IS THERE A DIFFERENCE BETWEEN NET; NET NET; AND NET NET NET, COMMERCIAL LEASES?

This issue as well as the definition of structural repairs or replacements were addressed in the case of 154640 Canada Inc. et al. vs. Garadex Inc. et al., 2011 QCCS 2968.

In the opinion of the Court, a net lease is meant to provide that all expenses are assumed by the tenant and that the net rent received by the landlord constitutes a 100% return on investment. Consequently, the terms net net and net net net are redundant.

In practice, many leases describe themselves as “net” although some expenses are expressly assumed by the landlord. Usually, such expenses relate to structural repairs or replacements. In the opinion of the Court, such leases should more accurately be described as “semi-net.”

In the case at bar, a partial replacement of the roof and repairs to cracks in the concrete slab were at issue. The Court had to decide whether such repairs were structural since if so, the cost would be the sole responsibility of the landlord. Although the parties are entitled to define the terms used in their lease as they see fit, in the absence of such contractual definitions, the Court will search for the usual meaning of the terms. Here, the Court determined that structural meant the constitution, disposition and assembly of elements that form the skeleton of the building and provide it with rigidity and stability.

Based on this definition, the Court found that the replacement of part of the roof with a membrane, flashing and insulation was not structural since these were not elements that assured the rigidity and solidity of the building. Based on the same reasoning, the Court found that the concrete slab was a part of the building structure.

It is incumbent upon the parties to ensure that the terms used in the lease are clearly defined in order to avoid unpleasant surprises such as: a tenant with a five-year lease being held responsible to pay the full cost of a new roof with an expected life of 20 years; a landlord who negotiated a rental rate with the expectation that the tenant would pay for absolutely all expenses ends up with a zero or negative return on investment.