Undeveloped Land Loans

Funding of a business tenant's fixtures and fittings

A lot of enterprises are completely or partially active outside rented space. Owners can rent fully constructed and finished space in an established facility with all available utilities and conveniences. On the other end of the scale, an entrepreneur can rent - usually in the long run - undeveloped undeveloped land, provided that the entrepreneur will enhance the land with the necessary infrastructure - to include agreements with utilities - and the necessary utilities for the owners to run their operations.

However, even the entrepreneur who rents a room in a fully occupied property usually needs some renovation or changes to the layout of the current property in order to "adapt" the room to the specific needs and wishes of the property owners. Companies in both kinds of situation must also procure gear, stationery and the like, and stationery is required in almost all cases.

Often, in the case of lease agreements for hire, the lessor, as "part of the business", bears the costs of acquiring and/or installing part - and sometimes almost all - of the improvement needed by the lessee. For example, a bank, credit union or other lender is often asked to grant loans to a lessee to help him upgrade the rented property and to finance the purchase of furniture, fixtures and fittings.

As a consequence, the creditor, who offers the professional lessee a value enabling him to purchase and fit what he needs for his activities, wishes to provide certainty as to the object of his financing. Thus, creditors assume collateral for the company's stocks (including "revenues", usually trade receivables) and interests in the company's operating assets, facilities, etc.

Lenders who are used to fund the tenants' conversions want collateral in: (ii) take over the tenants' conversions themselves. Certain tenants' fixtures are easier to liquidate than others. Of course, enhancements that have been added to or appended to the property or integrated into the property (which includes the rented premises), but which can be taken away and taken away for sale and used elsewhere without excessive costs and difficulties, are most valued by the creditor as collateral.

Unfortunately, when a professional tenant's deal is unsuccessful and both the tenant's lessor and his lessor wish to terminate their relationship with the lessee, dispute often arises between the lessor and the lessee's lessor as to what and to what extent the lessor should be authorized to take away the lessee's improvement and resell it to someone else, or if it is appropriate to resell these improvement to the lessor or to a new lessee whom the lessor takes to the property to substitute for the former lessee.

Difficulties in such litigation are compounded by these two factors: (b) the often contradictory and bewildering terminology used in business rental agreements to deal with what is to be done to improve the lessee's situation upon cessation of the tenancy (provisions often vary within the same tenancy, according to the cause or cause of cessation of the tenancy).

Recent cases of the Ontario Superior Court of Justice, the Toronto Dominion Bank and the Hockey Academy Inc. the Hockey Academy Case) illustrated the difficulty that may arise in terminating the tenancy if the lessor and his lessor assert any right to improvement of the rented accommodation that the lessor has funded for the lessee.

Facts in the case of the Hockey Academy were that the Academy had concluded a rental agreement for facilities from its lessor (Champagne Centre Ltd., hereafter referred to as'the lessor') and, as provided by and in accordance with the rental conditions (the'rental agreement'), the Academy was developing a retail ice field. Rental agreement has been changed twice.

In order to fund its said establishment, the Hockey Academy has lent a significant amount from the Toronto Dominion Bank (the "Bank") and, in exchange, the Hockey Academy has concluded a general collateral contract (the "GSA") with the Bank under which it has provided the Bank with a lien on all current and subsequently purchased Hockey Academy real estate, personally owned, held and held by the Bank, comprising the Hockey Academy ice arena and related assets.

The landlord then cancelled the Hockey Academy rental agreement, and after the bank was in arrears with the payments of its liabilities to the bank, it requested full reimbursement and realised its collateral under the GSA. Then the bank and the landlord disputed which of them was eligible for the ice skating rink or the realisation revenue.

This fight resulted in the Hockey Academy Case. "In the centre of the principal controversy is the question of whether the hockey academy kept the property in the objects complained of at the end of the tenancy or whether these objects became furnishings of the rooms and are therefore the property of the landlord. There is agreement that this case of litigation is to be decided in principle by an explanation of the tenancy agreement of the obligor with the landlord (in the valid in each case version).

" The Court, in examining the case, took notice of the following provisions of the lease; i) the lease provided that "nothing in it shall prevent or prevent the lessee from mortgaging and lending against his rented improvements"; ii) the lease further provided that "all modifications and extensions to the facilities made by or on account of the lessee, with the exception of the lessee's commercial facilities, shall immediately become the lessor's possession without indemnity to the lessee".

Commercial facilities specified in the lease agreement as objects identified as such on a floor Plan of the facilities. iii) The initial repetition of the lease agreement permitted the lessee to make changes and amendments and to identify them as "commercial facilities", whereby commercial facilities do not become the lessor's property. 3.

In addition, it allowed the lessee to dismantle commercial facilities at the end of the lease period and requested the lessee to dismantle any ice track gear and furnishings not durably installed on the facilities each time the lease was terminated. Following changes, the lessee was not obliged to delete supplements or enhancements after "expiration or (any other) premature end of the lease" with the exception of "ice skating rinks, sands, planks, pipelines, refrigeration systems and associated ice rinks".

In addition, it provided that the lessee had the right to dispose of'other commercial facilities' and devices not installed indefinitely on the premises. iv ) Thus, the lessee was obliged and entitled to dispose of his devices under the lease as such. In order to avoid any question as to whether the indication of a tenant's commitment to removing his equipment/commercial facilities does not at least implicitly give the renter the right to do so, the Court has clearly stated that a removal duty includes a removal right.

v ) It is obvious that the lessee would not be allowed to take away the entire edifice or its components, but, as the court stated, "...it is...entirely appropriate for the lessee to keep the property in the ice rink because it was the lessee and not the lessor who was involved in the ice skating arcade business".

vi ) Thus, since the lessee's machines were regarded as his own and not the landlord's, the bank's interest in the landlord trumps the landlord's interest in the landlord. So what does the Hockey Academy Case suggest for those considering lease real estate and for creditors considering advance loans - often significant loans - to such potential renters for the safety of rented fixtures and fittings?

As the Court held,'the central issue in the principal dispute' was whether, on expiry of the rental agreement, certain material property remained the property of the landlord and was part of the land, or whether that property remained the property of the lessee and was therefore secured by the bank's priority interest?

On the basis of the application of the principle that, when construing a concluded agreement, a judicial authority must first define the intention of the contracting party on the basis of the'simple meaning' of the words used by the contracting party in its agreement, and taking into account the abovementioned contractual conditions, the goods at issue were not returned to the landlord (as part of his property), but were in fact the lessee's possession, which could be removed by the lessee at the end of the tenancy.

Not one of the detachable elements were enhancements that "had (had) to do entirely with the actual structure of the house, such as: pillar and distance, support structure, washroom outlets, concrete stone walling and external entrance to the building's fire sprinklers". Rather, the detachable objects were the tenants' use of the site as a shop for ice rinks.

While it should be noted that these inferences were mainly drawn from the text of the agreement, the Court also found that it would have considered the lessee's belongings as his own and not as "furnishings" under Community Legislation (i.e. not as part of the landlord's exchange interest), even if the Court's subsequent judgment on the basis of the text of the agreement was considered wrong.

Owners, lessees and financers of rent enhancements (and their attorneys ) should thoroughly examine the conditions of a planned business rental agreement before making any commitment. The author's personal experiences are that according to the typical case used by a lessor or his lawyer, the text of the laws and duties related to fixtures - and in particular the tenant's right to dispose of or pawn them - will vary from tenancy agreement to tenancy agreement.

Every leasing contract's formulation should be thoroughly examined and checked by each of the contracting partners and not just "embellished".