Larry: asked us to review a Commercial Tenancy Agreement (CTA) for him. It was full of uncertainty and ambiguity. What if the landlord decided to sell the building? What if there were problems with the air-conditioning or if the premises flooded? What if he wanted to sell his business in five years and wanted to show the buyer that he had an option to stay in the premises for much longer? Uncertainty about make good can end up costing a small fortune just when you want to move out. Business people often want certainty and they know that hope is not a strategy.
What is a Commercial Tenancy Agreement (CTA)?
A CTA is a standardised document provided by the REIQ. It serves as a legally binding contract between landlords and tenants. However, a CTA is only suitable for short term leases because they lack the clarity of a full commercial lease. The CTA is primarily designed for:
- very small tenancies
- lease terms of three years or less
- providing a cheap, basic lease solution
Limitations and Shortcomings of CTAs
For some businesses, there are certain circumstances where a Commercial Tenancy Agreement (CTA) will be the appropriate choice due to its flexibility and cost-effectiveness, however, it is important to be aware of its limitations.
- Lack of Property Title Registration. CTAs are not in the right form to be registrable on the property title. This lack of registration means that if the property is sold, in some situations the new owner may not be legally obliged to honor the existing lease terms. The tenant may have a right against the landlord (assuming they have some assets) but not against the land itself. This poses a risk for tenants, potentially impacting their business continuity.
- Limited Provisions. CTAs often lack detailed provisions found in normal leases. Key areas like payment of outgoings, insurance responsibilities, maintenance, and end-of-tenancy requirements (“make good”) are not thoroughly covered. This can lead to varied interpretations and potential disputes.
- Not Suitable for Complex Leases. For normal or more complex lease agreements, a CTA may not be appropriate. Its limited scope provides less protection for tenants and does not comprehensively address issues that could lead to lengthy and costly legal disputes.
Strategies in Mitigating the Risks of a CTA
To safeguard against potential pitfalls and ensure long-term business stability, it’s important to:
- Thoroughly Evaluate Risks. Before committing to any agreement, weigh potential risks, and equip yourself with the necessary knowledge to manage them effectively.
- Deal with Ambiguities. If a term is ambiguous, get it clarified. Don’t put yourself in a situation where you are left to interpret uncertain or unclear information. Ambiguities can lead to legal disputes, which can be time-consuming and costly.
- Insurance Considerations. As CTAs may not clearly define insurance responsibilities, make sure you have adequate coverage for your business to protect against unforeseen events.
- Plan for Property Sale. Since CTAs do not guarantee lease continuation after a property sale, consider at least adding clauses to try to protect your tenancy or provide ample notice in case of such events.
- Build a Relationship with Your Landlord. Open communication can often resolve issues more effectively than legal measures. A good rapport can lead to mutual understanding and cooperation.
Do we recommend CTAs? Yes, we can recommend Commercial Tenancy Agreements (CTAs) with CAUTION, depending on the specific needs and circumstances of your business. If your business’ leasing requirements align with what a CTA offers and you are prepared to proactively manage the risks, a CTA can be a beneficial choice. Get legal advice to thoroughly understand all aspects and implications before making any decision.
This page is not intended to provide legal advice and does not create a client-lawyer relationship. This post is provided for general information purposes and should not be relied upon as a substitute for legal advice. If you need help with legal advice for your particular situation, please contact our office (details below or on ‘Contact’ page) and we’ll be happy to assist you.