By Liad Hadar, Director and Jayson Junkoon, Associate at Hadar Incorporated, Specialist Property Law Firm
This article first appeared in Asset Magazine’s November 2022 edition

In this article, we assess some of the considerations around commercial zoning rights, and why proper training of leasing agents is essential to prevent avoidable contractual breaches and material losses in the future.

Given that a leasing agent represents the interests of a landlord, it is incumbent upon a landlord to ensure the leasing agent is adequately informed about the suitability of a property for certain types of commercial or industrial use.

As a typical example, a shopping mall in a particular area may be classified under a ‘Business 1’ zoning regulation, which allows virtually any kind of retail business to be conducted within its premises. Another location may feature a virtually identical mall but be designated a ‘Business 2’ zoning classification, which means that there are restrictions on certain types of business activity – for example, the sale of alcohol, or a restriction on the operating hours of entertainment venues.

Through assumption or neglect, a leasing agent may not be fully aware of the intricacies surrounding zoning rights for a particular property, and this can lead to significant issues with the authorities, other tenants or neighbours – not to mention financial losses to the landlord. Worse though, in certain circumstances we have witnessed and as detailed below, a leasing agent may intentionally withhold critical information from a tenant.

Be aware of history and context

It is important for a leasing agent to be aware of any existing restrictions, as well as any prior (or current) tenants whose business may have given rise to discontent or dispute.

As an example, a leasing agent may be approached by a prospective tenant interested in setting up a nightclub or similar entertainment venue. It’s vitally important to establish upfront whether there are existing restrictions on noise or traffic levels, the playing of music, etc.

It’s equally important to be aware of challenges to such tenancy that may have arisen in the past.

In one particular case, a leasing agent purported to a prospective tenant that a premises was suited to the establishment of a nightclub. This was done with disregard to the fact that a similar enterprise had previously been the subject of numerous neighbourhood complaints directed to the municipality, as well as periodic police shutdowns, all of which was within the leasing agent’s knowledge.

The risk of tenant litigation

In a case where a prospective tenant signs a lease agreement, and subsequently discovers that the relevant zoning rights do not in fact apply, the tenant may well claim misrepresentation on the part of the leasing agent, even if the agent was not specifically aware of this. This places the landlord in an unenviable position where consequences may include, among others:

• The tenant unilaterally refusing to honour the lease agreement and subsequently cancelling it.
• Loss of the tenant, and a subsequent chilling effect on new applications for such space.
• Having to refund the tenant for all rental and other payments that have already been received.
• The tenant suing for damages such as the costs of setting up the premises, relocating from it and the associated loss of income.

Why a blanket “no warranties” clause cannot always be applied

While a blanket “no warranties” clause can be helpful and certainly provide a level of protection to a landlord, such clauses may not necessarily help to enforce the terms of the lease agreement, nor protect the landlord from loss, in instances of misrepresentation, as one cannot contract outside of the law. If zoning rights have been granted for a specific property, a landlord or leasing agent cannot then absolve themselves of culpability in the event of deliberate or accidental misrepresentation.

In the example given above, where the leasing agent did not disclose the impediments to the establishment of a nightclub on the premises described, this was in fact deliberate. The agent was aware of the situation and chose not to disclose the information. Subsequently, the landlord was left with an unenforceable lease agreement and suffered significant losses as a result.

In a case where a lease agreement is found to be unenforceable, the ramifications extend beyond just the loss of rental income. It also means that a tenant could avoid liability for outstanding municipal service charges or other utility and maintenance charges, because the entirety of the lease agreement is deemed to be invalid.

Blanket clauses can, in certain circumstances, offer valuable and practical protection for landlords that have dozens or even hundreds of properties under their administration. That said, these blanket clauses are only helpful to an extent and will not protect landlords from misrepresentation. It then becomes even more important for leasing agents to be fully informed of the zoning rights pertaining to each individual property – and to present the correct and unreserved information to potential tenants ethically and without bias.

Ensure your leasing agents are adequately trained and well-informed

Landlords should ensure that their leasing agents are both knowledgeable and responsible. A leasing agent who acts out of self-interest may cause great harm – not only from a financial perspective, but in ways that may tarnish the reputation of the landlord’s business.

It makes sense to furnish leasing agents with comprehensive information upfront, so that, at the very least, the risk of an agent unintentionally misinforming a prospective tenant is lessened, while the agent is also held to greater accountability for any intentional act. As the old saying would have it: ‘An ounce of prevention is worth a pound of cure’ – and nowhere is this more applicable than when it comes to property law.

In the event of any contractual dispute between a landlord and a tenant, challenging a contractual breach can be an enormously complex, costly, and time-consuming exercise, with no guarantee of success. Ensuring that a lease agreement aligns with the relevant zoning rights is a sensible and simple way for a landlord to protect itself upfront against damages claims or other litigation.

An experienced and knowledgeable property law specialist will be able to help train leasing agents on the applicable zoning for properties and to advise on how to word a lease agreement in such a way that the landlord will be best protected from losing claims against a tenant should the worst happen – and lessen the risk of losses due to zoning rights issues.