With many parts of Canada’s economy in turmoil, some retail tenants in the Toronto area have been struggling to pay rent, and a local lawyer expects the number of landlords that take legal action as a result to increase.
Aram Simovonian of Lima Lee Simovonian LLP in Toronto told CoStar News numerous retail tenants are buckling under the weight of a weak consumer market, rendering their enterprises unfeasible and compelling them to try to break their leases and cut their losses.
Left in the lurch, landlords will often opt for litigation, even after finding replacement tenants. Simovonian said the reasons for opting to litigate range from the new tenant paying less rent than the previous tenant, because the market’s dropped, to simple resentment.
Simovonian was called to the bar in January 2018 and has since pursued civil and commercial law. His career began as an associate lawyer at Law Studio Professional Corp., a boutique firm in midtown Toronto, but he left during the pandemic. He subsequently spent a couple of years at Mason Caplan Roti, followed by another two years at Scalzi Caplan before becoming one of Lima Lee Simovonian’s founding partners.
Simovonian spoke with CoStar News about what he expects in landlord-tenant lease disputes. The following conversation has been edited for length and clarity.
What has sparked the recent flurry of lawsuits by landlords?
“You’ll have individuals who have small businesses that see their overhead increase with gradual increases to their monthly lease payments, and then suddenly, because of market shifts or what’s going on globally or nationally, revenue just isn’t where it needs to be,” he said. “They usually enter into these agreements in really hot markets.
How do things escalate so quickly?
“The landlord has a legal obligation to mitigate, so they have to try to re-rent the space that they're not going to have a tenant for, but the landlord can also sue [the previous tenant] for the balance of the lease term,” Simovonian said. “And in trying to mitigate, the really big challenge for the tenant is they’re supposed to pay, for example, $10,000 per month for the next five years, but the market now says that the value of this unit is $6,000, so they could still be on the hook for the rest.”
What are the likeliest outcomes from litigation?
“Your option likely becomes entering into some form of a payment plan, but if you have no assets — well, you can’t get blood from a stone —your other option is bankruptcy or making an assignment,” Simovonian said. “I’m seeing a lot of people pursuing that goal, and it’s occurring a lot more than it did two or three years ago. I have people coming to me about this all the time because they just don’t have options.
“Litigation is not only a pursuit of justice, but it's also a question of business efficiency and economics, like sometimes it just doesn't make sense, from a business standpoint, to litigate.
How can landlords and tenants avoid litigation?
“I’m starting to see this more now with businesses that have commercial leases and are worried about dollars and cents: they put mandatory mediation and mandatory arbitration clauses, (in their lease agreements)” he said.
“You hire a private judge who will be like a very senior lawyer, actually one of our partners, Gary Caplan, who's a senior partner. We sit down and try to solve the problem together from a business perspective through mediation, and if that doesn’t work, let’s avoid litigating in the court system for the next five years through arbitration,” Simovonian said. “If the parties are well organized, the process moves along toward resolution much, much faster.”