Recent developments in property leasing

Termination and Relief from Forfeiture during COVID-19

COVID-19 ushered in a slew of relief from forfeiture cases as tenants who were unable to pay rent had their leases terminated. These terminations were further complicated by moratoriums on evictions, as landlords had to consider timing and provincial restrictions then in place. In The Second Cup Ltd. v. 2410077 Ontario Ltd., 2020 ONSC 3684 (Ont. S.C.J.) (“Second Cup”), one of the early cases in the pandemic dealing with relief from forfeiture, the Courts signaled a willingness to consider rent defaults in the context of the pandemic in deciding whether to exercise its discretion to grant relief. Although the Courts were sympathetic to tenants, they generally did not grant relief from forfeiture where tenants were already in default pre-pandemic and where the tenants were not able to demonstrate that they could meet their obligations under the lease (Ontario International College Inc. v. Consumers Road Investments Inc., 2020 ONSC 6772 (Ont. S.C.J.)).

Traditionally, the Courts have relied on the following framework from Jungle Lion Management Inc. v. London Life Insurance Company, 2019 ONSC 780 and Michele’s Italian Ristorante Inc. v. 1272259 Ontario Ltd., 2016 ONSC 4888,in determining whether to grant relief from forfeiture:

  1. The conduct of the applicant and gravity of the breaches;
  2. Whether the object of the right of forfeiture in the lease was essentially to secure the payment of money;
  3. The disparity or disproportion between the value of the property forfeited and the damage caused by the breach;
  4. Whether the tenant comes to court with “clean hands”;
  5. Whether there has been an outright refusal to pay rent;
  6. Whether the rent has been in arrears for a short or long time; and
  7. Whether the landlord has suffered a serious loss by reason of the moving party’s delay in paying rent.

In Peninsula (Kingsway) Seafood Restaurant Inc. v. Central Park Developments Ltd., 2021 BCSC 119 (BCSC) (“Peninsula”), the Court expanded this framework to consider whether there are any intervening third party rights. The Tenant was persistently late in its obligation to pay rent. After many attempts to try to accommodate the Tenant, the Landlord terminated the lease on October 16, 2020, and entered into an offer to lease with a new tenant on November 13, 2020 (with the conditions removed on December 17, 2020). The Tenant subsequently filed an application for relief from forfeiture on November 26, 2020. The Court found that where the Landlord lawfully terminated the lease and then lawfully entered into a bona fide lease arrangement with an innocent third party, there was a compelling case for allowing the third party the right to trump the wishes of the original tenant in default, notwithstanding that the original Tenant had expended C$2 million on rent and improvements for a restaurant whose lease was terminated before it even opened. Since the new tenant had a right to sue the Landlord if it reneged on the new lease, the Court’s discretion should not be exercised so as to subject the Landlord to third-party claims where that party acted lawfully and reasonably throughout.

The case of 2487261 Ont. Corporation v. 2612123 Ont. Inc., 2021 ONSC 336 (Ont. S.C.J.) (“Symphony”) is also interesting as it is a case where termination, relief from forfeiture, government subsidy programs, and the moratorium on eviction all intersect. In Symphony, the Tenant paid 25% of rent from April to August 2020 as it thought the Landlord had applied for the Canada Emergency Commercial Rent Assistance Program (“CECRA”) which would have covered 50% of the rent with the Landlord covering the balance of the rent. The Landlord had submitted a blank rent reduction agreement to the Tenant for signature, apparently in support of its application for CECRA; however, it did not, in fact, apply for CECRA. When the Landlord did not receive full rent, it locked the Tenant out of the premises. The Tenant claimed that the Landlord had agreed to apply for CECRA allowing it to pay only 25% of rent from April to September and agreed not to require payment of the balance of the outstanding rent until it was able to re-open. However, the Landlord denied any agreement. The Tenant brought an application for relief from forfeiture. The Court rejected the Landlord’s evidence denying any agreement and found that it was reasonable for the Tenant to have assumed that the parties had reached an agreement for rent abatement, as the Landlord’s statements about outstanding rent were confusing and sometimes inconsistent. While the Landlord was within its rights to not apply for CECRA, it was unreasonable for the Landlord to lull the Tenant into thinking that the rent was reduced as the Landlord accepted the 25% payments in its correspondence with the Tenant and did not expressly reject the Tenant’s statements about those agreements. The Landlord had also breached s. 83(1) of Protecting Small Business Act, 2020, by exercising its right of re-entry for non-payment of rent during the non-enforcement period and as a result, the Tenant was entitled to relief from forfeiture.

Whether a landlord is looking to terminate a lease or a tenant is looking for relief from forfeiture, these cases are a good reminder that both landlords and tenants should examine their own conduct and ensure that they themselves come to court with clean hands.

The final word on tenant claims for rental abatement in light of COVID-19?

Two recent decisions, both involving the Hudson’s Bay Company, appear to signal the courts’ unwillingness to interpret leases in novel ways to grant tenants an abatement of rent as a result of the pandemic.

In Hudson’s Bay Company ULC v. Oxford Properties et al., 2021 ONSC 4515 (Ont. S.C.J.) (“HBC”), the Tenant took an aggressive approach by arguing that because the Landlord failed to provide a first-class shopping center, it was entitled to cease paying rent.

In April 2020, the Tenant stopped paying rent after the initial lockdown forced the Tenant to close its business temporarily. The Tenant relied heavily on high foot traffic and a food court to ensure maximum customer “dwell” time. It argued that the Landlord was in breach of the lease by failing to provide a first-class shopping center. Foot traffic at the center had decreased substantially as the pandemic restrictions and closures limited stores to just curbside pickup, reduced store capacities, and eliminated dine-in at the food court. The Tenant commenced an action against the Landlord arguing that it was entitled to rent relief as a result of a breach of the lease by the Landlord or pursuant to Section 20 of the Commercial Tenancies Act (Ontario) (“CTA”), which provides the Court with jurisdiction to grant relief “having regard to the proceeding and the conduct of the parties under section 19 and to all other circumstances, the Court thinks fit, and on such terms as to the payment of rent…” The Landlord responded with notice of its intent to terminate the lease. The Tenant brought an emergency injunction to enjoin the Landlord from terminating the lease.

The Court found that Section 20 of the CTA cannot be expanded to mean that external circumstances, such as the pandemic, will permit the Court to override private contracts where one of the parties is no longer satisfied with the contract terms. The Court should not be granting equitable relief as a way to enact policies that should be left to the Legislature. Moreover, the Landlord cannot be in breach of the lease for failing to provide a first-class shopping center where it is simply complying with applicable laws. As a result, the Court ordered full payment of the rent but granted the Tenant relief from forfeiture and permitted the Tenant to repay the arrears in deferred installments.

Similarly, in Cherry Lane Shopping Centre Holdings Ltd. v. Hudson’s Bay Company ULC, 2021 BCSC 1178 (BCSC), the Court rejected the same claim made by the Tenant and refused to even decide whether the Landlord had in fact breached any contractual obligations. The Court confirmed that the law is that notwithstanding any breach of a lease by a landlord, a tenant is obligated to continue to pay rent, without abatement, unless otherwise provided for in the lease or unless the landlord’s act amounts to an eviction. Contrary to the Tenant’s assertion, the Court found that in this lease the force majeure provision did not allow the Tenant to suspend rental payments. While the Court was prepared to accept that the COVID-19 pandemic could potentially be considered a force majeure event within the meaning of the clause, the force majeure provisions only applied to those lease provisions which were expressly made subject to force majeure. Given the Tenant’s rental obligations were not made subject to force majeure, the Tenant had no entitlement to suspend the payment of rent.

Tenants looking to take matters into their own hands by withholding payment of rent should take heed; the case law continues to affirm that the pandemic does not entitle tenants to an abatement of rent.

Doctrine of “Spent Breach” allows Tenant to exercise Renewal Option, notwithstanding ‘No Prior Default’ Condition

In H.A.S. Novelties Limited v. 1508269 Ontario Limited, 2021 ONSC 642 (Ont. S.C.J.), the Tenant entered into three leases for three units in the same building. The leases all contained renewal options. In March 2020, after the initial government-ordered pandemic lockdown, the parties entered into a temporary rent relief agreement where the Tenant would pay one-third of the rent while the lockdown was in effect and pay the remaining two-thirds over six months after the lockdown ends.

In April 2020, the Tenant approached the Landlord about participating in the government’s CECRA program. The Landlord initially agreed; however, it later raised concerns about the Tenant’s outstanding utility bills and did not submit the CECRA application. During the period of uncertainty surrounding the CECRA application and when full rent would resume, the Tenant defaulted on some rent payments agreed to under the terms of the Rent Relief Agreement. When the Tenant later advised the Landlord that it intended to exercise its option to renew the lease, the Landlord claimed the Tenant had lost its renewal right because it was only entitled to exercise the renewal option “provided the Tenant is not at any time in default of any covenants within the lease…”

The Court held that while the Landlord may have given the impression that it would apply for CECRA, there was no promise made by the Landlord that was intended to affect the parties’ legal relationship and unlike Symphony (discussed above), the Landlord made several demands for full payment of rent. Consequently, the Landlord was not obligated to submit the CECRA application.

With respect to the Tenant’s right to renew, the Court applied the doctrine of “spent breach” and held that “where there has been an historical breach by a tenant, which has been remedied, the tenant is entitled to exercise the renewal right under the agreement.” The Court further stated that “only when the breach is subsisting at the time of the exercise of the renewal is the tenant precluded from exercising the option.” As a result, the Tenant was entitled to renew the lease despite the rent default, given that at the time of the hearing, all rent arrears except for one month had been paid and the Court had no doubt that the Tenant would pay the remaining arrears in advance of the renewal date.

Landlords looking to limit the application of the doctrine of “spent breach” should expressly exclude same from the preconditions to the exercise of any renewal or extension option.

Implied Term that the Premises comply with Code requirements

In Transport Canpar LP v. 3258042 Nova Scotia Limited, 2020 NSSC 274 (NSSC), an unsophisticated Landlord purchased a building on an as-is basis without a building inspection. The Landlord later leased the building to the Tenant. During a time of unusually heavy snow in Nova Scotia, the roof of the building collapsed. The Tenant brought an action seeking damages for breach of lease and/or negligence. After careful review of the evidence and engineering reports, it was determined that the load-carrying capacity of the roof was significantly lower than that prescribed by the National Building Code.

Although the lease did not contain any Landlord reps and warranties about the condition of the premises, the Tenant argued that there was an implied term in the lease that the premises would be reasonably fit for occupation. The lease contained numerous references requiring building approvals from various governmental authorities for work undertaken by the parties, such as the requirement that all alterations comply with the building code. The Court found that if the parties required alterations and repairs to comply with the building code, they would have assumed at the outset that the premises complied with the building code. As a result, the Court found that the lease contained an implied term that the building was designed and constructed in accordance with the National Building Code.

Landlords beware ­― the absence of reps and warranties with respect to the condition of leased premises may not preclude a landlord from liability if the premises are not in compliance with applicable laws.

Intent is important in Lease Repudiation

A tenant’s right to quiet enjoyment is one of the most basic tenant rights. As a result, a landlord who changes the locks and takes possession of leased premises is generally found to have terminated a lease. While a landlord may not intend to terminate the lease by changing the locks, the landlord’s intention is not usually relevant and its remedies will be limited regardless.

In Fenske v. MacLeod, 2020 BCSC 532 (BCSC), the parties disputed the legal consequences of the Landlord changing the lock on the back door. The Tenant was looking to establish a new wood-fired pizza business and was in the process of renovating the premises. Unfortunately, while the proposed business was to serve takeout food, the building was not zoned for food takeout (though a temporary workaround was available). In addition, the Tenant’s costs were quickly exceeding budget. Although the business had not yet opened, its financial outlook was not optimistic.

It is against this backdrop that the Landlord required access to the leased premises to address a hot water issue. Because the Landlord did not have a key, the Landlord drilled out the back door lock to gain entry and changed the lock. Unfortunately, the Landlord did not inform the Tenant of the change in locks. The Landlord thought that the Tenant was accessing the premises through the front door and did not know that the Tenant did not have a key. When the Tenant later tried to access the premises, it discovered that the back door lock had been changed. The Tenant did not contact the Landlord to request an explanation or a new key. When the Landlord later e-mailed the Tenant’s lawyer on the zoning issue and raised her suspicions that the Tenant was seeking to escape its lease obligations, the Tenant’s lawyer responded that the changing of locks was a breach of the lease and that the Tenant accepted the repudiation of the lease. The Tenant stopped paying rent. The Landlord proceeded to terminate the lease and sell the Tenant’s equipment, but it did not provide notice of default (or a cure period) or notice requesting the Tenant to remove its equipment.

At issue was whether the change in locks constituted an interruption of the Tenant’s right of quiet enjoyment such that it amounted to a repudiation of the lease. The Court found that the changing of one lock was only a temporary inconvenience to the Tenant and that it was clear that if the Tenant had requested a new key to the back door, the Landlord would have provided one. The Court found that the Landlord did not intend to repudiate or terminate the lease through the changing of locks and, as a result, the act of changing the lock to the back door cannot be interpreted as a repudiation of the lease.

While the Landlord was not found to have repudiated the lease in changing one lock here, landlords should ensure that they do not interrupt a tenant’s right of quiet enjoyment and say so by clear written notice at the time of changing any lock.

“Persistent, substantial or reprehensive” conduct required for Landlord to terminate a Lease

When the landlord and tenant relationship sour, the temptation may grow for a landlord to terminate a lease. However, Landlords must act carefully to make sure that they provide proper notice of default and that they have adequate grounds for terminating a lease. In VMAT (Oakville) Inc. o/a Suvai Classic Indian Restaurant v. Trafalgar Terrace Enterprise Inc., 2020 ONSC 2111 (Ont. S.C.J.), the Landlord provided notice to the Tenant listing two breaches: (1) the Tenant’s hot water tank was non-conforming to municipal by-law; and (2) the Tenant caused flooding and water damage to the building. A further notice was later sent alleging that the Tenant had not maintained the overhead fan cleaning or obtained fire suppression system re-validation. The Tenant was given 30 days to remedy the breaches. Although some of the breaches (like the cost to clean the overhead fan) were quantifiable, the notice did not include an amount for the reasonable cost of the repairs.

The Court found that the breaches specified by the Landlord were insufficient to lead to forfeiture of the lease. There was no by-law the Tenant had to comply with for the hot water tank. The water leakage occurred in the past (and was not caused by the Tenant’s negligence or intentional conduct) and the Landlord cannot rely on a past breach that has been remedied to justify an eviction. The Tenant cleaned the overhead fan and made reasonable efforts to bring the fire suppression system into compliance.

Referring to ClubLink Corp. v. Pro-Hedge Funds Inc., 2009 CanLII 32910 (ON SC) (“ClubLink”), the Court held that “courts do not look favourably on forfeiture unless the tenant’s behavior has been persistent, substantial or reprehensible.” Moreover, the notice of default was deficient for failing to include an amount for compensation as required by the CTA (which the Court found was intentionally omitted because the Landlord did not wish to have the breach remedied but wanted to evict the Tenant).

This case demonstrates that a landlord cannot terminate a lease for just any breach. A tenant’s misconduct must be of sufficient gravity to warrant termination. Landlords should also include an amount for compensation where a breach is quantifiable in damages so that a tenant has an opportunity to cure the default.

Is an agreement to lease containing uncertain essential terms still binding?

It is settled law that in order to create a valid lease, the agreement must contain the following essential elements:

  1. identification of the parties;
  2. description of the premises;
  3. specification of a commencement time;
  4. specification of term duration;
  5. rent; and
  6. any other material terms incidental to the parties’ relationship.

In 285 Spadina SPV Inc. v. 2356802 Ontario Corp., 2020 ONSC 1645 (Ont. S.C.J.), the Landlord and the Tenant entered into two agreements for a theater and restaurant in a 100-year-old building. Although the parties initially tried to negotiate a detailed offer to lease with the assistance of their lawyers, they later opted for the simpler OREA standard form contract prepared by their agents without the assistance of lawyers. Unfortunately, the drafting was sloppy and there were many inconsistencies and ambiguities in the agreements such as the term of the theater and restaurant agreement, the boundaries of the theater premises and whether it included the first-floor space, the area on which additional rent for the theater agreement should be calculated, etc. These ambiguities, together with various disputes that included the scope of the Landlord’s work, caused the relationship between the parties to deteriorate. Because of the stalemate between the parties over the Landlord’s work and the various Tenant defaults, the Landlord took the position that the agreement was too uncertain in its terms to be enforceable and sought to evict the Tenant.

The Court found that the impugned terms could be interpreted and given binding meaning by applying the principles of contract interpretation to determine the parties’ intentions when they signed the agreements. Consideration must be given to the words used by the parties and the surrounding context (the factual background and commercial purpose of the contract), the purpose sought, and the knowledge the parties had or ought to have had when contracting.

Ultimately, the Court found that the parties had entered into a binding agreement even though the parties had not settled on the ‘formal’ lease because the parties agreed on all the essential terms of the lease. It further noted that the fact that the parties had a binding agreement was evidenced by the parties’ behavior after signing the agreements (i.e., the Landlord granting the Tenant occupancy of the theater premises, the Tenant commencing work, etc.).

Both landlords and tenants should remember that unless otherwise expressly provided in an agreement, there is a binding lease once the essential elements are present.

Severing One Provision to Save the Rest: The Question of Enforceability

In Hotchkiss v. Budding Gardens Inc., 2021 ABQB 333 (Alta. Q.B.), the parties entered into a lease for a three-year term with rent fixed for the first year and rent to be negotiated for years two and three. Unfortunately, the parties were unable to agree on rent for years two and three. After the end of the first year, the Landlord claimed the lease was not enforceable for the balance of the term because the amount of rent was uncertain. The Tenant claimed the lease was enforceable but required direction from the Court to fix the amount of rent under the lease.

The Court considered whether this contract, which contained an uncertain essential term, could be saved by implying that an unspecified price be a reasonable price. It rejected this approach, however, as the landlord and tenant had expressly reserved the right to determine rent without reference to market rates or any other considerations.

The Court also considered whether the rent clause for years two and three could be severed, with the remainder of the contract to be enforced, and applied the following principles from Halsbury’s Laws of England, Vol. 9, 4th ed. (London: Butterworths, 1998) for determining whether a clause can be severed: (i) the clause must be void, but not illegal; (ii) it must be possible to strike out the clause without rewriting or rearranging the contract; (iii) severance of the clause must not alter the scope or the intention of the agreement; and (iv) the contract, once the offending clause is removed, must retain the essential characteristics of a valid contract. Based on the foregoing, the Court found that the “agreement to agree” on rent for years two and three could be severed. Severing the language would recognize the parties’ intention that the Tenant take possession first and discuss the rent at a later date, with the likely intent that the lease agreement terminates if the parties could not agree on rent.

An ”agreement to agree” is not enforceable. Where rent is to be determined in the future, parties should ensure that the lease contains objective criteria for determining the amount of rent and a mechanism for resolving disputes if the parties cannot agree.

Duty of Good Faith: Does a Landlord need to advise a Tenant that it improperly exercised its option to renew?

Since the Supreme Court of Canada released its seminal decision in Bhasin v. Hrynew, 2014 SCC 71, parties have had to consider their duty of good faith in the performance of a contract. Contracting parties must have “appropriate regard to the legitimate contractual interest of the contracting partner” and “not seek to undermine those interests in bad faith”.

In Subway Franchise Restaurants of Canada Ltd. v. BMO Life Assurance Company, 2021 ONCA 349 (ONCA), the Court of Appeal upheld the trial court’s decision that found the Tenant’s exercise of its renewal option was not valid.

The lease required the Tenant to exercise its renewal option at least nine months and not more than 12 months prior to the expiry of the term. Unfortunately, the Tenant had recorded the commencement and expiry date incorrectly, which led the Tenant to exercise its renewal option more than 12 months prior to the expiry of the term. When the Landlord acquired the building from the original landlord, the Tenant signed an estoppel certificate with the correct commencement and expiry dates. However, the Tenant failed to recognize the discrepancy between the correct dates and its internal records.

The Tenant sent multiple letters to the Landlord seeking confirmation of the expiry date (since the commencement and expiry date were floating dates tied to the fixturing period). Despite the Landlord’s ignoring these requests to confirm the correct dates, the Court held that the Tenant was responsible for its failure to exercise the option within the proper window of time for such notice.

At trial, the Tenant sought relief from forfeiture on the grounds that the Landlord, in ignoring their requests to confirm the correct expiry date of the term and seemingly allowing the Tenant to improperly exercise its renewal option, had failed to act in good faith in the performance of the lease contract. The Superior Court sided with the Landlord, stating: “the onus is on the tenant seeking relief from forfeiture to, at the very least, make a diligent effort to comply with the Lease’s terms.” As the Tenant had signed the estoppel certificate, the Court determined that it would have uncovered the true expiry date of the term had it made a diligent effort to comply with the lease. On the issue of good faith, the Superior Court found “the duty of good faith is designed to ensure that the contract terms are performed in the spirit and substance of each party’s rights and obligations...It is not, however, designed to transform or modify those rights and obligations.”

In considering the Landlord’s duty of good faith, the Superior Court followed a decision that was subsequently overturned by the Supreme Court of Canada, providing the Tenant with grounds for appeal. The Court of Appeal unanimously dismissed the appeal and provided further insight on the evolution of the duty of good faith in contract following the Supreme Court’s recent decision in C.M. Callow Inc. v. Zollinger, 2020 SCC 45. The Court of Appeal found that for a contracting party to breach their duty of good faith, they must actively deceive the injured party. The Court stated “In the absence of the defendant’s false representations, the failure to disclose a material fact, without more, would not be contrary to the standard [of acting in good faith].”

We seriously question whether this decision is correct in law. Nevertheless, this case is a reminder about the importance of properly tracking dates, as providing notice too early can be just as costly to a tenant as providing notice too late.

Withholding Consent to an Assignment of Lease

It is clear that a landlord cannot, as a condition to granting consent to an assignment of lease, require amendments to a lease to provide itself with more advantageous terms. But what happens when a landlord relies on both reasonable and unreasonable grounds to refuse consent to an assignment of lease?

In Tabriz Persian Cuisine Inc. v. Highrise Property Group Inc., 2021 ONSC 4065 (Ont. S.C.J.), the Tenant sought damages from the Landlord for its refusal to even consider consenting to various proposed assignments until the Tenant satisfied a number of pre-conditions. These conditions included removing a patio installed by the Tenant on the common area without the Landlord’s or condominium corporation’s consent and ceasing the legal action relating to the patio between the Landlord, Tenant, and condominium corporation.

Although the Tenant agreed to remove the patio, it never did. As a result, the Court found the Landlord acted reasonably in requiring the patio to be removed before consenting to the assignment. The Landlord’s demand that the Tenant cease its lawsuit against the Landlord and condominium corporation was a collateral purpose, however, not connected to the request to assign the lease. Faced with both reasonable and unreasonable grounds for refusing consent to an assignment of lease, the Court held that where a Landlord has sufficient reason to withhold consent, the fact that the Landlord has another improper purpose does not matter.

While it is not always easy to determine whether or not a landlord is acting reasonably in withholding consent, Section 23(2) of the CTA allows tenants to make an application to the Superior Court for an order determining whether or not consent is unreasonably withheld.

Special acknowledgement and thanks to Corinne Doroszkiewicz (Student-at-Law), Alyssa Girardi, and Benji Wiseman for their valuable assistance in preparing this article.