COMMERCIAL LEASING: Fundamental Breach and Exclusion Clauses

The second instalment in our review of the emerging trends in commercial lease jurisprudence is evident in the lawsuit relating to HREIT Holdings 45 Corp. v. R.A.S. Food Services (Kenora) Inc., where the court held that the new Landlord had lost its right to collect a higher amount of rent due to two reasons: 1) It’s conduct ; and/or 2) It was estopped on the basis of equity.

While operating a restaurant in the complex in 1999, the tenant got the previous landlord to agree to waive the increase in basic rent for years 6-10 of the lease. The leased premises changed hands in 2005, and the purchaser became the landlord. After the purchase, the tenant continued to pay the same annual basic rent, but in October 2006, the tenant was advised by the new landlord that the rent it was paying was lower than the amount required by the lease, consequently the new landlord sought $35,139.00 in arrears.

To determine if the new landlord either waived its right to, or was estopped from, collecting a higher rent, the court examined the conduct of the parties. The court specially noted that during negotiations for the purchase of the complex, rent was not discussed and no estoppel certificates were provided. However, evidence amply showed that the new landlord was aware of the current rent being paid at the time of sale and that it was not increased for some time. In fact, in the time between November 1, 2005 and October 2006, the new landlord did nothing to notify the tenant that it was in default, which is a fact that came under the court’s observation.

In his argument, the new landlord said that Article 18 of the lease requires any waiver to be in writing. The court ignored that and instead relied on Med-Chem Health Care Inc. (Re), and accepted that a course of conduct can determine whether there is any intention by the landlord to not rely on the strict terms of the lease with respect to the amount of the rent. Interestingly, the court acknowledged that the roots of each doctrine were different; waiver has been developed at common law, whereas estoppel is a principle of equity.

Nonetheless, the court agreed with Professor John Swan’s opinion that “the terms “waiver” and “estoppel”…are used interchangeably”, that “[w]aiver is probably the broadest term, with the varieties of estoppel being used in more specialized situations. Nothing turns on the semantic distinctions, with the same results being reached whatever term is used.” Elaborating on, it can be said that both waiver and estoppel could arise out of the conduct of the parties and it appeared that the courts would resort to either to reach a fair result in the circumstances since “the courts of law and equity…merged long ago” and distinction between their origins is “no longer very relevant”.

Fundamental Breach and Exclusion Clauses

According to the doctrine of fundamental breach, an innocent party can stop performing its obligations under a contract if the other party has committed a breach that is so “fundamental” that it denies the innocent party of “substantially the whole” of the contract’s benefit. Despite a clear and express “exclusion clause” in the contract limiting liability, fundamental breach allows a court to refuse to enforce this clause and allows the innocent party to sue for damages that would have otherwise been excluded.

A section of opinion holds that the Supreme Court’s recent decision in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways) has withdrawn the doctrine of fundamental breach in Canadian contract law relating to construction procurement cases. It is undecided what impact this will have on commercial leasing contracts. In the background of the Tercon decision, the following commercial leasing lawsuit is reviewed.

DMX Plastics Ltd. v. Misco Holdings Inc.

A multi-building commercial property was leased by the tenant, DMX Plastics Ltd., in which, the landlord, Misco Holdings Inc., promised for quiet enjoyment, repair or replacement as necessary of levelers and roof , and permitted that the tenant had the opportunity to cure the landlord’s default and deduct such costs from rent.

In 2003, the east building roof  began to leak and over the next several years, despite numerous letters and expert estimates regarding the cost of replacement, the landlord only did temporary patchwork repairs. The leaks increasingly became worse to the point that it appeared to be raining inside the building. This introduced a significant electrical hazard to the tenant and its employees because its operations included the use of high-voltage equipment. There was an intervention by the Ministry of Labour, and in consequence, work was stopped by order. The landlord suggested that the tenant move to the west building; however, the tenant continued to pay rent for both buildings and was not reimbursed for its moving costs, which the landlord estimated at over $100,000.00. Having no other recourse, the tenant began to deduct from rent the amount it had spent due to the leaks.

The bailiff was called by the landlord to deal with the tenant’s non-payment of rent. The tenant was ordered to pay rent into court when $256,087.00 was deposited into the tenant’s solicitor’s trust account. The court decided that the landlord’s failure to respond to the problem of leaks over the course of five years gave the tenant no other option but to move out. As well, the court decided the costs associated with such a move were attributable to the landlord. In the opinion of the court, the on-going leaks caused a breach of the covenant for quiet enjoyment contained in the lease as it caused serious and substantial interference with the tenant’s use and enjoyment of the premises and had a significant impact on the tenant’s ability to carry on its business. Although a breach like that was not regarded as a fundamental breach, the tenant was nonetheless entitled to damages and a reduction of rent, which was fixed at fifty percent for the period of time following when the conditions in the premises were described as “raining indoors”. The costs for hiring expert roof inspectors were also granted by the court.

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