The Practice of Law

Got Ya!

Quite some time ago in Toronto, there was a major retail landlord who had some very desirable space in the downtown core past which walked thousands and thousands of commuters on their way to and from the subway every working day.  The space was leased to a large number of small boutique tenants who were quite delighted to be allowed to locate their business there.

The premises were in high demand and the landlord’s agent had a way of creating a sense of urgency.

One could almost forgive the small tenants anxious to locate their businesses at that location if they somehow thought that it was reasonable to sign the landlord’s brief form of offer to lease without running it by their lawyer. Perhaps the landlord’s agent even said that it was all standard and that the landlord would never change anything anyway.  It has been known to happen.

Of course, the brief offer to lease had the not uncommon clause which bound the tenant to sign the landlord’s fifty-page standard lease form which was not known for being particularly reasonable.  That is unfortunate, but not completely outrageous, and I don’t have too much sympathy for the tenants in that regard.  Anyone in the industry could have told them to watch out for that one.  They really should have hired a lawyer.

However, this particular landlord’s form of offer to lease did have something unusual in it.  Under a misleading heading which offered absolutely no hint at what was included in the text, there was the present grant of a security interest in all of the tenant’s property to secure the rent. Immediately after the offer to lease was signed and the deposit had been put up, the landlord would register its security interest against the tenant and then wait for the show to begin.

Typically, what happened next is that the tenant went to its bank to obtain financing to construct, equip and stock its store. After that, the bank did a search and informed the tenant that it could not provide financing until the registration in favour of the landlord was discharged or subordinated.  The tenant then called the landlord, certain that this was all a big mistake and asked the landlord to discharge its registration. At that point, the landlord agreed to subordinate its registration if the tenant coughed up several more months of a rental deposit.  Of course, if the tenant simply wanted out, they would have to worry about the deposit which they had given being forfeited to the landlord, and perhaps being sued for not going forward with the transaction.

Got ya!

I can only imagine how smart the landlord’s lawyers thought that they were when they came up with this little ambush, and it was indeed a clever one.  I suppose that if they had brought the clause to the attention of the prospective tenant, perhaps under a heading that said something like “Grant of Security Interest Which Will Completely Screw Up Your Financing”, I would say that inequality of bargaining power is a bitch, but that is how the cookie crumbles.  However, hiding the clause in a place where it was not expected to be, while intending to extract further concessions as a condition to modifying it, seems like a marriage of the worst of both capitalism and the legal profession.

I supposed that a lawyer who has not yet retired and who loves studying how the law is evolving in the area of good faith in the negotiation of contracts would write a scholarly article about this type of provision.  That is not me, and I will not.  But I will make the following points. 

First, it is actually important to have a good lawyer read every single word before signing a contract, as if that were not already clear. 

Second, and on a more philosophical bent, when we lawyers are just that damn clever, how much damage do we do to the reputation of our profession?  When we encourage and facilitate the worst anti-competitive instincts of our business clients or even worse, use our overdeveloped intellects to instigate such nonsense, are we helping create the type of society which we want to live in?

Now, I cannot say that in my years of practicing I never put a clause in the boilerplate hoping that the other lawyer might get tired and stop reading before they got to it, or that my attitude was not “hey, they are paid to read the stuff; it is not my fault if they are stupid or lazy or overworked or stressed-out.”  But do I think that I made the world a better place by doing that?   Not really.

4 replies on “Got Ya!”

This article reminds me of a case I worked on at my previous firm.

We acted for the tenant who argued that the annual rent review mechanism contained a mistake because if read literally it would transform the yearly rent from about £15,000 a year to £76 million a year by the end of the 25 year lease. Something about creating exponential growth rather than incremental inflation-linked increases.

The landlord, who drafted the lease and granted it to an SPV tenant entity he controlled which he later marketed and sold on, disagreed.

I guess the landlord was able to provide evidence from both the landlord and management of the tenant back at the time that the lease was signed of what the intention of both parties was at the time that the lease was signed. That sounds like a fun one.

How did you guess?

The landlord also argued that his interpretation of the relevant clause carried financial risk for him as well, because deflation was a real possibility – in which case the rent would decrease and he would be out of pocket. Which again is an interesting point to make. Especially when giving evidence under oath. The court declined to make a ruling on that point.

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