Each year we provide a summary and insight on key cases that apply to commercial landlords and tenants. We hope you enjoyed Part 1 in our Summer 2019 newsletter.
Formation of Contract & Fundamental Breach
In Northridge Property Management Inc. v. Champion Products Corp., 2017 ONCA 249, the Court considered two issues relating to agreements to lease: (1) when an agreement to lease is binding, as opposed to an unenforceable "agreement to agree" and (2) when the threshold of a fundamental breach by the landlord is achieved.
Before discussing the decision in Northridge, let us go back to basics. The case law is well-settled – there are certain essential terms that must be agreed upon by the parties in order for a court to find there is a binding and enforceable lease agreement in place. The essential elements of a lease (as set out by Williams & Rhodes and approved in many cases) are: "the parties, a description of the premises to be demised, the commencement date and duration of the term, the rent, if any, and all material terms of the contract not incident to the relation of landlord and tenant." With respect to fundamental breach, contract law recognizes that when there has been a fundamental breach, the wronged party may terminate the contract and claim damages. Historically, fundamental breach was difficult to prove in the commercial leasing context, but since the late 1980s there have been a handful of cases where tenants argued successfully that the landlord's breach was a fundamental breach and the tenants were entitled to treat the lease as at an end. In Northridge, the landlord and tenant entered into an offer to lease for the tenant to operate a party supply business and a sanitation supply business on the premises. The offer outlined a list of renovations that the landlord was required to complete before or within the first month of the tenant's possession of the premises. The landlord did not complete the renovations and the tenant subsequently abandoned the premises on the basis that the premises was zoned for warehouse use and not retail (and therefore, unsuitable for the tenant's business). The landlord brought an action against the tenant for damages for breach of lease. The tenant argued there was no binding lease between the landlord and tenant and that the offer was a mere agreement to agree. In the alternative, the tenant argued that the landlord had fundamentally breached the lease. The trial judge held that the offer to lease was binding because both the landlord and the tenant had carefully discussed the terms of the offer. In affirming the trial judge's decision, the Ontario Court of Appeal also noted that the parties were sophisticated corporate entities that negotiated the terms of the offer, committed those terms to writing, and signed a document reflecting those terms. In addition, the Court found that the language and dispute resolution mechanisms contained in the offer represented the characteristics and fulfilled all the requirements of a valid lease. Northridge serves as a reminder for both landlords and tenants that offers to lease can create valid and enforceable obligations and therefore it is imperative for parties to ensure that their interests are properly reflected in such offers. With respect to the fundamental breach issue, Northridge demonstrates that fundamental breach is a high standard to meet. The trial judge declined to find that the landlord had fundamentally breached the offer to lease and the Court of Appeal agreed. In regards to the zoning
argument, the court found the zoning was suitable as the tenant's business was chiefly a warehouse and the first time the zoning issue was raised was in defense to this action. As for the outstanding renovation work, the judge found the deficiencies could be remedied for approximately $25,000, which was relatively insignificant in relation to the value of the lease. The Court noted that the landlord's failure to perform the repairs did not deprive the tenant of essentially the whole benefit of the agreement to lease.
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