Legal insight and perspective from the Steinbergs Team
Published: June 4, 2024
Category: Real Estate
Lengthy terms are common as they provide a measure of certainty, especially in cases where the parties invest substantial funds to renovate or improve the premises to suit the tenant’s needs. A landlord, however, may want to keep open the option of redeveloping the property prior to the expiry of the lease, an especially important consideration in areas with high demand for housing and densification or other types of development.
For that reason, among others, a landlord may insist on a demolition clause being included in a commercial lease. Such clauses typically permit the landlord to cancel the lease early for the purposes of renovating, expanding or redeveloping the property. While a landlord is generally required to act in good faith when exercising its right to trigger the demolition clause, a tenant may want to include contractual language constraining the landlord’s right to terminate in order to provide for further protection.
As a result, tenants commonly seek to include specific conditions that a landlord must satisfy in order to trigger the demolition clause and terminate the lease early. Such conditions may include: (i) that early termination may only occur after part of the lease term has elapsed (for example, five years into a ten-year lease); (ii) that the landlord must provide the tenant with a relatively long notice period prior to termination; and (iii) that the landlord provide compensation to the tenant for things such as moving or other expenses. Further, tenants may want to include a right of first refusal should the landlord eventually seek to re-lease the property or a portion thereof once the redevelopment has been completed.
Demolition clauses are thus an important part of commercial leases, especially in a city like Toronto, which continues to see a reliable demand for the redevelopment of commercial properties. Ultimately, overlooking a demolition clause can result in substantial losses, and, thus, such clauses require careful scrutiny.
