Commercial Bare Land Lease Use Restriction and Rent Adjustments #361
By Gerry Neely
The language used in a lease to decide how the adjustment of rent will be determined for a bare land commercial property can be very important. A recent decision involving the rental to be paid during each successive five-year period of a 20-year commercial bare land lease, where the use of the land was restricted to "construction and operation of a building supply business," serves as a reminder. The adjusted rents were to reflect a "fair market rental," with any dispute settled by arbitration.
The appraisers for both parties agreed the fair market value of the land was $425,000, but differed on whether the restricted use should influence their calculations of fair market rental. The tenant's appraiser argued it should and, because the demand for building supply sites was low, arrived at an annual rental of $27,000. The landlord's appraiser thought it should not be a factor as almost all commercial leases contained a use restriction, and settled on $45,000.
The arbitrator accepted the landlord's appraisal evidence by deciding that a use restriction should only be taken into account if it was expressly stated in the rent adjustment clause. The tenant appealed, leading to an examination of three cases:
- 1. An Ontario Court of Appeal decision that rejected a landlord basing rent on highest and best use, in favour of taking into account the restriction limiting land use for manufacturing purposes. The lease did not set a method for the valuation of the renewal rent.
- 2. A British Columbia Court of Appeal decision regarding a lease that limited use to "a hotel and related hospitality business," stating that the renewal rent was to be "a value equal to 10% of the fair market value of the Leased Premises as bare land." The Court overturned the trial judge's decision that the restricted use was a factor in determining the rent, because of the express reference to bare land.
- 3. A Supreme Court of Canada decision that the phrase "current land value" in a rental adjustment clause excluded a consideration of any uses made of the leased lands.
The tenant's appeal was successful and the rent was fixed at $27, 000.1
* * *
Legally Speaking 297 discussed a 1997 case where a seller was ordered to pay the agent's commission despite a buyer's default, and the two approaches courts have taken in this circumstance. In one approach, sellers expect to pay commissions only from the proceeds of sales and, therefore, should only be liable for commissions if they are advised of their obligations beforehand. The other says the right to commission depends upon the interpretation of the listing contract.
The British Columbia Supreme Court (BCSC) judge in the 1997 case adopted the second approach, with a warning that his decision would not necessarily apply in all instances. Therefore, he said, prudent licensees should advise their principals that they expect to be paid even if the buyer defaults. The seller appealed and the British Columbia Court of Appeal (BCCA) upheld the trial judge's decision, but commented it would not "necessarily concur" with his warning - a comment which leans toward the interpretation made in the BCSC, but leaves the issue open for BCCA interpretation in future cases.2
The BCSC also examined a licensee's entitlement to commission in a recent case where a sale failed because of the death of the buyer before closing. The seller sued the buyer's estate for damages, which included the amount paid to the licensee to settle his commission claim. The judge examined the commission clause in the standard Multiple Listing Contract and the contract between the parties that was signed during the period of the listing. Following the precedent set in the 1997 case, he decided either party could have enforced the contract, and the commission claim was valid.3
The results of the BCSC cases are favourable for licensees since few, if any, discuss whether they expect to be paid commissions upon sales that collapse through no fault of the clients at the time the listing is to be signed.
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