Suppose for a moment that in negotiating a lease, the landlord
was required to tell a prospective tenant that it had received no
offers in the last six months and that the last one it did receive
offered rent of $10 per square foot while the landlord was asking
$30 per square foot. Such a proposition goes against all conceptual
notions of negotiation, where hard bargaining rules and each party
seeks to get the best deal for themselves. While it has long been
recognized that there is an obligation to perform the obligations
of a contract in good faith, absent special circumstances such as
employer/employee and franchisor/franchisee relationships, no court
has suggested that there is a general duty to negotiate in good
faith. Courts are cautious about creating rights for which the
parties have not bargained. However, recent Ontario Superior Court
and Supreme Court of Canada decisions signal that change may be on
In SCM Insurance Services v. Medisys Corporate Health
LP, 2014 ONSC 2632, Cira agreed to waive a restrictive
covenant it held against Medisys on the condition that Cira would
have the first opportunity to negotiate for the purchase of a
business that Medisys was buying. The parties were unable to reach
an agreement and Medisys subsequently sold the business to
Cira's competitor. Cira sought an injunction preventing the
sale on the basis that, among other reasons, Medisys had breached
its duty of good faith.
Although there was no express covenant between the parties to
negotiate in good faith, the court implied such an obligation as
"a necessary corollary" of Cira's waiver of the
restrictive covenant. In the court's view, "the parties
must have intended that the Medisys obligation to
offer the Business to [Cira] would constitute an enforceable
obligation". While the scope of this obligation required
Medisys to "act reasonably in negotiating a possible
sale" it "did not obligate Medisys to agree to whatever
price or other terms [Cira] considered reasonable", nor could
Medisys adopt "a negotiating position that 'eviscerates or
defeats the objectives of the agreement that they have entered
into'". The court held that no breach had occurred on the
basis that Medisys' position with respect to the terms of the
sale was not unreasonable and there was no evidence to suggest that
Medisys did not honestly believe their approach to be credible.
The court also found that Medisys' obligation to negotiate
in good faith did not give Cira the right to match the offer from
Cira's competitor. This was seen as implying a
"substantive right" which is "not consistent with
the conceptual function of the duty of good faith, which is limited
to ensuring the performance and enforcement of the provisions of a
contract". So while the court was willing to imply
"necessary corollary" obligations, it was unwilling to
imply new substantive rights into the agreement.
Navigating this distinction may prove difficult, although it is
important to recall the narrow facts of this case: the court
implied a duty to negotiate in good faith based on Cira's
waiver of its restrictive covenant which came in the context of an
ongoing relationship. In the circumstances, perhaps it is fair that
Medisys be required to negotiate the subsequent sale in a fair and
How might this apply to lease negotiations? Suppose an offer
does not state that the parties are required to negotiate the
subsequent lease in good faith. Would a court nevertheless find
that doing so was implied as a "necessary corollary" of
signing the offer? If a landlord insists on retaining a favourable,
one-sided indemnity provision, would a court view this position as
not being within the realm of reasonable positions and therefore a
violation of an implied duty to negotiate in good faith? The facts
of each situation will be of paramount importance.
This emphasis on the facts is particularly significant in light
of a recent Supreme Court of Canada decision (Sattva Capital
Corp. v. Creston Moly Corp., 2014 SCC 53) which makes clear
that in cases of contractual interpretation (such as leases),
deference is owed to the trial judge's decision. Practically
speaking, this means that if a judge determines that the facts of a
particular situation give rise to a duty to negotiate in good
faith, barring a particularly egregious error on the judge's
part, this determination is generally not appealable to a higher
court. While this has the benefit of providing greater certainty at
an earlier stage in the legal proceedings, it will be of little
comfort to the party who is found to have not negotiated in good
faith and has no avenue to appeal that outcome.
It is too early to say whether the combined effect of these two
cases opens the door to a new era of lease negotiations. Only time,
and likely a few more court decisions, will tell.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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