Canada: Terminating An Offer To Lease In Good Faith: It Can Still Happen

A recent Quebec Superior Court decision appears to have softened the court's tendency of considering tenants' abrupt terminations of offers to lease as acts of bad faith.

Background

In Lexi-Tech International Inc. (the Tenant) v Complexe LL Phase I, S.E.C. (the Landlord),¹ the Landlord and Tenant signed an offer to lease on November 13, 2008, which provided that the parties were to sign the definitive lease within 30 days. The offer further provided that should the Landlord and Tenant fail to sign the lease within such delay, the offer would be null and void and the deposit ($75,000) would be returned the Tenant.

The offer indicated that the Landlord was not obligated to commence any leasehold improvement work in the premises and the Tenant was not permitted to occupy the premises until a binding, non-conditional lease was signed between the parties. It should be noted the premises were situated in a new building that required substantial work in order to accommodate the Tenant. Also relevant is the Tenant's lease at its then-current premises expired March 31, 2009, so there was a legitimate need for the Tenant to have the new premises ready by April 1, 2009.

Despite the fact the offer to lease included the usual provision that the Landlord's lease was attached to the offer and would be subject to reasonable modifications as required by the Landlord and Tenant's lawyers (the lease was not attached to the offer), the Landlord only provided a first draft of the lease to the Tenant on December 5, 2008. Realizing they could not meet the 30 day delay set forth in the offer for the conclusion of the lease, the parties agreed to extend the delay to January 8, 2009.

After receiving the lease and despite having scheduled a meeting, when the Tenant attempted to meet with the Landlord in Montreal (the Tenant was based in Ottawa), he was told upon his arrival in Montreal that the person with whom he was to meet was not available. On December 30, 2008, the Tenant provided its comments to the Landlord on the draft lease. Again, realizing that the delay of January 8, 2009, could not be met, the parties further extended the delay to finalize the lease to January 20, 2009.

It was only at 9 p.m. on January 20 that the Tenant received the Landlord's responses to the Tenant's comments on the lease, which were sent on December 30. The Landlord also requested an extension of the January 20 delay to January 30.

At this point, the Tenant decided it was unlikely the lease would be finalized by January 30 and it would be impossible to complete the work in the premises by March 31, 2009. Based on the foregoing, the Tenant elected not to extend the delay and terminated the offer to lease.

The Tenant requested the return of its deposit from the Landlord and proceeded to negotiate with its then-current landlord for the lease of new premises in another building, despite the fact the proposed location with the Landlord was advantageous to the Tenant. The Tenant succeeded in finalizing the lease with its current landlord and moved into the new premises on April 3, 2009.

Court: tenant acted in good faith

Despite the Landlord's assertions that the negotiations with the Tenant were always cordial and the Tenant never indicated it would refuse to extend the delay to finalize the lease, the court found the Tenant acted in good faith in terminating the offer to lease, particularly in light of the urgency in having to move from its current premises on March 31, 2009. The judge was convinced the Tenant truly desired to move into the proposed premises with the Landlord, but that the Landlord's lack of responsiveness and the unlikelihood that the required work would be completed in time justified the termination of the offer to lease.

Despite the fact the Landlord brought into evidence that it had spent approximately $23,000 related to the required work and that the premises would be ready for March 1, 2009, given that the total budget was $500,000, the court was not convinced the new premises would be ready by March 31, 2009. The court also did not give much importance to the Tenant's cancellation of a meeting with the Landlord on January 16, 2009.

While the Tenant's reasons for terminating the lease are understandable, the court's decision is somewhat surprising given the Tenant terminated the lease without any warning. This is usually viewed negatively by the courts, as a sign of bad faith. Moreover, the court ignored the Landlord's assertions that it could complete the required work by March 31.

Among the lessons learned from this case is that the Landlord's tardiness in providing not only the initial lease but also a new draft after receiving the Tenant's comments left a lasting impression on the court.

Footnote

1 Lexi-Tech International Inc. v Complexe LL Phase I, S.E.C., C.S., Montréal, J.E. 2013-2063.

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