Canada: Property Leasing - Recent Developments Of Importance

A. TENANT'S RIGHTS

While commercial leases will vary from agreement to agreement, all leases will contain provisions that aim to protect the rights of the landlord and the tenant. The level of protection provided to each party depends on what is specifically negotiated for in the lease, in addition to the rights that are available at law. With respect to the rights of a tenant that can be found in a commercial lease, there are a number of ways in which they can be described and categorized. Naturally, there are the tenant's common law rights, which are those that have arisen as a result of judicial precedent. There are fundamental rights, which come from the common law and are categorized as rights that are fundamental in order for a tenant to achieve the entire benefit of the contract. Finally, there are special rights, which are specifically negotiated for in order to provide the tenant with a benefit it would otherwise not be entitled to. The following group of cases address how these rights are interpreted, protected, and adjudicated in the current landscape of commercial leasing.

Quiet Enjoyment

A landlord's covenant of quiet enjoyment is one of the cornerstones of a commercial lease. A tenant's right to peaceably possess, use, and enjoy its premises without interference, interruption, or disturbance from other parties is the ultimate marker of a tenant's leasehold interest. The case of Kjargaard Heating & Cooling Ltd. v. Chakraborty illustrates how a tenant has a claim for breach of quiet enjoyment if the actions of a landlord or its agent substantially interfere with the tenant's possession.

In this case, the Lease was for an unspecified term and provided for 90 days notice of termination if the Landlord wanted to redevelop the building. The Lease also provided the Landlord with the right to post "for rent" or "for sale" signs during the last 90 days of the term. One month after the Tenant opened for business, the Landlord advised that it wished to sell the building and its agent posted "for sale" and "business relocating" signs near the Premises. Through conversations with the Landlord's broker, the Tenant understood that she was being evicted and proceeded to move out. The Landlord sued for rent for the balance of the term after the Tenant vacated. The Tenant counterclaimed for damages for breach of the implied covenant of quiet enjoyment and constructive eviction.

The Court found that the placing of the "for sale" and "business relocating" signs indicating that the defendant was relocating, as well as the disruptive showing of the Premises during business hours, interfered with the Tenant's enjoyment of her business for the usual purposes. The Court reminded us of the principle stated in the Ontario decision in Arangio v. Patterson: "Where the breach is intentional or the probable consequence of intentional conduct, the consequences are foreseeable, the interference has the character of permanence and wrongfulness, and the degree of interference is so substantial or intolerable as to make it reasonable for the Tenant to vacate, then the breach will be found to constitute a constructive eviction."

Transfers: The Consent Requirement

The following cases illustrate some of the issues that continue to arise between landlords and tenants in the context of transferring leases. Leases increasingly include detailed provisions to address these issues, such as prescribing a formal process to request consent or carefully defining permitted transferees. However, every year there are situations before the court to determine application and interpretation that leave commercial leasing lawyers scratching their heads at the court's decisions.

In Smith v. 2249778 Ontario Inc. the Tenant entered into an Agreement to sell its business and requested the Landlord's consent to the assignment of the Lease, which could not be unreasonably withheld. The Lease provided the Landlord with the right to terminate the Lease instead of granting its consent, after which the Tenant had the option to withdraw its request and reinstate the Lease. Here, the Landlord elected to terminate and the Tenant exercised its right to reinstate the Lease. Notably, the market value of the Leased Premises had increased since the Landlord and Tenant had originally entered into the Lease. The Tenant brought an application for a declaration requiring the Landlord to permit the assignment, arguing that the Landlord's right to terminate was only available if there was a reasonable basis to withhold consent. The Court found that the reasonableness requirement in withholding consent applied only to granting or refusing consent, and not in the case of the Landlord's termination right. Rather, the Landlord's termination right was clever bargaining – if market rent was less than the Lease rates at the time of the request, the Landlord could consent. However, if market rent increased, as it did in this situation, the Landlord had the opportunity to terminate the Lease and get the benefit of the current higher market rate from a new Tenant.

The decision in Hudson's Bay Co. v. OMERS Realty Corp. is one that will undoubtedly influence how big-time landlords draft the transfer provisions in their standard forms of lease, possibly making a tenant's right to transfer without the landlord's consent gradually scarce. From a litigation perspective, Hudson's Bay also provides insight into how provisions concerning permitted transferees and changes in control may be interpreted in light of the practical commercial context. This case shows that courts may not be willing to assess the real interests in the property and operations of a business beyond the strict terms of an assignment of lease.

In Hudson's Bay, the Tenant entered into a joint venture with a third party and sought to transfer three existing Leases to a limited partnership, whereby the third party would have a beneficial ownership interest in the Leases. The Landlord, who was in direct competition with the third party, refused to consent even after the joint venture was restructured to limit the third party's degree of control over the Leases. The Tenant argued that the assignment was covered by the exception for affiliates under the Lease, which meant the Landlord's consent was not required. The trial court found in favor of the Tenant and the Landlord appealed on the grounds that the court overlooked the commercial reality of the transaction. The Landlord argued that changing the beneficial ownership of the entity holding the Leases would result in a change of control in the Tenant. The Court of Appeal found that the Landlord's characterization of the effect of the assignments went beyond the scope of the Lease terms and affirmed the trial court's decision that the Landlord's consent was not required.

Renewal Rights

The following cases exemplify the complexities of drafting and exercising options to renew in the commercial leasing context. Renewal rights are some of the most important special rights that a tenant can negotiate into its lease and some of the easiest rights to inadvertently lose if the pre-conditions to exercise are not strictly followed. Tenants are advised to eliminate or limit pre-conditions to exercise or, if a landlord insists, should try to tighten up any conditions and be as clear as possible. In addition, tenants should begin negotiating a renewal well in advance of the deadline.

Mapleview-Veterans Drive Investments Inc. v. Papa Kerollus VI Inc. considers whether the respondent Tenant was entitled to exercise a right of renewal. The Tenant purported to exercise the option to renew within the exercise period, but the appellant Landlord rejected the notice on account of noncompliance with the pre-conditions to exercise because there were additional rent arrears.

The Landlord applied to the Court for a declaration that the option itself was void for uncertainty because there were no guidelines for calculating rent or, in the alternative, that the Tenant was in breach of the preconditions such that the Tenant's exercise of the option was void.

The Tenant argued that the rental arrears were on account of the Landlord improperly accounting for additional rent and unfairly demanding higher payments in an attempt to squeeze the Tenant out. The application judge was sympathetic and found that there was a live issue regarding the amount of outstanding rent. A trial was ordered to determine the arrears, following which the Tenant would pay the amount owing and the renewal rent would be determined.

The Landlord appealed and the Court of Appeal agreed that the clause was not void for uncertainty because the formula for establishing the renewal rental rate was described as "the then current rate," which was the functional equivalent of saying the "then market value" or the "then prevailing market rate". The Court allowed the appeal on the basis that the Tenant could show that it satisfied the pre-conditions to exercise, which included complying with its rent obligations. Notwithstanding that the Tenant disputed the amount owing, as long as the Landlord had made a demand for the funds pursuant to the terms of the Lease, the Tenant was required to pay in order to avoid default and loss of its renewal right. Furthermore, the time for exercising had now expired and the Tenant was given 30 days to vacate the Premises.

Understandably, non-default under the Lease is a very common pre-condition to exercise a renewal right. Landlords are not often keen to extend a tenancy with a defaulting party. Tenants should try to limit such pre-conditions to defaults in existence at the time of exercise so that past defaults don't result in losing the right. In addition, tenants should try to add notice and cure periods to preconditions, such that a tenant would only lose its option if it was then in default and it failed to cure the default after receiving notice from the landlord. Though a landlord may not agree to such language, the Tenant may have retained its right if the Lease provided that any bona fide dispute that the parties were working to resolve would not constitute a default under the Lease.

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