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COMMERCIAL LEASING: How the Court Applies Equitable Remedies

There have been some interesting developments in commercial leasing law over the last year, among which can be seen important trends in commercial leasing jurisprudence.

Equitable Remedies

It has been found in the past year that the courts will make every effort to use equitable remedies in circumstances where strict contractual interpretation leads to absurd commercial results or where there has been unfair conduct between the parties. However, in some cases the results have been out of the ordinary. It would be seen that while leasing agreements have gotten longer and longer by elaborating on all of the various foreseeable and unforeseeable circumstances that might arise over the period of a long term relationship. In order to bring about a more equitable result, the courts are trying to discern from the document some more general principles by scrutinizing the contract document in its entirety.  It is also seen that, in the absence of language that protects a party’s specific interests, the courts are using equitable remedies, sometimes with a result that is different from what the parties wished for. This is evident in the case outlined below.

Calloway Reit (Westgate) Inc. v. Michaels of Canada, ULC, (“Calloway”)

In this case, the Ontario Court of Appeal invoked the doctrine of latent ambiguity and waiver to resolve, in order to address internal inconsistencies within the Lease. On December 19, 2005, the parties entered into a shopping centre lease. Then, on July 5, 2007, Michaels of Canada, ULC took possession of the premises and opened for business, but refused to pay rent. Following the tenant’s continuous refusal to pay rent, the landlord, Calloway Reit (Westgate) Inc., resorted to court action on November 21, 2008. A condition of the lease, written after the tenant’s standard, was that rent accrued since the rental commencement date could not be collected until the Landlord fulfilled its construction obligations. The tenant argued that this meant that until all buildings in the shopping centre were constructed, no rent was due. Therefore, since the Shopping Centre was only 90% complete by the beginning of November 2008, there was no question regarding the tenant’s payment of rent.

The court first made a factual analysis to determine the “general context that gave birth to the document”, when the application judge decided that the interpretation argued by the tenant is not what good business sense dictates for several reasons. Firstly, it was very much within the tenant’s knowledge that the shopping centre was proceeding as a phased development project. Besides, the condition of the Tenant’s obligation to pay rent in the co-tenancy clause in the lease only required Wal-Mart to be opened for business, which it was. Secondly, the same provisions were found in nine previous leases negotiated by the Tenant, in respect of phased development projects, but in each of those premises the Tenant had commenced paying rent well before all of the buildings in those respective shopping centres were fully built out. Thirdly, the judge found internal inconsistencies within the Lease, which supported the Landlord’s contention that the shopping centre need not be fully constructed before the Tenant start paying rent. After pointing all of this out, the application judge then correctly highlighted the absurd practical effect of the Tenant’s position that, if allowed, would permit it to “occupy the Premises, rent-free, until the Shopping Centre is fully completed, despite itself being fully operational . . . “.

Support from the Court of Appeal

Accepting the application judge’s observations on internal inconsistencies within the Lease, the Court of Appeal used the doctrine of “latent ambiguity” to put the matter to an end. Among other things, the doctrine of “latent ambiguity” says that an interpretation of an agreement must accord with good business sense, and at the same time, avoid commercial absurdity. It is regarded as latent because the ambiguity is usually not obvious on the face of the document and only arises when evolving factual circumstances come into conflict with each other. After reaching the conclusion that it was not commercially reasonable to interpret the completion date and rental commencement date in such a way that would allow the Tenant to take possession, carry on business, and avail itself of the common elements and other services of the Landlord while not paying rent, the Court of Appeal applied the doctrine of “latent ambiguity”. The Court of Appeal went on to observe that the Tenant’s conduct in the circumstances effectively waived strict compliance by the Landlord with its construction obligations as a condition to mark the beginning of the Tenant’s rent obligations.

In view of the foregoing, it is wise to think of waiver and latent ambiguity tools when the contract seems suspicious.

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 in Toronto, Ontario today.