In these challenging economic times, it is essential that commercial landlords remain vigilant to ensure that their tenants are paying the rent called for under the terms of their leasehold agreements diligently and in a timely manner. They must not, however, become complacent just because the tenant is up-to-date with the payment of rent. All landlords must be mindful that there are certain acts or omissions of their tenants, which could potentially impose liability on the landlord.

The provision of utility services to the leased premises is a good example. In the past, the Public Utilities Act provided that, with respect to the provision of water and sewage services, as long as the account with the supplier was in the name of the tenant, the landlord could rest assured that any arrears owing would only form a lien against the tenant’s leasehold interest in the premises. Consequently, once the tenant had provided evidence to the landlord that the account was opened in the tenant’s name, the landlord need not be concerned with the status of the tenant’s water account. This is no longer the case. The relevant portions of the Public Utilities Act have been repealed. The subject matter is now dealt with under Subsection 398(2) of the Municipal Act, which provides that, in the case of charges for the supply of a public utility (which includes water, sewage and in some instances hydro electricity), arrears will form a lien against the property to which the public utility was supplied. Collection may be enforced by adding the arrears to the tax roll pertaining to the property.

In certain circumstances, this poses a significant concern for the landlord. In the case of industrial uses where the tenant is using a significant amount of water in its operations, large accounts may be incurred for water and sewage. If not paid in a timely manner, these accounts are added to the tax roll of the property. A prudent landlord must, therefore, monitor the tenant’s payment history in respect to these accounts. If added to the tax roll, the arrears will bear interest at the rate of 1¼% per month, compounded monthly in the same manner as realty tax arrears, and will form a lien against the property in priority to all other charges and encumbrances. In those instances where it is anticipated that the tenant will be a heavy user of these public utilities, landlords are advised to require the tenant to produce evidence of payment of each account on a periodic basis, or even provide security in the form of a deposit or letter of credit to the landlord to protect it from any potential liability in that regard.

The construction of leasehold improvements in the leased premises by the tenant can also pose significant problems for a landlord. In most instances, any lien arising with respect to the provision of labour or materials to build out the leased premises will only attach against the tenant’s leasehold interest. Subsection 19(1) of the Construction Lien Act, provides, however, that a contractor entitled to a lien on the tenant’s leasehold interest may impose this lien on title to the landlord’s property by providing the landlord with notice of the improvement made. This lien will attach to the landlord’s interest in the property unless the landlord, within 15 days of receiving such notice, replies to the contractor in writing that it assumes no responsibility for the improvement being made. Landlords are advised to monitor any improvements being made to the leased premises carefully to ensure all parties who supply materials or labour for these improvements are paid in a timely manner. Furthermore, landlords should be proactive to ensure that they react quickly to any notice served upon them under Section 19 to ensure that the proper disclaimer is provided and they do not incur unexpected liability to the tenant’s contractor.

Chuck Stobie is a Partner with Keyser Mason Ball, LLP. His practices focuses on real property sales and acquisitions, secured lending, commercial leasing and land use matters. Chuck can be reached at 905-276-0405 or by email at cstobie@kmblaw.com.

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