Corporate and property searches are an essential starting point for tenant due diligence when negotiating a commercial lease. Due diligence search results can provide tenants with a clearer picture of the property, the parties involved, potential restrictions on the land and the liabilities that may arise.
I had the privilege of co-chairing a roundtable on the topic of due diligence for tenants at the recent ICSC+Canadian Law conference. We discussed the importance of tailoring due diligence searches to those most applicable to the asset class of the property, the surrounding area and any other impacts to the intended use and occupation of the premises.
Tenants should ask the following questions regarding the condition of the property:
Here are the key steps we discussed and how they can help tenants enter into stronger leases and avoid uncertain risks.
Tenants should begin with a corporate search of the landlord entity. This allows for a basic understanding of the ownership structure and the ability to verify the legal existence of the landlord and any other parties involved. If, for instance, the landlord is different from the registered owner on title to the leased premises, the tenant may want to dig further to determine the relationship between the two entities. This is an important consideration in ensuring the appropriate parties are bound by the landlord’s obligations in the lease.
A land title search is strongly recommended, as it identifies the registered owner of the leased premises and allows the tenant to ascertain the state of title to the land. For instance, there may be statutory rights of way or restrictive covenants that restrict the way the property may be utilized, including no-build areas, restrictions on permitted uses, or building height or sightline restrictions. If the leased premises are located within a First Nations Reserve, then a title search conducted in the Indian Lands Registry System or First Nations Land Registry System, as applicable, will instead be required.
If the title search reveals that the property is a strata development, then the tenant must ensure that certain strata-related provisions are included in the lease. Because the tenant does not have a direct, contractual relationship with the strata corporation, the tenant must make certain that the landlord will compel the strata corporation to fulfill its duties, for example, by making the necessary maintenance and repairs to common areas and maintaining adequate insurance.
Property taxation searches can reveal if a landlord is in payment arrears, and also disclose the property class, any applicable grants, and, in some municipalities, sewerage and water charges. This will shed light on some of the tenant’s operating expenses.
Zoning and land use compliance searches will confirm whether the existing (and proposed) uses and improvements on the property comply with applicable zoning bylaws and regulations, and that all necessary permits have been obtained, and compliance confirmed. These searches would be valuable for a new build or turnkey premises.
Work order searches can disclose whether there are any outstanding work orders that may impact the tenant’s use, occupation or quiet enjoyment of its premises. This includes critical areas like health and safety, electrical equipment, elevators, gas systems and fire department. Performing these searches help tenants avoid inheriting existing problems, especially if they are leasing the premises on an “as is” basis.
If the property appears to be a heritage building or contains unique characteristics, additional searches, such as archaeological or heritage site searches, may be useful.
If environmental contamination may be present on the premises, a search of the BC Ministry of Environment and Climate Change Strategy site registry would reveal whether the lands have been designated a contaminated site. Tenants should request an environmental site assessment from the landlord to provide a baseline for delineating the tenant’s remediation responsibilities while in occupation of the premises from any pre-existing conditions.
If the premises are near a watercourse or stream, certain fisheries and oceans searches may be useful to determine impact to fish habitat or any restrictions on activities on site that may impact the tenant’s proposed use of the premises.
Bennett Jones works with tenants and landlords in every type of commercial development, including in the retail, mixed-use, office and industrial sectors. To discuss how Bennett Jones can help in tenant due diligence or any aspect of commercial leasing, please contact Michelle Yung or another member of the Commercial Real Estate Group.