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COMMERCIAL LEASING: Careful Consideration of Clauses

Renewals and Extensions are quite important in C. L., as can be seen from the case histories below.

Saskatchewan Ltd. v. Nelson

In this case, a lease was taken by the former landlord and the tenant for a term commencing in March 2001, and ending February 2006.

The lease had an option to renew for one further period of five years on the same terms and conditions as existing with the exception of annual rent, which was to be agreed between the parties. In 2005, the tenant faced trouble in paying the rent, so a reduced rent was negotiated between the parties. Nothing was done by the tenant to exercise its option to renew and the landlord acted on the assumption that the lease was month-to-month with the tenant continuing to pay rent at the reduced rate. In 2007, a new landlord assumed the lease, received an offer to rent the entire space in September 2008, and gave notice to the tenant that it wanted the premises to be vacated by the end of October 2008 if no market rent for the space is paid. The tenant argued that it had exercised its right to renew the lease to February 2010 and hence the landlord could not ask the space to be vacated by the end of October.

Very little evidence was produced by the tenant to the court to support its’ position that the term had been renewed. The only evidence presented before the court was that the tenant continued to pay rent at the reduced rate after February 2006, and that sometimes the rent was late. It was further pointed out by the court that while the tenant was given the option to renew, the option was not automatic, the tenant had to first comply with the conditions contained in the renewal and then it could exercise the option. Considering that the tenant had the most to lose, the court asked the tenant to demonstrate that the landlord had agreed to the renewal. Citing Laing J. in Pleasant Hill Plaza Inc. v. Sheppard the court stated that “the test of agreement for legal purposes is whether parties have indicated to the outside world, in the form of the objective reasonable bystander, their intention to contract and the terms of such contract”. It means that the tenant had the option to renew, but it also had the obligation to take steps to verify the renewal, which it failed to do.  In the opinion of the court, there was also no consensus ad idem on the material term, that is, the amount of rent. Furthermore, the arbitration clause was unclear as it did not provide for arbitration or some formula for calculating the rent if there was no agreement. Strictly speaking, the tenants have been in a position of overstaying since February 2006, and the tenancy has continued on a month-to-month basis thereafter. The landlord is justifiably entitled to possession.

Entire Agreement Clauses

Entire agreement clauses are exemption clauses and are usually interpreted in a strict manner at law against the interest of the drafter. In view of this, landlords should be extra-careful while drafting clauses of this nature.

It would also be prudent not to assume that collateral agreements cannot form part of or be an amendment to the lease because that would depend entirely on the wording of the provision.

Punto e Pasta Manufacturing Inc. v. Henderson Development (Canada ) Ltd.

In this case, there was a mixed residential and retail complex on Vancouver’s east side, which the landlord developed, owned, and operated. A lease was made in 2000 by the tenant with the landlord to operate a restaurant based on representations of the landlord regarding other tenants that would be occupying the complex. However, the other tenants described by the landlord, including Benetton, a liquor store, a brew pub, and a food market, never became tenants. In fact, the landlord’s representatives knew at the time the representations were made that the landlord was telling lies. First,  the business entity with which it had entered a lease would not operate a Benetton store, so Benetton could never become a tenant of the complex. Second, there were no committed tenants for the food market. Opening the business in May 2000, the tenant had to close in November 2001 due to poor business. Thereafter, the tenant sued the landlord alleging that the representations made to it during the negotiations were negligent, at best, or fraudulent, at worst. In response, the landlord counterclaimed for non-payment of rent. The court examined closely the landlord’s plea that the entire agreement clause in the offer to lease, as well as the lease, prevented the tenant’s claim of negligent misrepresentation to be scrutinized by the court. The court found that the entire agreement clause in the offer to lease provided that:

1) “…there are no covenants, representations, agreements, warranties or conditions in any way relating to the subject matter of this Offer to Lease, whether express or implied, collateral or otherwise, either oral or written, except for those set forth in this Offer to Lease”; and

2)  “…all warranties, representations, covenants, promises, agreements, conditions and understandings between the parties concerning the Premises and the Centre…were set out in the Lease”.

On comparing the entire agreement clause in the offer to lease and the lease, the court found that there was no doubt that both parties intended to govern their relationship themselves. But, the entire agreement clause did not refer to any representations relating to its subject matter, which according to the court were the premises of the case. The court concluded that the representations made by the landlord’s representative did not relate to the premises, they related to the identity of other tenants and the status of the landlord’s plans to implement the food market.  Due to this reason, the court applied the doctrine of contra proferentem and found that the entire agreement clause in the offer to lease and the lease did not exempt the landlord from claims based on negligent misrepresentation concerning matters that do not relate to the physical plant of the centre, including the premises.

The court further stressed the principle that entire agreement clauses will only be enforced against a party who understood (or ought to have understood) the effect of the clause and whose attention was specifically drawn to the provision. Speaking generally, the clause is more appropriate to be enforced against a sophisticated party than against an unsophisticated one, and entire agreement clauses which are buried in fine print are not to be enforced.

Automaster Automotive Services Ltd. v. Kenco Enterprises Ltd.

In this case, although the matter was an option to purchase, the court examined the scope of the “entire contract” clause in that context. The tenant applied for an order of specific performance of an option agreement to purchase a property it had been renting as a location for a transmission repair shop. In response, the landlord argued that the lease gave only the tenant company the option to purchase, and not some other company related to the tenant company. The lease in question was signed by the principal of the landlord company and the chief of the tenant company on behalf of itself and the company related therewith. To formalize the arrangement, the tenant’s related company then signed a letter agreement with the landlord purporting to purchase the property. Setting out the terms of the lease, the letter agreement was signed once more by the principals of landlord and the tenant. Opposing, the landlord argued that the “entire contract” clause prevented the letter agreement from giving effect to the option to purchase, and more generally, because it was not signed by the landlord but it’s principal. The court disagreed with the latter argument stating that although landlord was not named, the documents identified the property, which was known to be owned by the landlord. Moreover, it was signed by none other than the landlord’s principal, who the parties knew to be the president of the landlord’s organization. As its principal, therefore, he had no authority to sign in his personal capacity, and hence, must have signed on behalf of the corporate landlord. As regards to the landlord’s “entire contract” argument, the court conceded the point that the tenant’s related company was not a party to the lease. At the same time, the court pointed out that the “entire contract” clause, as written, did not exclude the letter agreement. Referring to something else, the clause stated that no agreement collateral to the lease would be binding “unless it is in writing and signed by the lessor”. In view of the above, the letter agreement has created a binding contract between the landlord and the tenant’s related company.

Don’t make a move before fully understanding your rights and obligations. For more information and assistance regarding commercial leasing or Real Estate in Ontario contact Levy Zavet PC (Levy Zavet) in Toronto, Ontario today.