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Just Cause Terminations – An Update

The vast majority of terminations are on a without cause basis, in some circumstances employers are permitted to terminated employees for just cause without the requirement to provide advanced notice of termination or payment in lieu thereof.  The burden of proof rests with the employer to demonstrate the basis for the just cause termination.

The seminal case on just cause terminations is McKinley v. BC Tel, 2001 SCC where the court indicated, among other things, that “just cause for dismissal exists where dishonesty violates the essential condition of the employment contract, breaches the faith inherent to the work relationship, or is fundamentally or directly inconsistent with the employee’s obligations to his or her employer.”

The case of Dowling v. Ontario provides guidance on the examination that should be undertaken to ascertain whether such misconduct has occurred to demonstrate just cause:

  1. determine the nature and extent of the misconduct
  2. consider the surrounding circumstances
  3. decide whether the dismissal was warranted

Where Just Cause Has Been Found: 

Dunsmuir v. Royal Group, Inc., 2018 ONCA 773
Just cause termination of a senior executive upheld by the Court for breach of fiduciary duty.  In this case, a senior officer and shareholder of the company bought property from a third party and then sold it back to the company for a personal profit of $6.5 million.  The individual never disclosed this information to anyone in the company with authority. The executive engaged in other activities of this nature that was found as a breach of his duty of loyalty, fidelity and candour, requiring him to disclose to the corporation conflicts of interest and the misappropriation of corporate opportunities and assets.

McNabb v. Clouatre et al., 2018 ONSC 1058
The Plaintiff was an employee of a construction company and was involved with behavioral issues over a prolonged period of time, including insubordination, absenteeism, consuming alcohol on the job and using equipment under the influence of alcohol. He was verbally abusive to employees and constantly engaged in behavior detrimental to the company. The extensive list of misbehaviors was deemed to sufficient to constitute just cause.

If you are an employee in Ontario that has been terminated for just cause, it is imperative that you seek out counsel to determine whether the alleged misconduct sufficiently satisfies the test for just cause termination. If not, you could be entitled to a substantial severance package.

Reasonable Notice Periods on Termination

Age and tenure of services are typically positively correlated, and they are two of the key factors considered by a Court in determining a terminated employee’s reasonable notice entitlement.  It has been recognized in case law that the availability of similar employment opportunities diminishes as the prospective employee ages.  As a result, recent decisions have that the Courts are more willing to extend the reasonable notice period beyond the previous maximum of 24 months.

O’Reilly v. Imax Corporation – after 22 years of employment, the Plaintiff was dismissed without just cause at the age of 54.  The employee was a commissioned salesperson and lost a substantial book of business as a result of the termination. In this case, the Plaintiff did not establish that there were exceptional circumstances to justify a reasonable notice period beyond 24 months.

Beattie v. Women’s College Hospital – two Plaintiff doctors commenced an action against the Hospital for wrongful dismissal. The co-Plaintiffs were 64 and 65 years of age and had been employed for 21 and 30 years by the hospital, respectively. The Plaintiffs were awarded greater than 24 months of notice irrespective of the fact that alternate employment was available to them.

Dawe v. Equitable Life Insurance Company  – Employee was part of the senior management team, he was 62 years of age at the date of dismissal and had worked for the employer for 37 years. The Plaintiff was found entitled to 30 months of notice given that there was no comparable employment available and the termination was tantamount to forced retirement.

Recent case law is clear that courts in Ontario are willing to extend the reasonable notice period beyond 24 months. The demographic shift is changing the age composition of the workforce and expectations regarding retirement. As such, notices awards in excess of 24 months are likely to become more common.

 

 

 

Reviewing Leases on Income Producing Properties

When acquiring an investment property, a thorough review of lease agreements is required to determine the appropriate valuation of the property.  The value of the investment property is directly linked to the amount of rental income, the term, the quality of the tenants, the enforceability of the lease, and any issues that may interfere with the landlord’s ability to collect rent.

Quality of the Tenant
Assessing the stability of the tenant is a critical consideration. In the commercial context, large shopping malls and plazas typically have a number of store-fronts with a diversified tenant base, where the rental income is split between a number of units. In such a case, where one tenant’s lease expires and does not renew, or where one business shuts down, the overall impact on the profitability and value of the property will ideally be negligible. However, where an Anchor Tenant occupies a large portion of the property square foot, the success or failure of this particular tenant has large implications on the value of the property. If the Anchor Tenant does not renew its lease at expiry or the business ultimately fails, large amounts of square footage can be left vacant and difficult to fill with new occupants. This is more common as e-commerce is reducing the square footage commanded by traditional bricks-and-mortar retailers.

Duration of Term
A purchaser of an investment property has to understand the terms of the leases and any options to extend or renew the lease terms. The lease terms are key considerations in determining the length and extent of the rental income stream. The terms of potential lease renewals should be considered and the rental basis (i.e., whether fair market rent at the time of renewal or inflation-adjusted escalators or other means of determining the rent at the renewal period).  If the intention is to develop the property, long lease terms (without demolition clauses) will have an impact on a purchaser’s ability to do so. Specific consideration must be given to demolition clauses to understand the basis this can be done and the notice or time frame required to be given to the tenant.

Use & Exclusivity
Commercial leases will specify the permitted uses of the premises.  Use provisions restrict the tenant’s flexibility in its operations and ensure that a landlord stays onside other leases which restrict what the landlord can and cannot permit at the property. This is particularly relevant in medical office properties where tenants request that direct competitors cannot operate in certain proximity around their practice. All restrictive covenants in the lease should be identified to ensure existing and prospective tenants are in compliance.

Tenant Inducements
For new tenants, landlords will often grant rent-free periods or grant allowances to improve the property for tenants permitted use.

Triple Net Leases – Q & A

As a real estate lawyer handling commercial leasing disputes and a commercial property manager, I am commonly involved with payment disputes between Landlords and Tenants, often resulting from ambiguity in the terms of a Lease Agreement.  In this article, I will provide some initial definitions to differentiate between a Gross Lease and Net Lease and thereafter I will discuss some specific challenges, and means to remedying such challenges, pertaining to the most common lease in the commercial property context – the Triple Net Lease.

Gross Lease: A gross lease is where the tenant pays the landlord a flat monthly rental amount, which is determined upon signing of the Lease Agreement, and the landlord pays all expenses related to property ownership (i.e., property taxes, maintenance, utilities, and insurance).  Gross leases are more common in residential leasing (i.e., apartment) transactions. The monthly rental payment in a gross lease is typically higher than in a net lease scenario.

Net Lease: In a net lease, a tenant is required to pay, in addition to the monthly fixed rental payments, a contribution towards the landlord’s property taxes, insurance, maintenance, repairs, utilities, etc. In such cases, the Lease Agreement stipulates that the tenant is to pay the landlord a Base Rent and an Additional Rent (amounts which are typically based on a dollar value per square foot of rentable space). Where property taxes, maintenance, and insurance are all paid by the tenant, the lease is typically referred to as a “triple net lease,” in which case the Landlord receives the funds “net,” after the expenses passed through to the tenant are paid.  Net leases are most common in a commercial property context.

Net Leases – What is Additional Rent?

As mentioned, in a triple net lease the tenant is required to pay Base Rent (i.e., the cost of renting the premises) plus an Additional Rent (i.e. to defray the landlord’s property-related expenses). In commercial properties where multiple tenants lease divisible units of a larger building, a triple net lease will include a provision allowing the landlord to charge its tenants for their respective contributions (usually on a proportionate share basis of the ratio that the rentable area of the particular tenant’s premises bears to the total rentable area of the commercial property).

The operating costs (i.e., the expenses incurred by the Landlord in owning, operating, insuring, repairing, and managing the property) are shared between the tenants based on their proportionate share of the property.

Calculating Additional Rent

Triple net leases typically provide the landlord with the right to estimate, in advance, the amount a commercial tenant will pay in respect of operating costs on an annual basis. At year-end, the total amount paid by the tenant to the landlord on account of operating expenses is compared to the actual amount of operating expenses incurred by the landlord during that period.  At this point, these amounts are to reconciled between the landlord and tenant within a period of time (typically 30- 60- or 90 days following year-end) to ensure that the tenant is credited for any overpayment of Additional Rent or the tenant pays the landlord for any underpayment.

In the multi-tenant scenario, the Landlord is required to determine the proportionate share of operating expenses applicable to each tenant, and reconcile their Additional Rent payments accordingly.

Operating Cost Statements

Operating cost statements are financial disclosures provided by landlords’ to tenants to support their claim for Additional Rent. Such statements will itemize total maintenance and repair bills paid during the relevant time period, property tax installments, insurance premiums, and variable utility payments. Landlords have a common law obligation to produce an operating cost statement to its tenants, irrespective of the terms of the Lease Agreement. As such, tenants have the right to inspect the landlord’s claims for Additional Rent and can request books and records, and supporting invoices, to substantiate such claims.

In 1877352 Ontario Inc. v. 699147 Ontario Inc.the Court indicated: “the duty of the Landlord to perform its obligations under the Lease is served by requesting it to deliver all documents that are the basis for the annual adjustment.  It is commercially reasonable to imply a term into the Lease that requires the Landlord to deliver with its annual adjustment for Additional Rent a copy of all the documents such as tax bills, insurance premiums, property management invoices, which support the amounts claimed.” 

In 2373322 Ontario Inc. v. Nolisthe tenant was obligated under the lease to make Additional Rent payments in monthly installments with the landlord at least once a year to provide an operating statement as required to accurately calculate the amounts payable in respect of Additional Rent. The Landlord provided one operating statement in 2016 to substantiate the expenses incurred from 2013 to 2016. The Court concluded that the failure of the landlord to deliver the operating statement does not relieve the tenant from the obligation to pay Additional Rent once the statement is provided. In this case, the Court permitted the Landlord to recover its proportionate share of expenses notwithstanding its late deliver of the statements.

Avoiding Disputes in a Commercial Lease

In order to avoid Additional Rent disputes, it is imperative that the Landlord provide the Tenant with an operating statement shortly after year-end. If the Tenant requests supporting documentation, the Landlord should deliver the same in order to substantiate its Additional Rent reconciliations. In the subsequent years, the Additional Rent estimate is based on the actual amount of expenses incurred by the Landlord in the previous years. If you are a Landlord, it is imperative that you comply with these obligations in order to properly administer a Triple Net Lease; otherwise, a tenant may have the right to hold-back Additional Rent Payments claimed.  As such, a professional accountant and lawyer with experience handling these matters can save both parties from substantial costs in the event of a dispute.

In a legal and property management capacity, we have been involved in a number of disputes between commercial landlords and tenants related to cost allocations. In many cases, disputes arise around repair and maintenance obligations and the parties respective payment obligations under the lease (a topic we will delve into further in a later blog post).  For the purposes of this discussion, it is imperative that the reader understands the characteristics of a gross vs. net lease, and the obligations of landlords and tenants in both scenarios.  For further questions about commercial lease disputes or other real estate-related matters, feel free to contact Goldstein Law at 647-838-6740.

Commercial Lease Renewals

Negotiating Commercial Lease Renewals

In a typical commercial lease, the landlord and tenant will agree to renew the lease on the same terms and conditions of the original lease; however, the base rent is typically subject to negotiation upon renewal.  Case law in Ontario suggests that a Court will enforce a renewal clause if it is sufficiently clear and unambiguous.

Ambiguous Renewal Clauses

Where the rent is simply to “be agreed” where there is no formula for determining the rent upon the renewal or extension period, the clause would be considered void due to uncertainty. Courts have found phrases such as “current market rents” or “fair market rent” to be enforceable, rather than those terms that indicate “rent is to be determined based on a mutually agreed upon” amount.

Use of the Premises

The type of ‘use’ of the premises ought to be considered as well in the formula for determining the rental rate at renewal.  The fair market rent based on the tenants existing limited use may be different than the fair market rent of the premises with a broader use, or at the highest and best use; as such, the type of use that will be applied to determine the market value of the rent should be stipulated in the renewal clause.

Tenant Improvements

Landlords should not assume that the value of tenants improvement are to be included in the “fair market rent” that is negotiated upon renewal or extension.  If the clause indicates that the renewal rent will be based on the “as is” condition of the property at the date of the original lease, then the current market rent will be based on the unimproved condition of the property (and as such, the tenant will not have to pay twice for its capital investment into the property).  With specific wording in the renewal clause, such as the “rental rate will be based on the current and finished condition of the property as of the date of renewal, and with reference to similar properties for a similar term,” the value of tenant improvement would be included in determining the fair market rate.

A number of issues are considered in determining the fair market rental value of a commercial lease renewal and extension and the language of the commercial lease agreement will guide the analysis. For a consultation with a commercial leasing lawyer, contact Goldstein Law and we will advise you to maximize the value of your commercial property.

Expropriation in Ontario

As we have discussed in our expropriation law blog posts, we represent property owners and business owners in claims against government authorities when land is involuntarily purchased for a public purpose. The Municipal Act 2001 S.O. 2001, c. 25, in Ontario, provides that the power of a Municipality to acquire land under the Municipal Act, or any other Act, includes the power to expropriate land in accordance with the Expropriations Act.

In order to authorize an expropriation of land, the municipality must obtain the consent of the governing council to carry out the property acquisition. Once approval is obtained from municipal council to proceed with the purchase of land, a Notice of Application for Approval to Expropriate Land is delivered to the property owner, following which a series of steps is taken by the authorities, typically including but not limited to as follows:

a) a Plan of Expropriation be obtained and registered on title to the Lands;

b) the Notice of Expropriation, Notice of Possession and Notice of Election be served upon the owners of the Lands;

c) an appraisal report for expropriation purposes be obtained to establish the market value of the Lands;

d) the owners of the Lands be served with an offer in accordance with Section 25 of the Expropriations Act;

e) payment of compensation offered pursuant to Section 25 of the Expropriations Act, be made upon acceptance by the owners of the Lands;

f) all necessary steps required to be taken to obtain possession of the expropriated Lands.

If the property owner does not accept the section 25 offer of compensation in full and final satisfaction of their rights in the property, the owner may commence further legal action, engage their own property appraiser, and proceed with negotiation at the Board of Negotiation or an arbitration process through the Local Planning Appeals Tribunal (LPAT) for a determination of the proceeds of expropriation.

Expropriations Update in Ontario

As we have discussed here and has been discussed here and here the municipal governments across Ontario are undertaking various infrastructure projects that require the expropriation of land from private property owners.  As Goldstein Law Firm, we specialize in expropriation law, having helped property and business owners in various projects across Ontario, including but not limited to the following:

Eglinton Crosstown
Hurontario LRT
Hamilton LRT
Speers Road Widening
Trafalgar Road Widening
Yonge Street Road Widening

If you are a property owner being impacted by any of the above-referenced construction projects or any other project across Ontario and you have received a Notice of Application for Approval to Expropriate Land, it is best to consult with an experienced expropriation lawyer to advise you of your rights.  We do not charge any up-front fees in expropriation matter, and authorities are required to reimburse all reasonable legal and professional fees incurred by the property owner through the course of the expropriation.

As such, there is absolutely no cost to you for contacting and consulting with an expropriation lawyer.  Call Goldstein Law at 647.838.6740 today!

Highway 401 Expropriations

As you may have heard, the Ministry of Transportation of Ontario (MTO) through its agents, is undertaking a widening of an 18-km stretch of Highway 401 through the GTA, with the addition of at least six (6) new traffic lanes, as reported here.  The Highway 401 Expansion Project extends from the western part of the GTA in Mississauga over to Milton.

In order to accommodate the road widening, the MTO needs to acquire (or expropriate) land.  The MTO is expropriating land from residential homeowners, commercial landlords, farmland, and otherwise.  A question we often receive from property owners is: how will I be compensated?

The expropriating authority must service an Offer of Compensation on the property owner. The offer must include the amount of compensation payable to the property owner immediately without prejudice to a further payout of compensation if future damages result.  As well, the authorities are required to produce an appraisal of the property.  As such, the owner can accept the initial offer of compensation and then negotiate with the authorities about the balance of funds owing at a later date.

If the owner disagrees with the authorities assessment of market value or has other damages, a claim for compensation can be brought under the Expropriations Act to the Local Planning Appeal Tribunal (LPAT) formerly the Ontario Municipal Board (OMB).  The property owner can pursue various claims for compensation in addition to the market value of the proposed land taken, including but not limited to:

-Business losses resulting from the expropriation;
-Relocation costs (i.e., costs to move the business or property, real estate commissions and legal fees) directly resulting from the expropriation;
-Loss of goodwill (i.e., where a business has to shut down and has been operating in the same location for a long period of time if it cannot be relocated);
-Injurious affection (i.e., where the Owner’s use and enjoyment of the land are disrupted or where a partial expropriation negatively impacts the value of the remainder of the property).

How much are Legal Fees?

The purpose of the Expropriations Act in Ontario is to make the property owner “whole.” If the property owner were paid for the fair market value of their land and any other damages attributable to the expropriation but had to pay expensive legal fees from any settlement, the owner would not be made “whole.” As such, the Act requires that the authorities pay all reasonable legal and professional (i.e., appraisal, valuators, planners, etc.) fees, which ensures that the property owner is not out-of-pocket.

If your property is being expropriated, it is imperative that you consult with a lawyer.  Call Goldstein Law – Expropriation Law Firm today. We often do not require any up-front retainers for expropriation-related matters.