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| Ray Mikkola |
The relevant facts are as follows: in 1996, the tenant and landlord signed a ground lease for a McDonald’s restaurant to be constructed on part of the landlord’s property. The lease was for an initial term of 21 years less a day, with two renewal terms of 10 years each. The lease contemplated an application for a consent to the local Committee of Adjustment due to the length of the term. The landlord determined at some point during the initial term that it would not support McDonald’s contractual entitlement to exercise its renewal rights, as the landlord had plans to redevelop its entire property including the leased lands. No consent of the committee adjustment had been obtained by the deadline imposed by the lease, and the landlord took the position that the lease was therefore terminated and of no force and effect at the end of the initial term. The tenant argued that the landlord had failed to take steps to obtain the consent and had actively interfered with the tenant’s attempts to obtain the required consent, contrary to its obligations under the lease. The court made several findings that are relevant to real estate lawyers in dealing with leases that have automatic renewal terms that result in aggregate terms longer than 21 years less a day.
Why might a Planning Act consent be required for a lease?
The requirement to obtain a consent from the Committee of Adjustment (sitting as a Land Division Committee in this instance) arises from the provisions of s. 50(3) or (5) of the Planning Act. This section requires a consent where a lease grants the use of land directly or by entitlement to renewal for a period of 21 years or more. Absent obtaining such consent, such a lease does not create any interest in land pursuant to s. 50(21), although the lease may be validated, even retroactively, by the saving provisions of s. 50(14). In this case, the lease contained the usual saving provision that until the consent is obtained, the lease would be for a maximum term of 21 years less a day (thereby expiring in 2018). The purpose of a maximum length of lease in the Planning Act is to ensure that a subdivision of land could not otherwise be affected for all practical purposes by leasing part of an owner’s land for a long term.
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The decision of the court reminds practitioners of the importance of the Planning Act consent clauses found in leases in similar circumstances, including the following matters:
1. Obtaining consent from a Committee of Adjustment can be time-consuming, so the application should be made well before the 21-year deadline. The failure to obtain consent prior to the 21-year deadline may result in the failure of all renewal periods. Particularly in the case of ground leases where the tenant builds expensive improvements, the business case for the development may be predicated on a term significantly longer than 21 years in order to obtain a reasonable return on the cost of construction. In this case, although it was the landlord’s obligation to apply for the consent, a court had ordered that the tenant should make the application given that the tenant was the party most interested in obtaining and acting on the renewals. The landlord argued that the tenant had not diligently pursued the application, which was not accepted by the court.
Leaving the application for decades also invites complexities that may have arisen in the interim. For example, a rezoning that may have resulted in the use authorized by the lease becoming a lawful non-conforming use, or the Committee of Adjustment may require a rezoning or a minor variance as a condition of approving the consent, or it may decide that the application is premature before the zoning relief has been obtained. If little time is afforded to address any difficulties or requirements in obtaining the consent, the renewal term may be rendered void. A lease will typically set out a minimum period prior to the end of the initial term for the tenant to exercise the tenant’s right to the renewal, but it might not include any restriction on exercising extension rights early. An early exercise of the renewal right and application for consent can serve to flush out any objections to the consent, including (as in this case) any objections made by the landlord. For example, in this case, the landlord argued that, as the renewal term contained no fixed rental amount, the tenant could not exercise its renewal right because rent constitutes an essential term without which there could be no valid lease. Although a lower court agreed with the landlord on this point, the Court of Appeal at a separate attendance overruled this decision. Also, in this case, the landlord argued, unsuccessfully, that as the consent had not been obtained by the deadline imposed by the lease, which deadline also was the maximum period permitted for a lease to exist without consent having been obtained pursuant to the Planning Act, there was therefore no lease to form the basis of the consent application and therefore there could be no consent.
2. The consent clause should clearly set out who is to obtain the consent. The lease in this case contemplated that the landlord was to “diligently” obtain the consent, and if the landlord was unable to do so, the tenant may bring the necessary application with which the landlord must cooperate. In view of the determination by the landlord that the consent should not be given, the court issued an order that the tenant should apply for the consent, and that the landlord should cooperate with such application. However, the landlord still objected to the application on a number of points. In drafting the consent clause, a tenant’s lawyer should therefore insert provisions describing in some detail the hallmarks associated with the required cooperation expected from the landlord, beyond a mere requirement to cooperate. The provision should authorize the obtaining of a single consent for all renewal periods. In this case, the landlord took the position that consent needed to be obtained separately for each renewal term, which exposed the tenant to additional expense and risk.
3. The lease provision should address the requirement to satisfy any conditions of consent. Pursuant to the Planning Act, the Committee of Adjustment may impose conditions of consent, and the failure to satisfy such conditions, typically within a two-year period, will result in the consent failing to be effective. The lease provision should stipulate which party is required to satisfy any such conditions, address the responsibility to appeal unreasonable conditions, and in what circumstances a refusal to grant the consent should be appealed, and at whose expense. But regardless of the details of such a provision, it will be difficult to predict every issue, condition or objection that could be raised in a consent application. The satisfaction of some conditions may be out of the control of either party, such as where a condition requires an agreement to be registered on title to which the landlord’s mortgagee must postpone. Ultimately, a tenant should understand that the legal validity of the renewal terms is effectively being put into the hands of a Committee of Adjustment, which may base its decision on what it views as good planning and considerations potentially unconnected to the desire of the tenant.
4. Constraining an uncooperative landlord in these circumstances may be very difficult to achieve. A tenant who is faced by an uncooperative landlord in applying for and obtaining the consent will not likely succeed in obtaining a remedy from the court against the landlord in the nature of an order for specific performance or injunction. The tenant will need to convince the court of the usual requirement that the property is unique and that an award of damages against the landlord would be inadequate, as a condition of succeeding. In this case, despite listing numerous examples of the landlord attempting to derail and work against the issuance of obtaining the consent of the Committee of Adjustment, and despite the court determining on the facts that the property was unique, the court nevertheless declined to order any injunctive relief against the landlord. Instead, the court decided to order that, while the landlord may not revoke its agreement to support the issuance of the consent as set out clearly in the lease, the landlord could nevertheless “raise conditions” to such consent provided that such conditions did not “vitiate or render nugatory that consent.” In negotiating the lease, a tenant would be wise to consider the risk that any such condition, if not satisfied, would result in the failure to obtain the consent of the Committee of Adjustment.
Clearly, the court, although it expressly ordered that the lease “has been renewed” for both of the renewal terms, that renewal was made expressly “subject to a determination of the Planning Act requirements,” so that if the Committee of Adjustment ultimately decided not to grant its approval to the consent, the “conveyance of the further terms will be vitiated.” Such a holding is consistent with the provisions of the lease and the Planning Act, and the court’s deference to the decision of the legislature that consent decisions are to be made by specialized tribunals. The court expressly noted that it was not appropriate for it to deal with the matter as if it were an application for judicial review, and it would not consider or criticize any process or dealing with the matter by the Committee of Adjustment of the local municipality, including in respect of any delay by either of them. The court allowed the tenant’s right to enjoy the benefit of the renewal term despite the failure to obtain the consent within the period clearly specified in the lease, based on the curative, retrospective provisions of s. 50(14) of the Planning Act associated with the issuance of a consent, but only assuming that such consent is subsequently obtained.
Importantly, the court emphasized that in the background, despite the failure to obtain the consent by the deadline set out in the lease, the consent application contemplated by the lease “remains alive,” thereby holding out the prospect of a retrospectively curative provision of the Planning Act to what otherwise appears to be a legally void renewal entitlement. Accordingly, lease provisions that place the validity of renewal rights in the hands of the Committee of Adjustment should be viewed as inherently risky.
Ray Mikkola is a partner with the firm of Pallett Valo LLP.
The author would like to thank Alan Kay for his assistance with this paper.
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