The Story of a Commercial Lease Gone Wrong

A commercial lease can quickly turn into a nightmare. This article presents a few essential points to remember about commercial leasing to prevent negative outcomes.  

“Some years ago, we received a call from an entrepreneur who had found what he believed to be ideal premises for launching his business as a construction-industry distributor. It truly seemed a perfect location for this type of business.

Upon signing a long-term lease, he invested thousands of dollars in renovations and shelving. That was how sure he was that he had found the right site for his project.

A few weeks prior to the opening, however, he discovered that the premises were not perfect for the distribution operations he was planning. Municipal by-laws did not permit this use in this location. The entrepreneur had failed to check zoning regulations prior to signing the lease.

What happened next? He had to forego his business launch on these premises, resulting in major financial losses and considerable stress. This error would have been prevented by checking planning regulations and obtaining a certificate of occupancy. Unfortunately, this type of situation occurs all too frequently. That is why it is crucial to check that the intended use of premises complies with municipal by-laws before making a commitment.

To prevent such an occurrence, you must fully understand local zoning requirements and ensure that the premises you seek are approved for your business operations. Obtaining a certificate of occupancy protects you from unwelcome surprises and ensures your compliance before you launch your business.

To delve deeper into this topic, I asked Isabelle Landry at BCF Business Law for her thoughts.” - Alex Migneault, Rental Agent at Location BCI

Key takeaways from this situation

Let us say you are buying or leasing a new location for your company’s operations. Or you are putting up a new building or renovating one that you already own. Checking applicable planning regulations may not be at the top of your long to-do list. To safeguard your investment, however, you must make sure that you can use the targeted location in the way you are planning. Obtaining a certificate of occupancy is one way of ensuring that you meet this requirement.

What is a certificate of occupancy? Under section 119(3) of the Act respecting land use planning and development (Act respecting land use planning and development, chapter A-19.1), a municipal council may, by by-law, prohibit occupancy of a newly erected or altered building or a building whose use or purpose has been changed if the occupant has not first obtained a certificate of occupancy. The use of the word “may” above is important as not all municipalities have adopted provisions requiring that a certificate of occupancy be issued. The necessity of a certificate of occupancy and the circumstances in which it is required are stipulated mentioned in the by-law governing permits and certificates (Règlement sur les permis et certificats) or the regulations governing the administration of planning by-laws (Règlement sur l’administration des règlements d’urbanisme). If a certificate of occupancy is not needed, we strongly recommend that you pursue other means to ensure that your activities are compliant so as to avert any unpleasant surprises. These means may include enlisting professionals who can help you in this regard. Municipalities that do not require a certificate of occupancy will rarely want to commit themselves by confirming, in writing, the legality of any given use. This is why having the support of a professional who is familiar with the nuances of planning regulations is a recipe for success.

Section 119(3) of the Act respecting land use planning and development states the circumstances in which a certificate of occupancy is generally required, including new construction, alteration of a building, and change of use of a building.

The primary purpose of the certificate is to allow the municipal official to ensure compliance with the requirements of the zoning and building by-laws before the space is occupied (Act respecting land use planning and development, section 122).

In Québec City, section 1209 of the urban land use planning harmonization by-law (Règlement d’harmonisation sur l’urbanisme) provides that a certificate of occupancy is not required when the activities have been the subject of a building permit. Hence, it is primarily when there is a change of use of the building that you need to be concerned about obtaining the certificate and not when a new building is being erected or a renovation carried out. Certain nuances apply, however, to certain specific types of work, particularly with regard to heritage assets. Section 1226 of the urban land use planning harmonization by-law also provides for certain uses that do not require certificates of occupancy. Since authorizations vary from one municipality to another and from one planning by-law to another, you need to find out exactly what authorizations are required for the activities you are planning.

What does change of use mean? Let us say that the premises were commercial and remain so. In that case, can we assume that there is no change of use? No, unfortunately, it is not as simple as that. “Commercial” refers to a class of use, not to a specific use. Each class of use is made up of groups of uses, for example “C1 - Administrative services.” In addition, each group of uses is ultimately made up of individual uses (Règlement d’harmonisation sur l’urbanisme, section 10). For instance, the C1 group includes advertising consultancy services and professional, scientific or technical services. Let us suppose that, previously, the office was occupied by an advertising agency; however, you now wish to rent it out to an engineering firm. Is a certificate of occupancy is required? Yes, as this qualifies as a change of use.

Interpreting use is not always as straightforward as it may seem. Do your operations qualify as wholesale trade/para-industrial or rather as industrial use in the cottage industry group, for example? The answer to this question may determine whether or not it is legal for you to continue operating on the premises.

Now that you understand what a certificate of occupancy is and under what circumstances it is required, you can see how important it is to apply for one before signing a new lease or acquiring a building. Obtaining a certificate of occupancy ensures that the use you wish to make of the building is permitted under planning regulations. That being said, it is just as important for landlords to ensure that their tenants obtain this certificate of occupancy. Leases often provide that it is tenants’ responsibility to ensure that their use complies with the applicable planning regulations. If the municipality were to find a non-compliant use and force the tenant in question to cease its activities, a landlord may find that the tenant is no longer able to pay the rent. Hence, we suggest that landlords request proof of their potential tenants’ compliant use of premises before agreeing to sign any lease, thereby protecting both parties. Making sure of such compliance at the very beginning of the negotiation process also protects both parties from wasting time and money on a negotiation that would ultimately fail given that the planned use of the premises would not be permitted. It is worth noting that some municipalities require tenants wishing to obtain a certificate of occupancy   to provide a power of attorney from the landlord. Hence, it would appear that it is essential for both parties to cooperate in such preventive action.

Throughout this article, we have dealt only with situations in which a use was permitted by right under by-laws and where determining the legality of such use was a matter solely of interpreting the applicable planning regulations. We have not dealt with cases where a use may be protected by acquired rights. A given use that begins at a time when it is permitted by by-laws, and continues even after the by-laws have been amended to prohibit such use, is protected by acquired rights. An acquired right applies to the building and not to the person who exercised the use. If you lease new premises where certain uses were once conducted, you may have acquired rights that allow you to carry them on. But beware! It often has to be exactly the same use, since most municipal by-laws do not allow a non-complying use to be replaced by another non-complying use. Acquired rights are also lost through non-use, the duration of which varies according to the applicable by-laws. Accordingly, if the premises you are interested in are vacant and you are promised that they are protected by acquired rights, it is essential to know exactly what the previous tenant used them for and when that use was terminated. We hope this article encourages you to be vigilant. Be sure not to rent or buy any premises simply because size and location suit you. Get the information and support you need to carry out these tricky and crucial checks.

Got questions? Contact our team of professionals today.