Introduction
The Ontario Superior Court of Justice's contentious judgement in 1251614 Ontario Ltd. v. Gurudutt Inc., 2015 ONSC 2141 provides a cautionary lesson for tenants entering into leases and those exercising lease extension or renewal options (referred to as extensions hereafter). The judgment is the first of its kind by an Ontario court directly addressing the issue of a landlord's option to impose a current standard form lease on a tenant exercising an extension.
Facts & Decision
A party (franchisor) entered into a commercial lease for a ten
year period with the option to extend the lease for two terms of
five years each. The franchisor assigned the lease to the current
tenant (franchisee). The tenant sought to exercise its extension
option. Pursuant to the extension clause, the landlord had the
option to present the tenant with a new lease in the landlord's
then current standard form. The extension clause provided:
Any such renewal to be on the same terms and conditions as are
contained in this Lease except: (iii) the form of renewal Lease
shall be, at the landlord's option, a lease extension agreement
or a new lease in the landlord's then current standard
form.
The landlord presented the tenant with its standard form lease
which was in all respects similar to its existing lease, except for
the inclusion of a demolition clause permitting the landlord to
demolish the building upon providing six months' notice. The
tenant refused to sign the standard form lease, asserting that it
should be able to extend on the same terms as its existing
lease.
Ruling in favour of the landlord, the Superior Court maintained
that the tenant must sign the landlord's standard form lease as
a consequence of exercising its extension option. In doing so, the
Court suggested that the parties to the lease were sophisticated
business entities each with legal counsel. Further, the Court noted
that the tenant and its counsel had failed to make any objection to
the extension clause when the lease was assumed.
Significance
The Superior Court's recent decision in Gurudutt raises
important considerations for landlords, tenants and their
counsel.
From the tenant perspective, Gurudutt is a strong reminder that a
tenant should be diligent in negotiating the removal of a
landlord's option to use a new standard form lease on
extension. Should a landlord refuse to remove this option, a tenant
should negotiate for the opportunity to make reasonable revisions
to the standard form and ensure it contains, at minimum, those same
revisions to the new form of lease that were made to the current
standard form. Where a tenant has already entered into a lease
which contains a Gurudutt type clause, the tenant ought to review
the new standard form lease prior to exercising an extension in
order to determine what material changes will be binding should it
choose to extend.
From the perspective of a landlord, the inclusion of a clause that
requires the use of a new standard form lease with modified terms
on extension allows a landlord to accommodate new development
considerations, ensuring the lease agreement evolves over the
course of time. As such, when pushed by a tenant with some
leverage, the landlord may consider amending its then standard form
lease to reflect the revisions made to the current lease. This
would allow for evolution of the document while recognizing the
terms that had been specifically negotiated with the tenant and
which the tenant could reasonably expect to continue during the
extension term or terms.
Ultimately, there is little doubt that the decision in Gurudutt
will bring greater attention to the issues raised by the mandatory
use of a new standard form lease in an extension clause.
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.
