Commercial Landlord: Top 10 Tips to Avoid Lawsuits
No landlord wants to be sued. That said, lawsuits happen. Having acted for both commercial landlords and tenants, I have observed that several themes prevail when relationships go sour. The areas of disagreement can arise at the outset (e.g., how can you screen prospective tenants) and continue to the end of the relationship (e.g., what can you really do with the security deposit).
A general guideline for landlords as is follows: Just because the lease is not titled a “contract”, it is one. The lease is the document that governs the relationship between the parties, providing significant economic value to the landlord and tenant alike.
Here are helpful tips to avoid having your lease turn into litigation:
- Screen your prospective tenants. If the prospective tenant is too good to be true, she or he probably is. It is amazing what a few questions may elicit. Ask about the tenant’s previous leases and experiences. Ask what has worked and not worked with previous landlords. Contact previous landlords. Visit www.canlii.org and check whether the tenant has been involved in previous lawsuits (type the name in the “case name” box). If the prospective tenant is a numbered company, visit www.mgs.gov.on.ca and get a Corporate Profile Report to make sure the company exists. If you suspect the numbered company has no assets, consider asking for a personal guarantee.
- Put your lease in writing. You would be amazed how many leases are handshake deals. While most handshake deals work out, those that don’t are incredibly difficult to prove or contest. Even if your lease is in writing, the terms (e.g., rent amount, use and repair obligations) may change over time. Make sure you amend the lease or have a collateral agreement to accord with changes to the relationship. Note that a commercial lease of more than three years needs to be in writing.
- Make renewal and overholding obligations clear. The renewal obligation (or lack thereof) is a frequent cause for lawsuits. Make sure the obligations to renew are clearly spelled out: Is there an opt-in right and/or is there an opt-out right? What are the timelines associated with those decisions? Agreements to agree (i.e., “the parties will agree to a renewed lease”) are unenforceable. If there is a renewal, ensure the terms are set out. Be careful about verbal representations that may be interpreted as renewals. Ensure your overholding clause is clear. Set out how the tenant is to be treated (e.g., month-to-month) once in overholding.
- Review your lease throughout the term. The conduct of the tenant or landlord may evolve over the course of the term. You won’t know if there is misconduct unless you review the lease periodically and remind your team of the obligations. Your staff will change over the course of a long-term lease. Don’t lose that institutional knowledge. Consider a global chart with the main terms of all your leases. Establish a reminder system with timelines. Make sure new managers review the leases anew.
- Keep in touch with your property manager. As much as you may know about on-site activity, your property manager knows more. She or he is often the first to know about possible infractions or potential problems. Make sure your property manager is inspecting the property and speaking with tenants. Maintain a true open-door policy. Establish monthly meetings or calls to stay updated.
- Document all infractions. Notify the tenant of breaches in writing, even if minor. But permit the tenant to cure during the cure period. If you are terminating for a breach or breaches, make sure you have documented examples. If you are then forced to defend your decision, the documents will be crucial. Keep copies of what you send to your tenants. Send important notices via certified letter or courier so they are trackable.
- Distrain with care. See “document infractions”, then call a lawyer. Ensure you distrain only to the extent necessary to satisfy the arrears or charges. Before you distrain, take an inventory of your evidence, and consider the financial costs and reputational risk to your organization and facility. Document the reason or reasons you are distraining, provide appropriate notice and be prepared for blowback.
- Get insurance: Though you will have insurance for damage to the property, you should require your tenant to have insurance and you should insure yourself against lawsuits brought by a tenant. In the unfortunate event you are sued by a tenant, you would want to have insurance cover litigation costs and damages/settlement.
- Use the security deposit wisely. Ensure your lease spells out exactly how the security deposit is to be used. It is not a “get out of jail” card to be used as a threat for any tenant non-compliance.
- Be nice (or nicer): Conventional wisdom says lawsuits should not be personal (“it is just business!”), but the decision to sue can often be personal. Get to know your tenants (or make sure that as the first line of contact, your property manager does this). Send a Christmas card. The occasional unsolicited nice gesture may be a tenant’s tipping point on whether to sue.
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