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Landlord and Tenant (Commercial)

(for Residential L&T, see 'Legal Guides' in the header)

1. General
2. Interpretation
3. Relief from Forfeiture
4. Insurance

1. General

Landlord and Tenant (L&T) law has been of long-standing in the British common law system. There is today a Commercial Tenancies Act which embodies the residue of this, but for the most part the field has merged with modern contract law, although heavily influenced by the practices of the real estate leasing trade.

2. Interpretation

. 2249778 Ontario Inc. v Smith (Fratburger)

In 2249778 Ontario Inc. v Smith (Fratburger) (Ont CA, 2014) the Court of Appeal, without comment, applied principles of contractual interpretation to the interpretation of a commercial lease, thus confirming that it was treating real estate leases as a form of contract. This is a variation from traditional law which viewed contracts and real estate leases as qualitatively distinct types of legal obligations [paras 16-18]. The Court also restated principles of interpretation applicable to commercial contracts, with particular attention to the role of 'surrounding circumstances' in interpretation (aka parole evidence), and the principle of contra proferentum:
[19] As stated in Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205 (CanLII), 85 O.R. (3d) 254 (C.A.), at para. 24, a commercial contract is to be interpreted:
(a) as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective;

(b) by determining the intention of the parties in accordance with the language they have used in the written document and based upon the “cardinal presumption” that they have intended what they have said;

(c) with regard to objective evidence of the factual matrix underlying the negotiation of the contract, but without reference to the subjective intention of the parties; and (to the extent there is any ambiguity in the contract),

(d) in a fashion that accords with sound commercial principles and good business sense, and that avoids a commercial absurdity.
[20] In Sattva, the Supreme Court addressed the issue of surrounding circumstances. Rothstein J. wrote, at para. 57:
While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement. The goal of examining such evidence is to deepen a decision-maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract. The interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract. While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement. [Citations omitted.]
[21] Evidence of surrounding circumstances should consist only of objective evidence of the background facts at the time of execution of the contract: knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting: Sattva, at para. 58.

[22] Finally, the rule of contra proferentum applies in cases where the contractual terms are ambiguous: Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888, at p. 900 and Manulife Bank of Canada v. Conlin, 1996 CanLII 182 (SCC), [1996] 3 S.C.R. 415, at pp. 425-426.

3. Relief from Forfeiture

. Mapleview-Veterans Drive Investments Inc. v. Papa Kerollus VI Inc. (Mr. Sub)

In Mapleview-Veterans Drive Investments Inc. v. Papa Kerollus VI Inc. (Mr. Sub) (Ont CA, 2016) the court considered a lease renewal, the landlord arguing that the tenant was in breach of an option-preconditioning term requiring it not to be in arrears. The issue was whether the tenant could avail itself of the court's relief from foreiture discretion (it couldn't):
[53] There appear to be conflicting authorities on whether a court can grant equitable relief from the failure to comply with a covenant that is a condition precedent to the renewal of a lease. In Re Pacella and Giuliana (1977), 1977 CanLII 1413 (ON CA), 16 O.R. (2d) 6, at p. 8, this Court concluded that the court “has power to relieve against forfeiture, but no power to excuse performance of conditions precedent.” While Re Pacella was a mortgage renewal case, the Court adopted the following statement from Sparkhall v. Watson, [1954] 2 D.L.R. 22 (Ont. H.C.), at pp. 25-26 – a lease renewal case – in support of its conclusion:
Counsel for the lessee also submitted that the order relieving against forfeiture wiped the slate clean and made it impossible to look at the prior default in the payment of rent in order to determine whether the right to renew was lost. The proposition is correct so far as the original term is concerned, but the order does not operate so as to excuse performance of conditions precedent to the right of renewal. The distinction is clearly made in Finch v. Underwood, 2 Ch. D. 310. The Court has power to relieve against forfeiture, but no power to excuse performance of conditions precedent. [Citation omitted.]
[54] More recently, the British Columbia Court of Appeal adopted a similar view in Clark Auto Body. At para. 30, Kirkpatrick J.A. said:
In my opinion, it is essential to distinguish between the court’s equitable jurisdiction to grant relief from forfeiture for the non-observance of covenants in an existing lease and from the failure to comply with conditions precedent to the exercise of an option to renew a lease. In the former, equity recognizes that a tenant may be permitted to cure its default and be relieved from forfeiture to allow it to retain the balance of the term of the lease. In the latter, there is no compulsion on the tenant to exercise the renewal option, but if it does so, the tenant must comply with the conditions precedent. If the tenant fails to comply, it does not suffer a penalty or forfeiture of an existing tenancy. Equity will not intervene.
[55] On the other hand, this Court has also concluded that the court does have jurisdiction to grant equitable relief in circumstances where there has been a failure to comply with a precondition to the renewal of a lease. But the jurisdiction to do so is a “narrow” or a “limited one”: see Ross v. T. Eaton Co. (1993), 1992 CanLII 7470 (ON CA), 11 O.R. (3d) 115 (C.A.), at pp. 124-25; 120 Adelaide Leaseholds Inc. v. Oxford Properties Canada Ltd., [1993] O.J. No. 2801 (Ont. C.A.), at para. 9; and Ole Miss Place Inc., at para. 80.

[56] It is not necessary to resolve the differences between these two lines of authority here because, in the circumstances of this appeal, Papa Kerollus is not entitled to the benefit of equitable intervention on either approach, in my view. The T. Eaton Co., 120 Adelaide Leaseholds, and Ole Miss Place Inc. line of authorities makes clear that one of the prerequisites for the exercise of any such equitable jurisdiction is that “the tenant has made diligent efforts to comply with the terms of the lease which are unavailing through no default of his or her own”: T. Eaton Co., at p. 125, cited in Ole Miss Place Inc., at para 80.

[57] That cannot be said in favour of Papa Kerollus here, for the reasons outlined above. It acknowledges that it was in default in payment of the admitted arrears of $251.92. This is a small amount, and had Papa Kerollus wished to preserve its position with respect to the renewal option, it could easily have paid it. Similarly, it could have paid the additional $1,017.00 monthly amounts for the period June 1, 2014 onwards – as the payment method in clause 3.C of the Lease required – and then sought a re-adjustment after receipt of the statement of actual expenses for the year 2014. But it did neither. Instead, it held tenaciously to its stance that it would pay nothing further until the dispute over the total amount of arrears owing was resolved. In my view, it was not entitled to do so under the terms of the Lease if it wished to preserve its option to renew.

4. Insurance

. D.L.G. & Associates Ltd. v. Minto Properties Inc.

In D.L.G. & Associates Ltd. v. Minto Properties Inc. (Ont CA, 2015) the Court of Appeal considered whether a contractual duty on one party to a contract to obtain liability insurance (here a tenant) immunized the other party (the landlord) from claims that would have been covered by that insurance, where it was not obtained [paras 16-29]:
The covenant to insure

[16] D.L.G. in para. 7.1 of the lease undertook to obtain “all risks” insurance which specifically included insurance for “sewer back-up”. D.L.G. accepts that a claim in negligence against Minto for failure to properly maintain the plumbing is barred by the covenant to insure, but submits that it is not plain and obvious that the covenant also bars a claim based on Minto’s breach of its “quiet enjoyment” and “good repair” obligations under the lease.

[17] D.L.G. argues that a trial is necessary to properly interpret the covenant to insure in the context of the entire agreement. I do not accept this argument. The covenant to insure focuses on risk and the responsibility as between D.L.G. and Minto for losses covered should the identified risks materialise during the term of the agreement. The provision is not concerned with the legal characterization of claims for losses arising out of the materialization of the risks.

[18] D.L.G.’s submission runs aground on this court’s judgment in Madison Developments Ltd. v. Plan Electric Co. (1997), 1997 CanLII 1277 (ON CA), 36 O.R. (3d) 80 at para. 9. Carthy J.A., speaking of a situation in which the landlord had covenanted to insure against all risks said:
The law is now clear that in the landlord-tenant relationship, where the landlord covenants to obtain insurance against the damage to premises by fire, the landlord cannot sue the tenant for a loss by fire caused by the tenant’s negligence. A contractual undertaking by one party to secure property insurance operates in effect as an assumption by that party of the risk of loss or damage caused by the peril to be insured against. This is so notwithstanding a covenant by the tenant to repair which, without the landlord’s covenant to insure, would obligate the tenant to indemnify for such a loss. This is a matter of contractual law not insurance law, but of course, the insurer can be in no better position than the landlord on a subrogated claim. The rationale for this conclusion is that the covenant to insure is a contractual benefit accorded to the tenant, which, on its face, covers fire with or without negligence by any person. There would be no benefit to the tenant from the covenant if it did not apply to a fire caused by the tenant’s negligence. [Emphasis added.]
[19] The language from Madison applies here. A covenant to insure is one of several provisions within a lease which allocates risk as between the parties to the lease. The allocation of risk is presumably reflected in the rent to be paid. A covenant to insure would hardly serve the purpose of risk allocation if it were read as allocating the risk to the tenant if the landlord was negligent, but to the landlord if the same act amounted to a breach of a provision in the lease, e.g. the obligation to maintain and repair. As almost any act of negligence would also be a breach of the obligation to maintain and repair, the interpretation urged by the appellant would effectively put the risk on Minto despite D.L.G.’s obligation to obtain “all risks” insurance.

The enforceability of the covenant to insure

[20] D.L.G. submits that the covenant to insure is an exclusion clause and is unenforceable under the principles set down in Tercon. In my view, the covenant to insure cannot be read as a clause excluding Minto from liability it would otherwise carry but for the clause. Instead, the covenant to insure assigns risk for certain losses by requiring that the tenant, D.L.G., obtain insurance coverage for those losses: Smith v. T. Eaton Co., 1977 CanLII 39 (SCC), [1978] 2 S.C.R. 749 at 756, St. Lawrence Cement Inc. v. Wakeham & Sons Limited (1995), 1995 CanLII 2482 (ON CA), 26 O.R. (3d) 321 at paras. 37-39 (C.A.).

[21] As I am satisfied that the covenant to insure cannot be read as an exclusion clause, I need not address the enforceability of that clause. I would, however, observe that in the context of a negotiated lease between arms-length commercial entities I see little room for an argument that a covenant to insure, whether directed at the landlord or the tenant, could be viewed as unconscionable.

[22] Nothing in the pleadings alleges any inherent unfairness in placing the burden of obtaining “all risks” insurance on D.L.G. I reject the argument that the relationship between D.L.G. and Minto during the lease negotiations was one of unequal bargaining power because Minto had knowledge about the plumbing that D.L.G. did not have. Nothing in the pleadings suggests that D.L.G. could not have made the relevant inquiries and conducted the necessary inspections to obtain whatever information about the plumbing it deemed necessary. Although D.L.G.’s claim that it relied on fraudulent/negligent misrepresentations by Minto gives rise to tort claims against Minto, it does not provide the basis for the assertion that D.L.G. was in a position of unequal bargaining power during the lease negotiations: see also the reasons of the motion judge at paras. 85-89.


To be Integrated

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