Buying a dental practice? Here’s what you need to know about getting your financing in place:
If there’s a fire, the banks want to be covered for the amount of the loan. For this reason, you will have to obtain fire insurance and assign it to the bank. The amount of fire insurance depends on the value of the contents.
If you die / become disabled, the banks want to be covered for the amount of the loan (or more in order to cover additional expenses). They’ll ask you to assign the life insurance policy to them (although you’ll still be required to pay the monthly premiums). So if you do have to do this, make sure you get EXTRA insurance to cover your loved ones (in the event of your death)!
You will need to provide the bank with proof of malpractice insurance. Since all dentists in Ontario are automatically insured through the Royal College of Dental Surgeons of Ontario (the “RCDSO“), this only requires you to write to the RCDSO and ask for a letter confirming that you have malpractice insurance in the amount of $2,000,000.
Another form of insurance required by the bank is general liability insurance. This is because the bank wants to know that, in the event of a lawsuit against the company, the insurance will be able to cover the costs of the law suit so that you may continue to pay back your obligations towards the bank.
Where the practice premises is leased, the bank will want to be provided with a copy of the signed lease assignment, coupled with the landlord’s consent. Where the practice premises is being purchased, the bank will want to see the purchase documents.
The bank will normally ask to see at least 10 years left on the lease. This can be an issue, for example, if you’re purchasing a practice where the lease only has 5 years left. What this means is that your lawyer will have to work extra hard to get you that 10 year term. But in the event that the landlord is not willing to give you the 10 years you seek, then a shorter term (i.e. 8 years) could work, but the terms of your bank loan, such as the amortization period of the loan, will have to change.
Another tricky situation when it comes to leases is that the bank will not tolerate a demolition clause in the lease which can be exercised during the 10 year term. The reason for this is because a demolition clause, properly exercised, could cause the dentist to be out on their rear without a location from which to practice well in advance of the lease term being up. Such a disturbance to the practice may result in loss of revenue and therefore a default on the loan.
For more information on demolition clauses you can read this blog.
If you are borrowing funds in the name of a dentistry professional corporation then, in order to ensure that you do not “hide behind the corporation”, the bank will usually ask that you, the dentist, sign a guarantee stating that you will be personally responsible for any default of the corporation.
8. General Security Agreement
Another way the bank will seek to protect its interest is by asking you to sign a General Security Agreement (the “GSA“). The GSA gives the bank interest in and recourse to all of the equipment, inventory, instruments, books & records, tangibles/intangibles, etc. at your office in the event that you and/or your corporation defaults on the loan. The bank calls these items “collateral”.
Once you agree to the bank’s terms, then the banks lawyer or your lawyer will register the GSA in the Personal Property Security Act (the “PPSA“) register. The PPSA register is a place where creditors can register their interest against a person or company. This registration will normally stay in place until it is renewed or until such time as you pay off your debt and the registration is “discharged”.
In some situations (depending on the bank, the amount of the loan, etc.) the bank will ask your lawyer to provide the with a letter of opinion. This states that the lawyer has examined certain documents and has done the necessary searches in order to guarantee to the bank that the borrower is a valid corporation which has the capacity to borrow funds, that there are no other PPSA registrations against the borrower, etc. Not all banks and not all loans require a lawyer’s letter of opinion, but in our experience, this is a more and more common occurrence and you should be aware of it.
Where your corporation is borrowing the funds for the purchase, the bank will want to see a directors’ resolution authorizing the corporation to sign the loan documents. A Certificate of Status of the corporation will also be required. This is a document from Service Ontario stating that the dentistry professional corporation is a valid corporation that is still in existence.
For further guidance and information on practice financing, you can contact me (Ljubica Durlovska), David Mayzel or Michael Carabash. We are your legal dental team.
Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.
Whether you’re a new dentist looking to start a practice OR an existing tenant who needs to renew their lease OR a dentist looking to sell their practice: you should NEVER BLINDLY TRUST your landlord. And to give you something to think about, here are some recent horror-stories:
We Own the Leaseholds, Now Pay Up!
In one transaction, it was discovered that the landlord (as per the lease) owned some of the cabinetry and the front desk in the dental office. So why would a purchasing dentist be paying the seller for those things? How did it get resolved? Thousands of dollars came off the purchase price.
Pay Me 5% of the Purchase Price Please!
This came out of left field. The lease was SILENT on how much the landlord was entitled to in the case of consenting to an assignment of the lease from a selling dentist to a purchasing dentist. But when the landlord was notified of the sale, they asked for a copy of the purchase and sale agreement and 5% of the purchase price as their administrative fee. Ouch! How did it get resolved? The landlord ultimately didn’t follow through on the 5% (perhaps they recognized that the weren’t entitled to it under this particular lease, but may have been entitled to it in other leases with other tenants in the building).
Show Me Your Audited Annual Financial Statements Please!
This came from an absolutely brutal lease (perhaps the worst one I’ve ever seen negotiated by a lawyer – not our firm). It included giving the landlord the right to have audited annual financial statements. Holy Cow Batman! Those are expensive to create and why does the landlord need to see them. How did this get resolved? The prospective purchaser did not move forward with buying the practice because of the horrific lease (and the landlord’s reluctance to amend it).
We May Need To Demolish!
In one famous example, a lease contained a provision allowing the landlord to terminate (and kick the tenant out) in order to demolish and put up a condo. There were condos all around the practice and a high vacancy rate in the building itself. The landlord was very uncooperative and refused to limit or remove the demolition clause. Any prospective purchaser would have nightmares of that demolition clause if they were to pay the $1-million the practice was appraised for. How did this get resolved? The purchaser paid $540k, largely in part because of the demolition clause, and relocated the practice to a new condo unit down the road which the purchaser bought.
Moral of the story: have a lawyer review the offer to lease or actual lease BEFORE you sign it to make sure there are no hidden disasters which could cost you money down the road.
We’ve seen it time and time again. Dentists (without proper representation no doubt) sign a very long lease that has a lot of small print. And years will go by without them ever thinking about that small print. Until… the time comes to sell the practice (typically). That’s when all sorts of problems arise. So, in an effort to help eliminate those pesky lease issues before they arise (and which cost dentists thousands of dollars to deal with at the worst possible time), I’ve narrowed down 5 things in bad leases every dentist should know:
1. Demolition Clause
The gist of this clause gives the landlord the right to terminate the lease by giving notice in order to redevelop the building (e.g. tear it down and build a condo). We have seen this clause cost one dentist three hundred thousand dollars because of the landlord’s high vacancy rate, location next to lots of condos, and adamant reluctance to remove the demolition clause when asked. Sometimes, these demolition clauses come with an obligation on the landlord to provide relocation space and leaseholds and reimbursement of some kind (but not for business interruption typically). Purchasers and their banks HATE these clauses because it gives the landlord to prematurely terminate the lease. Banks need to see at least 10 years remaining on the lease with no demolition. We have seen sellers have to pay the landlord thousands (think $25k) in order to persuade them to remove the demolition clause for a few years. Again, when you’re in the process of selling your practice, these are unexpected ‘dings’ that could have been avoided had the lease been properly negotiated.
2. Consent Terms
Landlords are generally brutal when it comes to considering a prospective assignee (i.e. the purchasing dentist) and consenting to a transfer of the lease. They generally like to give themselves all discretion and power in judging the incoming tenant. We have seen leases that were so brutally one-sided that a landlord could: (1) ask for every kind of document you can think of (including the purchase and sale agreement) in considering whether the prospective assignee is worthy, (2) be able to deny granting consent for a number of listed reasons (some of which don’t make sense – like the length of time or reputation the prospective assignee has run their own practice (how does this work for a new grad or a foreign trained dentist?), (3) be able to withhold consent and can act unreasonably, (4) can reject giving consent and decide to terminate the lease (in which case the existing tenant might be rushed to withdraw their request before the lease is terminated!), (5) and can ask for money. When it comes to asking for money, there are a few ways in which landlords do this. First, they can say that, pursuant to the lease, they own all the leaseholds which are being purchased and therefore need to be reimbursed (we’ve heard about this happening to the tune of $100k!). Second, they can ask, pursuant to the lease no doubt, that they are entitled to 1% of the purchase price. Ouch! Third, they can say that they need a set amount of money to consider the prospective assignee and their worthiness. And don’t forget the tenant and / or the prospective assignee will need to pay the landlord’s legal fees, regardless of whether consent is granted!
3. Staying on as Guarantor
Sometimes, you may be personally on the hook for the lease for the duration of the term. That might also include being on the hook for any renewal terms too. And, in the worst case scenario, you might be on the hook EVEN if you transfer the lease. In one situation, a dentist we know was on the hook until 2024 as a personal guarantor! This means that if the incoming dentist tenant (or anyone else they transferred the practice to who ended up being the tenant) defaults on the lease, the landlord can come after you for what is owed in the lease (i.e. rent x remaining term!). Ouch! One way we try to avoid this is by recognizing that it’s there in the lease and either removing it or mitigating its effect. For example, we can try to put a timeline (either after the lease starts or after the lease is transferred) on how long you would be a personal guarantor. This has sometimes worked out to 5-10 years after the start of the lease or 5 years after the lease has been transferred.
My advice: if you’re looking to lease space or renew your lease or getting ready to sell, speak with a professional about negotiating the lease terms. This will increase your chances of getting off the hook when you transfer the lease and paying the least amount of money (and losing the least amount of money as well).
Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice, contact me (Michael Carabash), David Mayzel or Ljubica Durlovska.
You are a dentist. You have a lease. The lease says something about “leasehold improvements” or “improvements”, who owns them, who can remove them and at what point in time, and who has to pay in the event of any damage that was caused by the removal. Leasehold improvements are sometimes thought of as fixtures that attach to the premises in some immovable way – like light fixtures, floors, walls, doors, ceilings, etc. Typically, a tenant will not own leasehold improvements or improvements once they’ve been installed or attached to the premises.
Now, leases also generally talk about “trade fixtures” or “tenant trade fixtures”. These are typically the tenant’s equipment, goods and chattels which are more movable than leaseholds and which the tenant can generally deal with as they see fit (absent anything to the contrary in the lease).
So what’s the big deal you ask, about “leasehold improvements” and “tenant trade fixtures”? Well, here’s the all-important question: if the lease is not specific about what piece of equipment, furniture or fixture is a leasehold improvement vs. a tenant trade fixture, then who owns it, who is liable for repairing / replacing it, and in what circumstances is the Tenant required to remove it and pay for any damages caused in removing it? If a judge or arbitrator is going to make that determination, how do they decide these things? Let’s look at some relevant legal principles and cases, shall we?
In the case of Argles v. McMath,  O.J. No. 102, the Ontario High Court of Justice (Queen’s Bench Division) laid down some important legal principles concerning the distinction between “fixtures” (modern day “leasehold improvements”, “improvements” or “fixtures”) and “tenant fixtures” or “tenant trade fixtures”. The Ontario High Court of Justice found that the term “fixtures” included only irremovable fixtures, which are things as may be affixed (e.g. doors and windows) or placed on (e.g. rail fences) the freehold. And if purchased and placed affixed or placed on the freehold by the Tenant, these things become the property of the Landlord (in which case the Tenant ceases to have any property). HOWEVER, these so-called true “fixtures” doesn’t include “removable fixtures” (modern day “tenant trade fixtures” or “tenant fixtures”), which are things as may be affixed to freehold for the purposes of trade or of domestic convenience or ornament, which remains the property of the Tenant. And the Tenant also owns those things that are affixed to the freehold for merely a temporary purpose, or for the more complete enjoyment and use of them as chattels. So far so good? We’ve got some basic legal principles under our belt… now, let’s move on to the next case…
In the case of Club 7 Ltd. v. E.P.K. Holdings Ltd.,  N.J. No. 363, the Newfoundland Supreme Court – Trial Division cited some additional relevant legal principles in determining whether something is a “fixture” which goes with the premises (i.e. owned by the landlord ) vs. a “tenant trade fixture” which is owned by the Tenant and which can be removed by the Tenant:
96 The next question is when will a chattel be considered to be “fixed to the freehold” so as to fall within the rule, as distinct from remaining a chattel and thus subject to the ownership rights of the person introducing it into the premises. In terms of deciding when, as between a landlord and tenant, an item becomes a fixture and no longer a chattel per se, the learned authors of Williams and Rhodes, op. cit. cites the decision of the Ontario Court of Appeal in Stack v. T. Eaton Co. (1902), 4 O.L.R. 355 positing five rules for the analysis and determination of this question. As set out at p. 13-12 of the text, these rules are expressed as follows:
“(1) That articles not otherwise attached to the land than by their own weight are not to be considered as part of the land, unless the circumstances are such as shown that they were intended to be part of the land.
(2) That articles affixed to the land even slightly are to be considered part of the land unless the circumstances are as such as to show that they were intended to continue chattels.
(3) That the circumstances necessary to be shown to alter the prima facie character of the articles are circumstances which show the degree of annexation and object of such annexation, which are patent to all to see.
(4) That the intention of the person affixing the article to the soil is material only so far as it can be presumed from the degree and object of the annexation.
(5) That, even in the case of tenants’ fixtures put in for the purposes of trade, they form part of the freehold with the right, however, to the tenant, as between him and his landlord, to bring them back to the state of chattels again by severing them from the soil, and that they pass by a conveyance of the land as part of it, subject to this right of the tenant.”
Let’s look over some of these principles, shall we? First, things that are attached to land simply by their own weight are not (in and of themselves) considered to be part of the land (i.e. they’re not necessarily fixtures). Second, if something is even slightly attached to the land, then it would generally be considered part of the land (i.e. they’re fixtures). Third, the parties can modify these rules by having an agreement (i.e. a lease). Fourth, it’s important to know whether an item can be easily severed and removed without substantial injury to itself or to the realty following that process. Fifth, it should be determined whether it is the intention of the parties to create a permanent and substantial improvement to the realty or only a transient or temporary purpose (or one designed to render the chattle itself more usable as a chattel instead of benefiting the use of the realty); you’ll note this is from the Argles v. McMath case noted above. The final point above deals with the tenant bringing in their own trade fixtures. These are two categories of trade fixtures: (1) “true fixtures” which attach to the realty which lose irrevocably their character as chattels and are non-recoverable by the tenant and (2) “tenant’s fixtures” or “trade fixtures” which are personal chattels annexed to the freehold by the tenant during the term, either for the purposes of their trade or for mere ornament and convenience, and which he has a right to sever and remove during the term, in the absence of any express stipulation or local custom to the contrary. To be considered a tenant’s trade fixture, it must have been brought in by the tenant (not the landlord) and must also be capable of removal without resulting in irreparable damage to the remaining freehold or to the fixture itself. Remember: this is all subject to the express terms of the lease.
In the case of Sheferaw v. Mutual Trust Co.,  O.J. No. 464, the Ontario Court of Justice had to determine whether former commercial tenants of a building should be compensated by a new Landlord who appropriated their exhaust hood and carbon dioxide fire suppression system. The former commercial tenants had an agreement with the previous Landlord to purchase his interest in a restaurant’s chattels and fixtures (which included the hood and suppression system). When the new Landlord took over and bought the building, it insisted that it was buying the restaurant’s chattels and fixtures. The problem for the new Landlord, however, was that the agreement of purchase and sale provided that the purchase price didn’t include any chattels and the new landlord was an “astute businessman” who should have known better. So who owned the exhaust hood and carbon dioxide fire suppression system? The Ontario Court of Justice concluded that those things belonged to the former tenant and, as such, the new landlord owed them money for appropriating their goods. Here’s how the Ontario Court of Justice came to that conclusion:
25 [The new landlord] made much of the fact that the exhaust hood and ductwork were attached to the building and that their removal would cause damage to the building. Other items such as the steam table were attached to the building through the electrical wiring needed for their operation. Mr. Zwiebel cited Royal Bank v. Maple Ridge Farmers Market (1995), 34 C.B.R. (3d) 270 (B.C.Sup.Ct.) for the proposition that any item which is attached even minimally (i.e. it cannot simply be unplugged) is a fixture. Although this is true for the purpose of distinguishing between chattels and fixtures, the Royal Bank case explicitly recognized that tenants’ fixtures are treated differently at law. Thus at pages 275 and 276 of that decision it is stated that a tenant who purchases a machine and bolts it to the floor would have the right to remove the machine during the currency of the tenancy, as a tenant’s fixture. The sole qualification seems to be that it must be possible to remove the item without causing irreparable damage to the remaining freehold or to the fixture itself. In this regard see Argles v. McMath (1896), 23 O.A.R. 44 (Ont. C.A.) and Club 7 Ltd. et al. v. E.P.K. Holdings Ltd. et al.(1993), 115 Nfld. & P.E.I. R. 271 (Nfld. S.C.) at pp. 291 and 292.
26 In this case there is no evidence that irreparable harm would have been done to the building by the removal of any of the tenants’ chattels or fixtures. Wayne Cahill testified that it would involve one day’s labour to dismantle the hood and ductwork. The hole in the outside wall through which the exhaust duct passed could be closed up.
27 There is nothing in the evidence to suggest that other large items like the steam table and the bar could not be removed from the building, by dismantling them if necessary. I infer from the fact that they were brought onto the premises, that they were capable of being removed for use elsewhere.
28 Even if the fixtures claimed to be tenant’s fixtures were brought into the premises by [the former landlord], the agreement between [the previous landlord] and [the former tenant] makes them the property of [the former tenant]. It is open, therefore, to [the former tenant] to claim them as tenant’s fixtures or trade fixtures: Club 7 Ltd., supra, at p. 292 (para. 107).
In the case of Clemmer Steelcraft Technologies Inc. v. Bangor Metals Corp.,  O.J. No. 3080, the Ontario Court of Appeal had to deal with a lease that said that “All… Leasehold Improvements and fixtures upon the Demised Premises and which in any manner are or shall be attached to the floors, walls, ceiling or roof of the Demised Premises shall, upon the Commencement Date, become the sole property of the Landlord….”. At issue was some of the tenant’s equipment – namely, a spray booth and racking. FYI, the tenant has been in the business of manufacturing and assembling large component pieces of heavy equipment. The tenant wanted the Court of Appeal to acknowledge that it (not the Landlord) owned the equipment and that it could enter the premises and remove it. But the Court of Appeal read the above provision in the lease and concluded that that equipment was actually owned by the Landlord! So what’s the moral of the story? Read the lease carefully because it can actually supersede the common law (i.e. legal principles and judge made law that we’ve been reviewing up until now).
In the case of B.D.N. Mechanical Ltd. v. British Columbia,  B.C.J. No. 83, the B.C. Supreme Court had to determine whether garbage compactors were real property or “fixtures” once installed (instead of personal property). The B.C. Supreme Court looked to the common law to make that determination and wrote the following:
17 The leading case in British Columbia on the issue of when chattels are sufficiently affixed to real property to constitute fixtures at common law is LaSalle Recreations Ltd. v. Canadian Camdex Investments Ltd. et al. (1969), 4 D.L.R. (3d) 549 (B.C.C.A.). In LaSalle at p. 554, McFarlane J.A. adopted a four-part test that was set out in Stack v. T. Eaton Co. (1902), 4 O.L.R. 335:
I take it to be settled law: —
(1) That articles not otherwise attached to the land than by their own weight are not to be considered as part of the land, unless the circumstances are such as shew that they were intended to be part of the land.
(2) That articles affixed to the land even slightly are to be considered part of the land unless the circumstances are such as to shew that they were intended to continue chattels.
(3) That the circumstances necessary to be shewn to alter the prima facie character of the articles are circumstances which shew the degree of annexation and object of such annexation, which are patent to all to see.
(4) That the intention of the person affixing the article to the soil is material only so far as it can be presumed from the degree and object of the annexation.
18 A review of the authorities that predate LaSalle, as well as those that apply it, reveals that the focus of the inquiry is on whether the goods in question are attached to the premises for the better use of the goods as goods, or to enhance the value of the premises, or to improve the usefulness of the premises: Haggert v. Town of Brampton (1897), 28 S.C.R. 174 (S.C.C.); Fess Oil Burners Ltd. v. Mutual Investments Ltd.,  O.R. 203 (Ont. C.A.); Turismo Industries Ltd. et. al. v. Kovacs et. al. (1976), 72 D.L.R. (3d) 710 (B.C.C.A.); Heathron Developments Ltd. v. Kemp Concrete Products,  B.C.J. No. 2292 (B.C.C.A.).
19 However, there have clearly been difficulties when it comes to applying the LaSalle test. These difficulties were considered by Maczko J. in Royal Bank of Canada v. Maple Ridge Farmers Market Ltd.,  B.C.J. No. 1696 (B.C.S.C.). At para. 2 he states: “Simply put, the test requires first determining whether an item is slightly attached’ and therefore presumed to be a fixture; and second, if it is slightly attached, to consider whether the presumption is defeated by the intended use of the item, ascertained by reference to the degree and object of the annexation.” At para. 3 he states that “the application of the test is uneven at best.”
20 In light of the apparent difficulties in applying the test, Maczko J. proposed six rules that he hoped would prevent parties from having to come to court for a determination on a case-by-case basis:
1. Any item which is unattached to the property, except by its own weight, and can be removed without damage or alterations to the fixtures or land that would need repair, is a chattel.
2. Any item which is plugged in and can be removed without any damage or alteration is a chattel.
3. Any item which is attached even minimally (i.e. it cannot simply be unplugged) is a fixture.
4. If a piece of equipment is attached to a structure, a part of which could be removed but which would be useless without the attached part, then the entire piece of equipment is a fixture. In other words, the item will be a fixture if it loses its essential character because it is of no use unless attached to a permanent and substantial improvement to the premises of which it formed part. The converse is also true. If an item can be detached without damage or alteration, and if the item retains its essential character without the attached part, then it will be a chattel.
5. Where an item is determined to be a fixture, it may nevertheless be removed if it can be shown that it is a tenant’s fixture. A tenant’s fixture may be removed from the premise during the currency of the tenancy providing that the tenant leaves the premises in exactly the same condition as he or she received them.
6. In very exceptional circumstances not covered by these rules the court should have resort to the purpose test. For example, a mobile home may be resting on the land by its own weight but it may be clearly established that it was intended to be a fixture. These circumstances should only arise rarely and in relation to very large or expensive items.
21 I do not doubt that these rules result in a clearer and simpler application of the law. These rules have been followed by this court in Pemberton Holmes Ltd. v. Ulaszonek,  B.C.J. No. 1938 (B.C.S.C.) and in Kaverit Steel and Crane Ltd. v. British Columbia,  B.C.J. No. 3204 (B.C.S.C.). They have also been referred to in Ontario in Phan v. Morris and Doris Realty Ltd.,  O.J. No. 1080 (Ont. Sup. Ct.) and in Sheferaw v. Mutual Trust Co.,  O.J. No. 464 (Ont. Ct. J. (Gen. Div.)).
22 I recognize the possibility that strict adherence to these rules might lead to a result inconsistent with the LaSalle approach. In particular, rule three suggests that minimal attachment is sufficient to render an item a fixture even if it was clearly intended to remain a chattel. However, the Court of Appeal has not overruled Royal Bank. In my view, rule six provides the court with sufficient latitude to follow the rules without arriving at a result incongruent with LaSalle.
The B.C. Supreme Court then applied the law to the facts and concluded that garbage compactors are fixtures at common law:
24 As a preliminary observation, I note that all three types of compactors are attached to some degree to the building they are intended to service and are prima facie, real property. Looking to the object and degree of annexation, it is clear to me that garbage compactors become real property once installed.
25 Despite the differences between the three compactors and their varying degrees of annexation, they are all installed with the intent to remain permanent fixtures to the premises. The evidence suggests that compactors will generally remain onsite for the duration of their useful lifespan. While affixing the compactors to the premises may improve the functioning of the compactors themselves, the true purpose behind their installation is to improve the usefulness, and to increase the value, of the premises. Compactors serve an ex post function. In other words, businesses do not purchase a compactor, install it on a site, and then build the premises around it. Compactors are installed to increase the efficiency of the premises by facilitating the removal of waste. All of these factors combined lead to the inexorable conclusion that garbage compactors are fixtures at common law [emphasis added].
In the case of Caledonia Service Station Inc. v. Cango Inc.,  O.J. No. 1045, the Ontario Court of Appeal had to figure out who owned and was responsible for underground storage tanks and fuel lines at a Mississauga gas station. One of the fuel lines had leaked and the Tenant simply capped it. When the Tenant terminated the lease, it left behind the capped underground fuel line. The Landlord claimed the storage tanks and fuel line belonged to the Tenant and the Tenant should remove them and pay for any damage caused in the removal. The Landlord lost in the lower court, so it brought a brand new lawsuit, asking the Court for an order requiring the Tenant to repair the underground storage tank and fuel lines. According to this argument, the lease required the Tenant to repair “improvements”. The Landlord won, so the Tenant appealed. The Court of Appeal sided with the Tenant on the basis that the lease didn’t impose an obligation on the Tenant to repair “trade fixtures”. The lease imposed an obligation on the tenant to repair “improvements”. So the Court of Appeal reviewed the common law (i.e. judge made law) dealing with “improvements” vs. “trade fixtures” and wrote the following at paragraph 14:
14 This distinction accords with the ordinary meaning of improvements and trade fixtures in the law of real property: improvements refer to things constructed on and attached to the realty that are intended to become part of it; trade fixtures refer to things placed on and connected to the realty but in a way that the connection can be severed, restoring their character as chattels. See Stack v. T. Eaton Co. (1902), 4 O.L.R. 335 (Div. Ct.); Fas Gas Oil Ltd. v. J.H. Automotive Ltd. (2004), 31 Alta. L.R. (4th) 197 (C.A.); Beloit Sorel Walmsley, Ltd. v. New Brunswick (1976), 71 D.L.R. (3d) 240 (N.B.C.A.).
Then the Court of Appeal noted what the lease said. It talked about “improvements” and the tenant’s obligation to repair them. This obligation doesn’t apply to the tenant’s “trade fixtures”. Since “trade fixtures” may be removed by the Tenant, the landlord had no stake in their state of repair; but with “improvements”, because they cannot be removed, they will inevitably become the property of the landlord (thus giving the landlord an interest in ensuring their repair). So based on the common law distinction between “improvements” and “trade fixtures” and in light of the provisions of the lease (which can override the common law), the Court of Appeal held that the underground storage tanks and fuel lines were indeed the tenant’s “trade fixtures” and NOT “improvements” (which is what a lower court in the first case had determined) and therefore the Tenant had no obligation to the Landlord to repair them.
MORAL OF THE STORY: be wear when negotiating leases. The common law – which isn’t always clear cut – may be overridden by the language of the lease.
Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice, contact me (Michael Carabash) or David Mayzel.
In this blog, I’ll be discussing rights of first offer and rights of first refusal.
Rights of First Offer for Additional Space
These are provisions that favour the tenant. They’ll typically say something like: so long as the Tenant has not defaulted on the Lease, and there is additional space in the property that the Landlord can / wishes to lease, then the Landlord will provide the Tenant with notice and the Tenant can put in the first offer for the space. There may be time limits on when the offer must be put in by (e.g. a few days or weeks) and when the definitive lease for the new space needs to be accepted by (e.g. a few weeks or months). If the offer is accepted, then the Landlord and the Tenant will enter into a lease. The Landlord has a duty to negotiate in good faith to try to reach an agreement. If the offer is rejected, then the Landlord can try to lease the space to someone else. There are typically limits on the number of times throughout the term of the lease that the Tenant will be entitled to use a right of first offer to lease additional space. That ‘additional space’ may also be limited in that it must be IMMEDIATELY BESIDE the Tenant’s existing space (not necessarily space in the building / project / any other building which the Landlord owns). Landlord prefer rights of first offer for additional space as opposed to rights of first refusal (discussed below) because the former give the landlord more flexibility in accepting the terms for the new lease.
Right of First Refusal for Additional Space
This is another provision that is in favour of the Tenant. It basically says that, so long as the Tenant is not in default under the lease, if the Landlord receives a bona fide offer from a third party for additional space which the Landlord has available / wishes to lease, then the Landlord must take that offer and present it to the Tenant AND if the Tenant wants, they can accept the same terms and conditions as are in that offer to get the additional space. So it’s now up to the Tenant to accept or REFUSE to accept the third party offer as their own (which has been presented to the Landlord). And they have the right to do so again, within a certain timeframe.
Nuances about these rights
If you’re a dentist and are negotiating rights of first offer and rights of first refusal with a landlord, just be mindful of things like:
If you need a professional to help you review your existing rights or negotiate an amendment or new rights, feel free to contact us!
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