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INTEGRITY CLAUSES WITH… INTEGRITY
Michael Brooks CEO, REALpac
It's been over two years now since the announcement of the Strengthening Accountability in Procurement and Real Property policy (the “Integrity Provisions”). Public Services and Government Services Canada (PWGSC) had quite noble intentions with the provisions: to constrain the ability of businesses convicted of certain federal offences such as fraud, bribery or corruption, to seek contract opportunities with PWGSC. The Real Property Association of Canada (REALpac), and its member companies, support the legislation in its intent and believe that stronger integrity provisions will lead to better governance in public procurement and higher standards in the Canadian business community. Having said that, it's also clear that the creators of the Integrity Provisions didn't fully consider the impact of these rules on long-term contracts such as commercial leases. Specifically, the continuing unilateral right of lease termination now required by PWGSC in new and renewing leases will give pause to many landlords who have other tenant options, and make PWGSC a less desirable tenant in most markets. The existence of the lease termination right will likely lower the value of a building containing a significant PWGSC tenancy where the clause is present and, where the leased area forms a significant part of a building, may make the building difficult to conventionally finance up to normal levels through a mortgage. The due diligence now required of PWGSC landlords to ensure anyone associated with the investment up and down the ownership chain is clear of conviction or threat of same, is substantial. The need to build in termination rights with partners, employees and other related parties in case they are convicted, will add significant time and cost to lease deals with PWGSC. Leases are different than a one-time procurement of a new building, a frigate, a fighter jet, or a bridge. Should long term contracts be treated the same as short term ones? Accountability in procurement practices in Quebec is notably different than its treatment federally. In 2012, the Government
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of Quebec adopted Bill 1, otherwise known as the Integrity in Public Contracts Act (the “Integrity Act”). The law amends several integrity provisions contained in other provincial statutes. Under Bill 1, every enterprise seeking to enter into a contract or subcontract with the government, and where public funds are involved, must obtain a prior authorization from the Autorité des Marchés Financiers (AMF). The authorization is either awarded or denied following a lengthy disclosure process. Only after obtaining an ‘authorization’, are enterprises able to bid on or enter into contracts with the government. The federal government’s Integrity Provisions need to be amended for longterm contracts to provide for formal notice of a breach (i.e., someone in the ownership hierarchy has been found to have been convicted of a breach of one of the listed federal acts) and a cure right over a reasonable period of time to allow remediation by the landlord. Much more definition needs to occur around contractors and subcontractors, also now apparently caught by the rules. Unless PWGSC’s Integrity Clauses are significantly revised, certain negative impacts on PWGSC can reasonably be expected. Lenders have already determined that in cases where PWGSC is a tenant in a lease containing the Integrity Provisions, it is possible that lenders may decide not to lend, lend at higher rates to mitigate the risk associated with an abrupt termination of the agreement, or require additional security that may be cumbersome to the parties involved. The provisions may also cause elevated rents for PWGSC due to increased financing costs. Furthermore, there is a considerable risk that PWGSC may be regarded as an unattractive tenant, given that strict certification criteria will motivate excessive due diligence. Adding a notice and cure period will be a good start to give the Integrity Provisions...integrity. ■ Michael Brooks mbrooks@realpac.ca 416-642-2700 x225
Canadian Real Estate Forum / FALL 2014