A common feature of many commercial lease agreements is an option to renew the lease for an additional term, provided that the tenant has not breached any covenants of the lease agreement.
In British Columbia, it has long been established that a tenant will not be granted relief from forfeiture by the court where a landlord relies on the "no prior default" stipulation in a renewal option clause, where the tenant has been in breach. In Clark Auto Body Ltd. v. Integra Custom Collision Ltd., the BC Court of Appeal concluded:
"there is no compulsion on the tenant to exercise the renewal option, but if it does so, the tenant must comply with the conditions precedent. If the tenant fails to comply, it does not suffer a penalty or forfeiture of an existing tenancy. Equity will not intervene."1
This line of reasoning has since been followed in numerous decisions in British Columbia where the courts have upheld the conditions precedent of a renewal option.2 However, a recent decision out of Ontario goes in a different direction.
In H.A.S Novelties Limited v. 1508269 Ontario Limited, a tenant's prior breach of a commercial lease agreement was determined not to prevent them from exercising a lease renewal option.3
The applicant tenant and respondent landlord entered into a Rent Relief Agreement at the outsight of the Covid-19 pandemic whereby the tenant was only required to pay 1/3 of the rent for the duration of Ontario's COVID-19 lockdown. The remaining 2/3 of the rent would be paid over six months after the conclusion of the lockdown.
Shortly after the Rent Relief Agreement was signed, the tenant requested the landlord to apply for the Canada Emergency Commercial Rent Assistance (CECRA) program. Under CECRA, eligible landlords and tenants could enter into an agreement whereby tenants pay 25% of the rent, the government would pay 50% of the rent, and the remaining 25% is absorbed by the landlord. The landlord ultimately decided not to apply for CECRA, but a lapse in communication resulted in the tenant being unaware of the landlord's decision.
The miscommunication allegedly led to the tenant not paying 1/3 of the rent pursuant to the Rent Relief Agreement, hence, breaching the lease agreement.
Overriding the Express Terms of the Lease Agreement
The lease contained the following clause:
"Provided the Tenant is not at any time in default of any covenants within the lease, the Tenant shall be entitled to renew this lease for 1 additional term(s) of 60 months (each) on written notice to the Landlord given not less than 6 months [12 months in the case of unit 3] prior to the expiry of the current term at a rental rate to be negotiated."4 [emphasis added]
Despite having express language stating the conditions precedent (i.e. "provided the Tenant is not at any time in default of any covenants within the lease"), the court allowed the tenant to exercise the renewal option. The court relied on the doctrine of spent breach to override the lease renewal terms, stating:
"Where there has been a historical breach by a tenant, which has been remedied, the tenant is entitled to exercise the renewal right under the agreement. The breach in such a case is a "spent breach". Only where the breach is subsisting at the time of the exercise of the renewal is the tenant precluded from exercising the option."5
The decision in H.A.S. Novelties Limited stands in stark contrast to that of the BC Court of Appeal in Clark Auto Body. In Clark Auto Body, the court noted that a tenant may be allowed to cure its default and be relieved from forfeiture to allow it to retain the balance of the lease, however, the same relief is not granted to exercise a renewal option.6 It appears that H.A.S Novelties Limited has now blurred the lines between the former and latter circumstances.
Hard cases make bad law
In the legal world, there is a saying that "hardship cases make bad law". H.A.S. Novelties Limited was decided in the backdrop of the Covid-19 pandemic. The court commented "we are in extraordinary times which call for extraordinary measures."7 In reaching its conclusion, the court appears to have been influenced in its legal reasoning by this circumstance.
Would the Ontario court or a BC court have granted the same relief in the absence of the extraordinary circumstance of the Covid-19 pandemic? Hard to say. Looking ahead we will wait to see how the courts in British Columbia react to the Ontario case.
Landlords can attempt to improve their position by more emphatic or robust language in the renewal clause.8
8. How clear would you have to be? It could seem overly strident, but what if the clause said "for this purpose, the Tenant agrees that the doctrine of spent breach will not apply". Or "is not in default and has never been in default, whether or not subsequently cured, remedied or considered spent".
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