Courts are adamant that deadlines for the renewal of commercial leases must be strictly met. The recent decision of the Court of Appeal for Ontario in Subway Franchise Restaurants of Canada Ltd. v. BMO Life Assurance Company, 2021 ONCA 349 (CanLII) confirms that these deadlines are generally set in stone, even if the landlord is uncooperative with the renewing tenant.
Here's the case in a nutshell - As the tenant, Subway was required to renew its commercial lease with its landlord nine to 12 months before the expiration of the term. BMO, who was not the original landlord, acquired the building where Subway was leasing. When BMO assumed the lease, Subway executed an estoppel certificate stating that the lease expired on August 23, 2018, and as a result, Subway would be required to exercise the option to renew between August 24, 2017, and November 23, 2017. Subway's central database reflected an incorrect expiry date of May 31, 2018. Subway wrote to BMO to confirm the expiry date on multiple occasions and, not helping matters, BMO left those confirmation letters unanswered. Subway missed its window to renew and BMO did not accept the renewal.
Subway commenced an application for relief from forfeiture of its lease, arguing that BMO failed to act in good faith under the lease by ignoring its requests for confirmation of the expiration date.
In its decision, the Court of Appeal considered the Supreme Court of Canada decision in C.M. Callow Inc. v. Zollinger, 2020 SCC 45 (CanLII). Here, the Court held that no contractual right can be exercised dishonestly. The case applies to contracts where one party lies or knowingly misleads another. Where a party has made false misrepresentations, there is a duty to correct a misapprehension. But a contracting party is not required to correct a misapprehension to which it has not contributed.
In the Subway decision, the Court found that BMO did not attempt to knowingly mislead Subway with its silence. BMO did not outwardly or intentionally obscure the lease terms from Subway and had provided transparency in regard to its plan to redevelop the property. BMO did not create a false impression regarding the renewal of the lease. Even though BMO did not respond to Subway's inquiries, its failure to respond did not amount to the kind of bad faith that is discussed in Callow. As a result, Subway was denied relief from forfeiture.
Critical Factors to Consider in Commercial Lease Renewals
To address the challenges associated with lease renewals and to avoid messy disputes, here are some key factors to bear in mind:
- Involve a lawyer before entering into lease renewal negotiations with a tenant to ensure that any correspondence and new or revised clauses are compliant with relevant legislation and case law.
- Provide appropriate notice to a tenant about when the lease is due to expire and when the renewal period will begin and end.
- Consider the current state of the rental market in your area when a tenant is up for renewal. Are you motivated to keep a good tenant in a bad market? Is there room for a rent increase and what ceiling does the lease agreement provide for that? Do you need an inspection of the property to determine its condition and use that as leverage in negotiations?
- Show transparency in your intentions with respect to long-term leases and renewals. Don't get stuck with a bad faith claim.
- Again, involve a commercial lawyer in your lease negotiations so you understand your obligations and you can avoid any expensive pitfalls.
- Evaluate your business needs, your location and your budget so you know where you stand on costs and the length of time to which you want to commit.
- Check market rents in your neighbourhood for comparison and negotiation.
- Pay particular attention to lease expiry, renewal and termination provisions and consider how you can protect yourself in the event of changing circumstances.
The decision made in Subway confirmed that the expansive duty of good faith set out in Calloway has some limitations. In order to breach a duty of good faith in a contract, there must be an intention to knowingly mislead. It is not enough that one party remains silent and fails to correct a poor assumption. So when you are renewing a commercial lease, make sure that you independently check your facts and your deadlines and protect yourself from a raw deal.
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.