May 4th - 2003

Nothing but “net”

Under this lease for Ontario commercial premises the tenants were required to pay “occupancy costs” which were the “operating costs” times the square footage of the leased premises.

Under this lease for Ontario commercial premises the tenants were required to pay “occupancy costs” which were the “operating costs” times the square footage of the leased premises. Those costs were an annual amount to be determined by dividing specific net costs by the total square footage of the building. The costs included municipal property taxes.

A new provincial law came into effect that gave the owner some tax relief for vacant portions of commercial buildings.

The dispute between the landlord and the tenant was to determine who obtained the benefit of that tax reduction. The landlord claimed that the tenant’s share was to be calculated as if the building was fully occupied and that any reduction or rebate was for the benefit of the landlord.

The judge decided that a tenant in this situation would reasonably assume that the tax calculation would be done on the basis net of any refund or rebate. The definition of occupancy costs used the expression “net” in defining those costs. In this case, the tenant won.

Merv’s Comments

The landlord might want the benefit of the tax reduction if all of the tenants were not on “net” leases but some were on “gross” leases in which the tenant did not pay municipal taxes.

In that situation, the landlord would be paying whatever taxes were not paid by the “net” tenants. The landlord may even have occupied some of the space.

This is another in a long line of cases dealing with the definitions of “net,” and “net, net,” and “triple net.” As usual, the courts will look at the definitions and language provided by the parties in their contracts to reach a sensible interpretation.

REALTORS and lawyers should draft such clauses in the Offers to Lease and Leases with care, particularly in a mixed lease contract environment.

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