Would you, or should you, agree to discharge liens?

Nov 03, 2016
Should you advise your tenant client to agree discharge all liens? And why is this even in the Offer?

You come across this in an Offer:

Section 5. Tenant to Discharge Liens
Tenant shall […] do all things necessary to prevent a lien attaching to the Lands or Building and should any such lien be made […] Tenant shall discharge or vacate such lien immediately. 
If Tenant shall fail to discharge or vacate any lien, then in addition to any other right or remedy of Landlord, Landlord may discharge or vacate the lien […] and the amount so paid by Landlord together with all costs and expenses including solicitor's fees incurred in connection therewith shall be due and payable by Tenant to Landlord on demand together with interest at the Interest Rate, including an administrative fee of 15%.

Should you advise your tenant client to agree discharge all liens? And why is this even in the Offer?
Is the Discharge Liens Clause Even Relevant?
Imagine this – a landlord leases a unit to a tenant and the tenant decides to hire a contractor to renovate the unit. The tenant refuses to submit the final payments to the general contractor because the contractors did a shoddy job.
The contractor disagrees and decides to seek relief under the Construction Lien Act by registering a claim-for-lien against the “owner’s interest” in the premises.1 While this all seems fair and a better approach to resolving disputes than fist fights, it does cause a problem for someone who has nothing to do with this dispute – the Landlord.
How? Apart from the claim frequently being wrongly registered against the landlord and not the tenant, a lien seriously encumbers the landlord’s ability to refinance. The lender may also require the landlord to discharge any liens, no matter how small.  Enter: the reason why landlords want tenants to agree to the Discharge Liens clause. But, should you advise your tenant-client to sign it?
What Does the Discharge Liens Clause Do?
This clause typically has the effect of requiring tenants to pay all of its contractors, despite any dispute, so that no lien is registered against the title to all or any part of the property.  If a lien is registered, then the tenant must remove it immediately (i.e. pay it!) – irrespective of whether or not the tenant is disputing the claim and is leveraging this as a negotiation tool.
What Happens if the Tenant Doesn’t Discharge the Lien?

Unsurprisingly, if the tenant fails discharge the lien, the landlord can step into the tenant’s shoes and discharge the lien. This includes whether or not the tenant intends to dispute the contractor’s claim.  All costs incurred by the landlord are to be paid by the tenant, of course.
While there are numerous considerations, options and problems that affect both the landlord and tenant in this scenario, we’ll focus on how we should makes two critical edits to our example clause. These clauses are imperative to allow for some flexibility and fairness by allowing the tenant to deal with unscrupulous contractors.
Provide the tenant with the opportunity to pursue a legitimate claim against the contractor.
The problem with the clause in this example is that it doesn’t allow for the tenant to pursue a claim in earnest and in good faith. The solution is to ask for a provision that nothing in the clause is deemed to prevent the tenant from contesting in good faith, expeditiously and according the law, the validity of the lien or claim.
Landlords may be weary of this request, so point out that the tenant is being held to a high standard in order to invoke this provision: she must act quickly and earnestly. These requirements, essentially, prevent the tenant from being unreasonable and unjustly difficult.
Protect the tenant’s responsibility to pay costs.
Don’t let loose language result in the tenant paying enormous fees associated with landlord taking action to discharge the lien.  The additional administrative costs listed in our example can be tantamount to double dipping -you’re already paying for administrative costs in your operating costs! Why should you pay again? What is more, you want to ensure that the costs incurred by the landlord are reasonable and directly related to the landlord’s efforts to discharge the lien. If the landlord refuses to agree to a standard of reasonableness – be concerned! This may reflect the landlord’s future interactions with the tenant and a potentially unscrupulous landlord.
If the landlord continues to refuse providing a standard of reasonableness, add in the following to ensure that these costs aren’t already caught under the Operating Costs definition and, therefore, already paid by the tenant in Additional Rent:
For clarity, in no circumstances shall the foregoing Landlord’s costs also be recoverable as an operating expense as defined under Schedule X.
As always, the lesson is simple: even the most route clauses carry a lot of problems if they’re not considered in a variety of “real life” contexts.

1 Unfortunately, as a result of the liens registration system, the landlord, and not the tenant, is frequently misnamed as the “owner interest”.  This is an issue that lies outside of the scope of this article, but frequently forces the landlord to act, despite not being involved. 
Natalka Falcomer, CLO

Written by Natalka Falcomer, CLO

Natalka Falcomer is a lawyer and Certified Leasing Officer (CLO) who has a passion to make the law accessible and affordable. She founded, hosts and coproduced a popular legal call-in show on Rogers TV, Toronto Speaks Legal Advice. She founded Groundworks, a firm specializing in commercial real estate law, and is the EVP of corporate development at Chestnut Park.