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Judicial Interpretation of "completely carefree net lease"

The intent of a "net" lease is to shift responsibility for the payment of expenses under the lease to the tenant. However, the case law has fairly consistently required landlords to specify particular expenses in their leases in order to be able to recover such expenses from tenants. This is seen again in 1645111 Ontario Ltd. v. 1169136 Ontario Inc., 2008 CarswellOnt 4002.

In this case, the Tenant leased the basement, main floor, patio space and a portion of the second floor of the building for the purpose of operating a bar and restaurant. The Landlord undertook major repairs of the roof and sought to charge the Tenant its proportionate share of the expense, an amount which totaled approximately $32,000.00.

The lease in question was prepared on a standard stationary company form which states that the lease is a "completely carefree net lease for the Landlord". However, in this case the parties also added a clause to Section 6 of the form, which addresses repair and maintenance. Paragraph 6(5), inserted by the parties, read "the Landlord shall be responsible for, at its expense, the maintenance of the structure of the building including, but not limited to, the roof, exterior walls and heating system."

The issue before DiTomaso J. of the Ontario Superior Court of Justice was how a lease described as being a "completely carefree net lease to the Landlord" could be reconciled with a provision in the lease which attributed responsibility to the Landlord for its expense in maintaining the roof of the building.

The Landlord argued that under the lease the Tenant was responsible to pay to the Landlord Additional Rent consisting of all charges, costs and expenses of every nature and kind and its proportionate share of costs for common areas and facilities (the roof being a common area used by the Tenant). The Tenant countered that the roof was not a common area that the Tenant used so as to attract Additional Rent and that paragraph 6(5) (mentioned above) excluded the Tenant from responsibility for expenses regarding the maintenance of the structure of the building, including the roof.

DiTomaso J. noted that despite the lease's description as being carefree and net to the Landlord, the terms of the lease as a whole must be considered. In this case, paragraph 6(5) was inserted as an exception to the overall intent of the lease. It placed responsibility for maintenance of the structure of the building (including the roof) on the Landlord and at the Landlord's expense. This was not an inconsistency that could be dismissed by characterizing the roof as a common area for which repair costs were chargeable to the Tenant as Additional Rent. The paragraph's wording and its context within the document defeated the Landlord's claim that the cost of the roof repair could be passed through proportionately to the Tenant and the Landlord's application was dismissed.

This case is important because it illustrates that the description of the lease as being "net" to the landlord does not necessarily make it so. Even in a net lease, tenant and landlord responsibilities for operating costs should be clearly and consistently defined.

Bob Fraser

November 24, 2008 in Leasing | Permalink

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Comments

Thanks for highlighting this case - I've come across this type of wording a few times, and will take care to make sure these issues are clarified!

Posted by: Jeff Sutherland | Nov 27, 2008 4:28:26 PM

Thanks for the article. It is easy to get confused with all those real estate financial terms, such as triple net lease and 1031 exchange property. Do you have any more resources I could look at?

Posted by: Stan Johnson | Jun 21, 2010 4:17:52 PM

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