- Long Term Leases and Ontario's Planning Act
- September 6, 2012 | Author: Max Maréchaux
- Law Firm: Miller Thomson LLP - Toronto Office
Section 50 of the Planning Act and its predecessor sections have been in force for many years. Subsections 50(3) and 50(5) begin with a general prohibition against any conveyance, mortgage, purchase and sale agreement, or “any agreement that has the effect of granting the use of or right in land directly or by entitlement to renewal for a period of twenty-one years or more”, unless such conveyance, mortgage or agreement falls into one of the stated exceptions. The words “agreement that has the effect of granting the use of or right in land directly or by entitlement to renewal for a period of twenty-one years or more” have generally been interpreted to refer to a lease.
There are a number of exceptions to this general prohibition. Section 50(9) states that the prohibition does not apply to a lease of part of a building or a structure, regardless of the length of the term or any renewals. For leases that are not part of a building or structure and have a term plus renewals of 21 years or more, the general prohibition may not apply as a result of any of the following exceptions: (a) the land demised under the lease is a whole lot or block on a registered plan of subdivision, (b) the landlord does not retain the fee or equity of redemption in any adjoining lands to those being demised under the lease, (c) the tenant is Her Majesty or a municipality, (d) a part lot exemption by-law applies, or (e) a consent has been given by the appropriate Committee of Adjustment or Land Division Committee. If a lease has a term including renewals of 21 years or more and does not fall within any of the exceptions set out in Section 50 of the Planning Act, the lease may be in contravention of Section 50. Accordingly, pursuant to Section 50(21) of the Planning Act, the lease would not create or convey any interest in land unless the lease is subject to the express condition that it is effective only if the provisions of Section 50 are complied with. Non-compliance with Section 50 of the Planning Act will likely result in the lease not creating any interest in land and therefore being ineffective. For that reason alone, the language of Section 50(21) of the Planning Act that provides that the lease is only effective if the provisions of Section 50 are complied with, should be included in all leases for the same reasons that it should be included in agreements of purchase and sale, options to purchase, assignments of agreements of purchase and sale, occupancy agreements, encroachment agreements and so on.
Although the exception in Section 50(9) of the Planning Act was not enacted until August 1, 1983, there were prior cases that considered the effect of leases having terms in excess of 21 years that appeared on their face to breach the provisions of Section 50 of the Planning Act. Section 50(9) does not appear to have a retroactive effect. Based on the review of the case law, the failure to include retroactive language does not seem to be a problem. It is interesting to note that there appears to be only one reported case where the lease was entered into after August 1, 1983. All the other reported cases deal with leases that were entered into before August 1, 1983 and were considered by the Court either before or after August 1, 1983. It is also interesting to note, that there are very few if any reported decisions (none, to the knowledge of the writer) where the Court held that a lease with a term in excess of 21 years is invalid because it breached the provisions of Section 50 of the Planning Act.
In the 1977 decision of Cardinière Atlantic Investment & Shipping Co. S.A. v. Royal Trust Co. (Ontario, August 15, 1977, unreported), there was a lease of part of an office building where the landlord leased a portion of the first floor to a tenant for a period of 25 years with an option to renew for a further 10 years. Both the lease was entered into and the matter heard long before Section 50(9) was enacted. In this case, O’Leary J. pointed out that the office building was built in conformity with the Planning Act and “presumably all municipal requirements.” While O’Leary J. acknowledges that the lease contravenes what is now Section 50 of the Planning Act, he goes on to state that the purpose of the Act “was not intended to apply to leases such as the one that is subject matter of this application. There is no suggestion that the lease in question would cause a subdivision of land and ... that the intent of the Act [is] not defeated by a lengthy lease as opposed to a sale of the fee.” O’Leary J. goes on to state that “the giving of such a lease simply carries out the lawful purpose for which the building was erected.” The decision in Cardinière was followed in a subsequent case, Favot v. The Children’s Aid Society for the Districts of Sudbury and Manitoulin, (1982), 37 O.R. (2d) 321, 24 R.P.R. 171. In this case, Van Camp J. was faced with a similar fact situation. However, the tenant also had the right to a stipulated number of parking spaces adjacent to the building. Van Camp J. adopted the reasoning in Cardinière and ruled that the “same reasoning applies to the lease that is before me. The subsequent allocation of the required parking spaces does not amount to a subdivision of land. As long as the parking spaces are provided for the number of cars and in the specified amount, it is sufficient.” It is also interesting to note that the general Planning Act amnesty that came into force on June 15, 1967 was also referred to in this decision and it may have played an equal or greater role in her decision.
Both Cardinière and Favot were considered in the subsequent case of Westway Plaza Inc. v. The Toronto-Dominion Bank (1986), 41 R.P.R. 9. The Court dealt with the issue of whether the lease was part of a building or structure. There was an initial lease for 21 years and then a subsequent agreement was entered into whereby the tenant “built a second storey on the back of the leased premises in conformity with city requirements”. Factoring in the renewal rights under the subsequent agreement, the term of the lease was well in excess of 21 years. While the initial lease may have been part of the building or structure, it could be argued that the subsequent lease was not. Here again, the Court looked beyond the technical wording and Hollingsworth J., relying on Cardinière and Favot, stated that the tenant’s addition to the landlord’s building was in full compliance with the planning authorities. In other words, no planning principles had been breached. It is also interesting to note that the new landlord, prior to completing the purchase of the plaza, obtained an estoppel certificate from the tenant. The estoppel certificate confirmed that the lease was valid. After closing, the landlord tried to argue that the lease was invalid. The decision states that “it is appalling that a landlord would interfere on the acknowledgement of the terms of the lease and who, after buying a property with a valid and subsisting lease, turns around and says that the lease is illegal. This is a case which offends the sensibilities of the Court.”
As indicated previously, all leases with a term of 21 years or more, are not necessarily leases of part of a building or structure. In the case of Kinsley v. GRM Contracting Ltd. 6 M.P.L.R. (2d) 127, 82 D.L.R. (4th) 751, 4 O.R. (3d) 648, there was a lease giving the tenant the right to operate lands as a pit and to dig and carry away materials and also a right-of-way to carry out these purposes. The term was 25 years or until the pit was exhausted, whichever was earlier. A subsequent owner brought an application to declare the lease void because it breached what is now Section 50 of the Planning Act. Langdon J. held that this was not a lease but rather a “profit à prendre” thereby not coming within the operation of the subdivision control provisions of the Planning Act. Also, there was a possibility that the term would not exceed 21 years because it was the earlier of 25 years or until the pit was exhausted.
The Court used a similar creative approach in the case of Spooner v. Arcand, 13 O.R. (3d) 835. As in Kinsley, this was not a lease of part of a building. It involved a lease entered into on August 1, 1973 for 20 years with a purchase option that was subject to obtaining the required consent. When the tenant exercised the purchase option, the landlord and tenant entered into an agreement to provide for an additional 20 year term that would apply in the event consent was refused. Consent was refused and the landlord took the position that the additional 20 year term beyond the initial 21 years violated the subdivision control provisions of the Planning Act. Loukidelis J. held that there were two separate leases and, therefore, there was no breach of the Planning Act.
Although the application of Section 50(9) of the Planning Act was a major factor in the decision in Services de Santé de Chapleau Health Services v. Sudbury & District Health Unit, 1995 CarswellOnt. 632, there were other considerations. Although the facts are somewhat difficult to unscramble, it appears that there was a lease or agreement for an indefinite period of time with respect to a hospital addition to be constructed. The tenant contributed towards the cost of the construction of the new addition. Therefore, it could be argued that initially, at least, it was not a lease or agreement with respect to part of a building or structure. As in previous cases, the Court does not appear to draw any distinction between leases of part of a building or leases of land on which an addition is to be constructed. At any rate, in addressing the Planning Act concern raised by the parties in this application, Loukidelis O. C. J. held that Section 50(9) applies to exempt this lease or agreement between the parties “from the restrictive provisions of subsection 50(3) of the Act.” Loukidelis O. C. J. goes on to determine that the agreement between the parties is not really a lease at all but an agreement that “created a trust relationship between the parties.” He further found that “in perpetuity” really meant “for the life of the building.”
The most recent reported case, Sears Canada Ltd. v. Scarborough Town Centre Holdings Inc., deals with five leases, each of which provided for terms in excess of 50 years beginning July, 1991. Each of the leases, except one, contained a provision whereby the term is deemed to be for a period of 21 years less a day until the required consent is obtained. Although the exact wording of each clause contemplated by Section 50(21) of the Planning Act is not available, it appears that the landlord was only required to obtain “such consent as may be required” or if the consent cannot be obtained, that the consent “continues to be required.” MacFarland J. dismissed these Section 50(21) clauses as clauses inserted “only out of an abundance of caution by careful conveyancing solicitors because of the uncertainty as to whether or not subsection 9 of Section 50 had application in the circumstances.” Referring to the decisions in Cardinière and Favot, MacFarland J. observed that the Planning Act was amended by including Section 50(9) to reflect and codify that jurisprudence. Although the facts are not altogether clear (and somewhat mystifying given that it was the tenant arguing that its lease has breached the Planning Act!) it appears that the leases were with respect to land on which the previous tenant had constructed a building that then became part of each shopping centre. In the words of MacFarland J. the premises were “within the skin of the mall building.” In addition, there were specific outdoor selling rights and use of the parking lot. Both of these were dismissed as being merely “ancillary to the essential lease provisions and do not change the character of it.” Again, this decision follows the previous decisions where the Courts have brushed aside technical objections and adopted a broader view. In each case, the leases were for substantial premises located in “large commercial shopping malls located in urban centres which have been through a plethora of approval processes before sod is ever turned.”
As indicated at the outset, there do not (to the knowledge of the writer) appear to be any reported or unreported decisions wherein leases with a term plus renewals of 21 years or more are held not to create an interest in land. While that may provide some comfort, we should ensure that the lease contains the saving clause contemplated by Section 50(21) of the Planning Act. Generally, this saving clause is part of most, if not all, standard forms of lease. There is no cost involved to include such a saving clause in a lease and it should be included if for no reason other than “an abundance of caution.”
In cases where the lease does not involve a demise of part of a building or structure, has a term plus renewals of 21 years or more and does not fall within any of the exemptions under Section 50 of the Planning Act, a consent from the appropriate land division committee or committee of adjustment, as the case may be, would be the most prudent course of action. It may be possible to have two leases as in the case of Spooner v. Arcand but this may be impractical if the term of the lease is for an extended period of time.
If the lease is for part of the building or structure with a term plus renewals of 21 years or more, then Section 50(9) of the Planning Act applies. Based on the decisions in Sears and Favot it would appear Section 50(9) applies even if the premises demised under the lease include premises outside of the building or structure, such as outdoor selling areas, pylon signs and assigned parking areas. Even where the tenant constructs the building and the initial lease was not part of the building or structure but subsequently became part of the “the skin of the mall building” as was the case in Westway and Sears, it does not appear to be an issue. If you find that the decisions in these cases are distinguishable and you have specific outdoor rights, the most prudent course of action would be to obtain a consent from the appropriate land division committee or committee of adjustment, as the case may be. In some cases, it may not be the landlord’s or the tenant’s decision. Financial institutions may insist on a consent as the condition of providing funds. In addition, a consent is a very cost effective way of minimizing risk to a landlord, tenant, lender or assignee. Once the consent has been successfully obtained, the lease is not subject to subsequent attack because of new case law or other changes in circumstances.
In the event there is reluctance to apply for a consent for whatever reason, it may be appropriate to consider obtaining a solicitor’s opinion that consent is not required. However, as we all know, opinions are based on existing case laws and statutes. If there is a change, the opinion is really not of any assistance. A more appropriate alternative may be to consider title insurance with a leasehold endorsement. Obviously, the title insurers will have to review all the applicable facts to determine whether or not they will insure to cover any possible breaches of subdivision control provisions of the Planning Act. Assuming there is no difficulty arriving at the amount to be insured, title insurance may be a solution in some cases.
It is evident that courts have given a broad interpretation of the subdivision control provisions of the Planning Act with respect to leases having terms of 21 years or more. Courts, in these cases, seem to brush aside technical objections and take into account factors such as compliance and conformity with planning principles, the conduct of the parties and, of course, the intent of the Planning Act. While this provides comfort to us as commercial leasing lawyers, we should not forget or in any way lose sight of the importance of compliance with the subdivision control provisions and protecting ourselves to the extent we can.