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Real Estate

COMMERCIAL LEASING: Past, Precedent, and Future

In the third part of our review of trends in Canadian commercial law, several interesting cases are discussed.

Canadian Western Bank v. 702348 Alberta Ltd.

This case highlights the aspects examined by the court when parties to a lease fail to meet their fundamental obligations. Two organizations, Telecommunications Research Laboratories (“TRL“) and Alberta Treasury Branch (“ATB”) wanted to terminate their commercial leases with Guild Developments Inc. (“GD”). The lease stipulated that TRL would take possession of the premises no later than April 2008, to be used both as its head office and as a research laboratory. TRL was supposed to get the premises on the Commencement Date subject to reasonable adjustments to the date in accordance with the lease. There was much delay and in September 2008, GD informed TRL that the premises would finally be delivered in December 2008. Meanwhile, unbeknownst to TRL, a builders’ lien was registered against the premises and all construction came to a standstill. TRL did not get what it leased and thus, wanted to terminate its lease with GD.

An offer to lease formed the basis of the relationship between ATB and GD. GD was supposed to deliver possession by August 1, 2008. If not, then the fixturing period and Commencement Date would be pushed back for the period of time equal to the delay. GD failed to meet the completion deadline and eventually pushed the date back to February, 2009. ATB also requested that the parking lot and exterior roadways be completed by November and that too GD did not comply. This caused ATB to want to cancel their lease on the basis of fundamental breach. ATB asked for written consent to terminate its lease when a Receiver was appointed for all of GD’s assets in November, 2008.

To analyse the matter, the court selected five factors developed in Spirent Communications of Ottawa Ltd. v. Quake Technologies (Canada) Inc. and ruled that GD’s conduct amounted to a fundamental breach of the contract. The five factors referred to above are: (i) the ratio of the party’s obligations not performed to that party’s obligations as a whole; (ii) the seriousness of the breach to the innocent party; (iii) the likelihood of repetition of such breach; (iv) the seriousness of the consequences of the breach; and (v) the relationship of the party of the obligation performed to the whole obligation. It was observed by the court that with regard to factors 1 and 5, GD failed to meet its obligation to complete the project by April 2008 and August 2008 for TRL and ATB, respectively. Other agreements to make up for the delay were vitiated by the fact that construction had ceased entirely due to the construction liens. With regard to factors 2 and 4, the court noted that TRL’s premises did not have suitable facilities through which to conduct its research while ATB’s staff was dispersed in various locations throughout the city. In respect to factor 3, the court was satisfied that a breach is likely to occur because the project would not be completed within a reasonable time.

Ontario Inc v. Extreme Properties Inc.

This case is an illustration of a landlord too hasty in reaching a conclusion and fundamentally breaching the lease by terminating it before a default is established.

The sub-tenant vacated the premises without notice to either the sub-landlord or the head landlord on February 27, 2006, but still paid February’s rent fully. Changing the locks at once, the head landlord entered the premises and served a notice on the sub-landlord dated February 28, 2006, which was received by the sub-tenant on March 2, 2006. Although the sub-landlord was ready to pay the rent on March 1, 2006, it could not be done due to repossession of the premises by the head landlord. A claim in damages against both the sub-tenant and the sub-landlord was then filed by the head landlord.

The trial court held that the sub-tenant’s actions did not amount to a breach of its sublease or the head lease. The conclusion was that the head landlord acted too hastily and fundamentally breached the contract by terminating the lease and that the sub-landlord was thus entitled to treat the lease at an end. The Ontario Court of Appeal agreed with the decision of the lower court and pointed out that the outcome could have been different if the head landlord waited until March 1, 2006. If no rent was paid by then, the head landlord could have applied for remedies and possessed the premises without breaching the terms of the lease. But by doing so on February 28, 2006, the head landlord fundamentally breached the lease.

Estoppel Certificates

Estoppel certificates are a legal concept prohibiting a party from relying too much on its legal rights. Following Lord Denning‘s endorsement of this doctrine in 1982, a plethora of different estoppels have emerged, such as estoppel by representation, estoppel by conduct, and estoppel by acquiescence. In leases, an estoppel certificate is equivalent to estoppel by representation. It is more than a mere promise to do something in the future. It has to be a certain, precise, and unambiguous promise or representation. The party invoking estoppel should ensure that the statement upon which it is doing so is true. Finally, a plea of mutual mistake cannot be the basis of estoppel. An example of why a party should not rely solely on estoppel certificates without first examining the lease documents in its possession follows.

Vancouver City Savings Credit Union v. New Town Investments Inc.

In this case, the tenant had a term of ten years in the original lease from January 1, 1993 to December 31, 2002, which also contained three options to renew for periods of five years each. In November 2008, a dispute began with regard to renewal options. The landlord contended that the first renewal period was exercised in September 2002, and provided evidence in the form of an estoppel certificate signed by the tenant in which it stated that the “current term of the lease is the First Renewal Term”. Due to this, the landlord argued that the tenant was presently in the first renewal period and seeking to exercise the second renewal option. The landlord also provided as evidence the tenant’s notice on or about April 2007, which stated that it intended to exercise its “Second Renewal Option”.

Scrutinizing the intervening 2002 Agreement, the court stated that the tenant was exercising the first renewal option because the language in the 2002 Agreement was conclusive. In that agreement, clearly an extension, and not a renewal, of the term was concluded. Therefore, the tenant’s April 2007 notice was an exercise of its first renewal option. Disapproving the landlord’s reliance on the tenant’s estoppel certificate and the letters exchanged, the court ruled that subsequent conduct cannot be used to interpret an agreement when the words of the written agreement are clear and unambiguous. The court also ruled that the estoppel certificate did not prevent the tenant from asserting that it was exercising its first renewal option by allowing the landlord to rely on misstatements contained therein. The court stated that whether or not the 2002 Agreement was an extension or renewal could be verified from the lease documents in the landlord’s possession and there should be no confusion about it. The court also stated that estoppel certificates do not alter the actual terms of the lease.

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.