14.2 Commercial leases in the context of co-ownership

You may be called upon to represent a business owner who wishes to lease a co-owner’s commercial space, or a co-owner who wishes to lease his commercial space to a business owner.

Be aware that the signing of a commercial lease in a co-ownership context involves a few risks for the lessor and the lessee that must be addressed with your clients before they commit themselves contractually. 

The broker must make sure to check the declaration of co-ownership (and more specifically the sections dealing with the destination of the immovable and the private and commercial portions) in order to determine the destination of the immovable and the unit being leased. The broker involved in the leasing of a co-ownership’s commercial space must also take into account the information included in the section “Possible use of the commercial fraction.” It may be beneficial to obtain an acknowledgement from the syndicate that the proposed use of the commercial space is in compliance.

There is no doubt that the declaration of co-ownership will apply to the commercial lessee. It is therefore relevant to read it very carefully before entering into a commercial lease in a co-ownership context. The person drafting the lease should also refer to the declaration of co-ownership. 

A commercial lessee in a co-ownership must be aware that decisions relating to the immovable are not made by his lessor, but by the syndicate, a third party that is not party to the lease. The by-laws of the immovable may change, and this can sometimes affect the lessee. The by-laws of the immovable are enforceable against the lessee, as soon as he receives a copy thereof or of any amendments thereto from the co-owner/lessor or from the syndicate.

In addition, the lessor will probably not have any decision-making power with respect to any work to be done on the immovable. While a lease will normally provide for repairs to be made by the lessor to the immovable, in this case it will be the syndicate (with whom the lessee is not contractually bound) that will make the repairs. A commercial lease in the context of co-ownership will usually provide that the sole obligation of the lessor with respect to the maintenance, repair and replacement of common elements will be to make reasonable (or necessary) efforts to ensure that the syndicate meets its obligations. 

In the context of a “net” lease, it is also necessary to look at how the operating costs of the immovable will be invoiced. Should the lessee’s additional rent include all the common expenses of the co-owner/lessor? What about the portion relating to the contingency fund? And what happens in the case of special assessments? The lease forms must be adapted to the context of the co-ownership, since it is the syndicate – and not the lessor – that decides on the budget. 

When a lessee (including a commercial lessee) violates an obligation, and the violation causes serious prejudice to the occupants of the immovable, the syndicate has the right, after notifying the lessee and the co-owner/lessor, to have the lease terminated. This will be the case if a commercial lessee violates the declaration of co-ownership or imposes abnormal annoyances on the occupants of the immovable.

Finally, it is very common for a developer to retain units (commercial or residential) from a project for the purpose of leasing them himself. If you are representing a commercial lessee who wishes to lease in a new mixed-use co-ownership with residential fractions, and the lessor turns out to be the developer, it is important to verify that the disclosure statement provided to the residential prospective buyers includes the maximum number of fractions intended for leasing purposes. Here’s why: A developer is required to disclose in his disclosure statement the maximum number of units that will be retained for leasing purposes. If the developer leases units (commercial or non-commercial) in excess of the maximum stated in the disclosure statement, the co-ownership has the right, after notice to the co-owner/lessor and the lessee, to petition the court to have leases terminated, starting with the most recent. A commercial broker acting on behalf of a commercial lessee should therefore ask the developer/lessor for the number of units already leased by him and verify the information indicated to this effect in the memorandum.