials. If you confuse the terms of the listing agreement, you may be risking your rights to collect.

Thinking like a Lawyer but Acting like a Leasing Guru

Should You Waive Goodbye to this Right or Sign a Release?

Most leases require a tenant to obtain insurance that is consistent with the lease terms before it can enter a premises.  Despite this fundamental prerequisite to enter, most tenants fail to meet the lease’s insurance provision. This failure can cause delays in construction, occupancy and the “grand opening”, not to mention tack on “surprise” premium increases. In order to avoid this disaster, a prudent agent will advise her client to have the insurer review the lease and the insurance clause; she will also have a general understanding of some critical insurance terms.

The Right of Subrogation and Releases 

What is the Right of Subrogation?

The right of subrogation is one of the most misunderstood and overlooked rights related to the insurance clause. This right is not the landlord or tenant’s to exercise. Rather, it’s the right of subrogation is the insurer’s right to sue the party responsible for causing a loss or damage. This right arises where the insurer pays insurance proceeds to the injured party to reimburse the insured for its losses due to damage or injury caused by another party. Once the insurer compensates the insured, the insurer then gets a right to “step into the shoes” of the insured and sue the party that caused the loss.  This right makes the insurer “whole” as it recoups its payment to the insured by suing the party that caused the damage.  For example, let’s say that the tenant burns down the building. The landlord’s insurer will reimburse the landlord for its loss of the building. The insurer then gets the right to “step into the landlord’s shoes” and sue the tenant for the money it had to pay out to the landlord due to the loss.

Is this Fair and What Can You Do? 

I believe that right of subrogation is unfair because it allows the insurer to be paid twice; once by the insured and then a second time by exercising its right to subrogation. This outcome, as well as the fact that no one likes getting sued, is why you want to ensure that the parties to a lease both obtain a waiver of subrogation. A waiver of subrogation provision will require the tenant and landlord to get, in writing, their insurers to agree to not sue the party that caused the damage.

Tenants should be particularly vocal about getting a waiver of subrogation if the tenant pays for the landlord’s insurance, as operating costs usually include landlord’s insurance. This is because without a waiver, the landlord’s insurer can sue the tenant despite the fact that the tenant just was the one paying for the insurance!

Do waivers affect insurance costs? 

Most insurers will agree to execute a waiver of subrogation without any penalty or increase in the insurance premium. While tenants are typically required to obtain a waiver, landlords will only agree to “use their best efforts” to obtain a waiver of subrogation from its insurer. This loose language gives the landlord leeway in case it cannot obtain the waiver.

Can a release be signed instead of a waiver? 

A release can be signed instead of a waiver, which simplifies the process of requesting waivers of subrogation from third parties. In fact, most balanced leases have a mutual release clause. This clause releases the landlord and tenant from claims they have against one another, but only to the point that they are insured or are required to be insured under the terms of the lease. In other words, both parties agree to not sue each other if they have insurance that covers the loss they suffered due to the other party’s action.

Releases have the same effect as waivers of subrogation because the insurer’s rights exist only if the insured has the right. If the tenant gives up a right by way of mutual release, then the insurer automatically loses this right as well. Consider a scenario where a tenant signs a mutual release and a few months later the landlord accidentally destroys the tenant’s premises. The tenant may want to sue the landlord, but, if the tenant’s insurance covers the loss, the tenant and insurer cannot sue the landlord. Rather, the tenant’s insurer will have to pay the tenant for the losses, but it can’t exercise its subrogation rights and step into the tenant’s shoes because the tenant has no shoes!

Cautionary Note

Failure to obtain waivers or insurance may be a breach of the lease, which puts an unadvised tenant in a tough position. What is more, many insurers are now refusing to insure tenants who are required to sign a release. Accordingly, it’s not only prudent to ensure that your tenant and has a full understanding of the insurance provisions, but it’s also prudent to ensure that insurer reviews the entire lease and approves all terms before the tenant is bound.

What Agents and Landlord Need to Know About the Marijuana Business

The legal marijuana business is booming. And landlords are taking notice. It makes sense: these tenants will have solid cash flow and they’ll be able to pay a premium rent. Too good to be true? Of course it is! Unless, the following critical steps are taken to avoid risk.

Important: Before You Start

Before you – or your landlord client – even entertain an Offer, it’s imperative that you ask your client to first get confirmation (in writing!) from her lender and insurer that:

  1. any damages or losses arising out of having a tenant in the marijuana business is covered by her insurance policy; and
  2. the nature of the tenant’s business will not affect her insurance or lending terms.

If the landlord gets written confirmation, then and only then should you start talking about the lease terms. If you don’t, you risk any or all of the following:

  1. lost time as the deal could never happen;
  2. causing your client significant legal and financial hardship;
  3. your reputation; or
  4. a lawsuit for professional negligence.

Some of the Clauses You Must Address

a) Permitted Use

Precision is key. Stating that the tenant can only use the space for “lawful uses” related to cannabis is not enough. As laws around the marijuana business changes, you may be exposed to lawful uses you never intended or wanted! Examples include, cultivating marijuana, dispensing or even smoking marijuana on your property.

The solution: state that the landlord is leasing the space to a marijuana business and then itemize the related activities the tenant may conduct on the premises. Some examples include:

  1. Sale of the following prescription products to eligible persons: dried marijuana, fresh marijuana and cannabis oil.
  2. Sale of recreational marijuana (if permitted in the province);
  3. Growing and harvesting (enumerate the number of plants permitted); and
  4. Treatment and processing of marijuana and permitted related.

Next, explicitly state what isn’t a permitted use (be sure to use the language of “such as, but not limited to…”). For instance, some landlords don’t want tenants or clients to use marijuana or cannabis on or near the premises or building, regardless if such use is ingested, snorted or smoked.

b) Covenant to Comply with All Laws

While boilerplate language is useful to ensure compliance with building code and disability access laws, it doesn’t cover all of the legal dynamics of marijuana leasing. For example, there are local, provincial and federal laws regulating security, licensing, programming, zoning and even building rules.

The solution is simple: make the language as broad as possible, requiring that the tenant comply with all federal, provincial and local laws and licensing, as it relates to the physical use of the property (i.e. zoning, noise, etc), as well as the tenant’s business. Ensuring that your tenant is compliant with all of these laws is critical, as you don’t want to be responsible for an unlicensed dispensary or a police raid!

c) Owner’s Early Termination Rights

The status of the marijuana industry is still grey – many dispensaries popping up in urban areas do not have the required licensing in place. This means that the landlord is exposed to the following risks:

  1. Criminal prosecution for conspiracy to sell, produce, or transport an illegal drug;
  2. Seizure of the building/property under federal laws providing for forfeiture of assets by those involved in drug trafficking;
  3. Getting hit with a “nuisance” claim for the smoke, odours, loiterers, or other unsavoury aspects of the marijuana tenant’s use;
  4. Bank foreclosure: claims that landlord defaulted on her mortgage by leasing to an illegal marijuana business;
  5. Actions by other owners or tenants of the commercial property for alleged violations of restricted covenants (for example, a covenant to lease only to “first class” business operations); and/or
  6. Tenant mutiny and protesting neighbours concerned about the tenant negatively impacting the community.

Managing – not eliminating – these risks can be done by adding in an Early Termination right. Essentially, this right allows the landlord to terminate the lease if any of the events listed above may occur or are threatened to occur. Ensure that you list any event that may impact the landlord negatively. Do not state that these events “must” occur for the landlord’s termination right to kick in; rather that it may or there’s a threat that the event may occur (why wait until the problem exists?).

d) Landlord’s Inspection Rights

The security rules around the marijuana industry are aggressive and may limit the landlord’s right to inspect the premises. It’s reasonable for the landlord to agree to a procedure to inspect the property without causing the tenant to be in breach of any regulatory requirements and, if the landlord must access “sensitive areas”, then he can do so only while accompanied with a tenant representative. The landlord, however, should not give up its rights to take photos or videos during inspections and the tenant should be charged for any additional expenses incurred by the landlord for carrying out such inspections.

e) Indemnities

The marijuana business has the reputation of being run by “shady” characters. Typically, an indemnity is a good method to protect the landlord from a “shell” tenant. However, the indemnifier in this scenario may be unable to fulfill the obligations under the lease (i.e. pay rent!). The solution: require that the tenant obtain a letter of credit. If the company is legitimate, secure and has the “approval” of the bank, the tenant is a better gamble and the landlord can manage its risk.

f) Liability

Clearly allocate any and all responsibility and liability related to the business to the tenant, regardless of whether or not the landlord has acted negligently. A strong “one way” indemnity clause and no liability clause is required and your client is wise to get legal advice on the terminology.

g) Additional Costs

If the has to police the site or add extra security measures, ensure that these costs are being charged back to the tenant.

h) Self-Help Rights

Giving the landlord strong self-help rights is critical to ensuring that tenant mutinies are avoided, as well as any legal risks listed above. Self-help rights may be to monitor, control, inspect, call the police, hire security, enter the premises etc.

As this article demonstrates, the biggest mistake landlords and agents make is solely focusing on the rent. In order to capitalize on the burgeoning marijuana industry, landlords and tenants should start to turn their minds to the “how” of working together and minimize risk with thoughtful planning.

 

 

Why Should You Give to Receive?

The Law May Not be Fair, But it Does Hate Takers

The common rule is that you must be ruthless during negotiations to succeed. This belief couldn’t be farther from the truth; not only will you destroy your relationships, but you’ll also fail to have a legally enforceable deal.

Do You Have a Deal?

You’ve signed a contract with your client to represent him for the sale of his building. The agreement states that you’ll be paid a 2% commission upon sale of the building. You begin working and marketing the building. Given your close interaction with your client, you become good friends.

During one of your dinner meetings your client offers you an extra 0.5% increase in your commission fee, “just because”. Your cousin – who’s a lawyer – tells you to get this in writing. Your client happily modifies the agreement and within a year you sell the building. When you get your cheque, however, doesn’t reflect the promised 0.5% increase in your commission rate. Can you sue for the 0.5% outstanding?

There’s no such thing as a free lunch

For those who guessed “Yes”, you’re wrong. The basic elements that make up a binding contract are: offer, acceptance and consideration. The missing element in the above scenario is consideration. And this doesn’t refer to being nice.

What is Consideration?

It’s generally understood that we make business contracts to exchange goods or services for a variety forms of payment. After all, apart from helping friends and family or giving gifts during the holiday season, profits are gained because we do not give up something of value for nothing in return. This is why courts created the concept of consideration, a concept which requires both parties to give up something.

What Happens if There’s No Consideration?

If there’s no consideration, a contract can be invalid. This is true despite the fact that you get the other party to agree to something and you put in writing. In our example, you and your client already committed in writing to sell the property for a particular fee. You gave your time and effort and your client gave up his money in exchange. Consideration was passed. However, when your client offered you a higher rate, you gave nothing up in return.

How Can I Avoid the Consideration Problem?

To make the renegotiated fee enforceable, you should have offered something nominal in exchange. For example, you could have offered to increase your marketing budget or promised to close the deal ahead of the expected schedule.

Consideration doesn’t have to be of equal value to the concession being given – even changing the font in all of your marketing materials or baking cookies would have been sufficient to meet the consideration criteria.

Should You Renegotiate an Existing Deal?

Renegotiating existing deals is a common practise and an excellent negotiating tactic. This tactic, however, should only be used with a counterpart you trust and with whom you have a great relationship. The reason why renegotiating a deal is a good negotiation tactic is because we typically don’t reach our fullest potential before we stop negotiating.

A variety of Kellogg studies conclude that we leave about 25% of “value” on the table. By reopening the conversation after you’ve signed a binding deal and asking how you both can do better (not just how you can do better!), you not only allow both sides to get a better outcome, but you also ensure that the consideration rule is met. In other words, you both make an exchange to achieve a better outcome.

I’ve seen this renegotiation technique successfully used by one of my students in the negotiation course I teach at the Real Estate Institute of Canada. Both parties made concessions to get a better outcome and both walked out forging a better deal and relationship. Not only did they both “make” more, their mutual willingness to make concessions ensured enforceability.

The golden rule is simple: make sure you give first and receive. If you fail to do this, you’ll not only come off as Scrooge, but you’ll also fail to have a binding agreement.

How to Play Dumb

For years I’ve wanted to bleach my hair blonde. I never did, however, because I feared that blonde hair would unfairly labelled me as a dumb helpless woman. I feared this until I realized: being dumb and helpless is great. Because it works during negotiations. Even for guys.

Weird Tactics to a Successful Negotiation

Chris Voss, author of  Never Split The Difference, was the FBI’s lead international hostage negotiator. He’s known for unconventional tactics such as acting dumb (see below for more), agreeing with character accusations (just take it and apologise, even if you come off as weak!), never splitting the difference and never being direct (you’ll come off as rude, even if you’re trying to be honest).

Although his negotiation heuristics are not the norm, they work. Very, very well. This is because his rules play upon many of Cialdini’s psychological triggers. These triggers are deeply imbedded in the way we behave. For example, most people lower their guard when they don’t feel threatened or if they “like” and feel understood by their counterpart. This is exactly, as Voss alludes to, why acting dumb is smart.

Act Dumb to Create a Non-Threatening Environment

People don’t feel threatened by those who appear less intelligent than themselves. In fact, if you’re perceived as helpless and weaker, your counterpart is more likely to impart information on you or start negotiating against themselves (i.e. making concessions before you ask). They do this to fill the air, out of pity or because they feel like they’ve already “won” and should throw you some scraps.

Leverage this psychological “tick” to not only get information but to avoid pressure tactics, evade angering your counterpart with blunt responses and restarting stalled negotiations.

The best way to get the most out of playing dumb is asking “how am I supposed to do that?” Voss explains:

Calibrated “How” questions are a surefire way to keep negotiations going. They put pressure on your counterpart to come up with answers, and to contemplate your problems when making their demands… The trick to “How” questions is that, correctly used, they are gentle and graceful ways to say “No” and guide your counterpart to develop a better solution — your solution.

Asking “how” gets the other side to feel in control, think about your situation, develop empathy for your position and fall into the “negotiating against yourself” phenomena (i.e. making concessions without you asking for them to do so). The kicker: since the concessions are their idea, they’re more likely to stick with the concessions, even if the concessions don’t suit their purpose or, in hindsight, hurts their position. Voss outlines how this works:

You want to make the other side take an honest look at your situation. It’s the first way of saying “no” where you’re doing a lot of things simultaneously. You’re making the other side take a look at you. You make them feel in control, because it’s a good “how” question. You don’t want to say it as an accusation. You want to say it deferentially, because there’s great power in deference. You want to find out if they’re going to collaborate with you. 9 times out of 10, you get a response that’s really very good.

Don’t be afraid to repeat the question. In hostage negotiations, Voss asked the following ad nauseam: “How do we know the hostage is safe?” “We don’t have that kind of money. How are we supposed to get it?“But how do we deliver the ransom to you?”

I know what you’re thinking. And, you’re right. Just like Voss, you’ll eventually get the response: “You’re just going to have to figure it out.” This is not a big issue. In fact it’s a signal that you’ve negotiated and have gotten as much out of the negotiations as possible:

Of course the one time out of 10 they’ll say to you, “Well, you’re just going to have to figure it out.” But even in that case “How am I supposed to do that?” helps you confirm that you have in fact pulled as much value or gotten as many options as you possibly can out of the other side. You found a solid barrier. Your decision now is, “Okay, do I like this? Do I move in another direction?”

The rule is simple: acting dumb is actually acting smart. That’s is exactly why I’m now a bleach blonde.