The Doctrine of 'Spent Breach' and what it means for Landlords
Lease agreements are contracts that guide the commercial tenancy relationship between landlords and tenants. One important clause in the commercial leases is known as an "option to renew" clause, which essentially allows the tenant to renew the lease for an additional term, as long as he or she is not in default of terms under the lease. While this is usually the status quo, an Ontario court has recently held otherwise, to the effect that a tenant may have the option to renew, despite being in breach of their commercial lease agreement. In today's blog post, we examine the case of H.A.S. Novelties Limited v. 1508269 Ontario Limited, 2021 ONSC 642 and the effect of this decision on commercial tenancies post-pandemic.
The Landlord and Tenant entered into 3 commercial leases (the “Lease Agreements”) for three units in the premises rented by the tenant. When the COVID-19 pandemic started, the tenant and landlord entered into a “Rent Relief Agreement” where it was agreed that the tenant would pay 1/3 of the regular rent under the Lease Agreements “while the Corona-related lockdown is in effect”. The tenant and the landlord agreed that the remaining 2/3 of the rent would be paid over six months after the lockdown ends. The parties further agreed that the term of the leases could extend past the expiry date.
Subsequently, in April 2020, the federal government introduced a program called the Canada Emergency Commercial Rent Assistance (“CECRA”), allowing eligible landlords and tenants to enter into agreements whereby tenants would pay 25% of their rent, the government would pay 50% of the rent to the landlord, and the remaining 25% of the rent would be absorbed or forgiven by the landlord. The details of this program have been discussed in our previous post. The tenant asked the landlord to apply for CECRA which the Landlord initially agreed to but never applied for.
Eventually, the tenant failed to pay the full rent under the Rent Relief Agreement, on the assumption that the landlord would apply for CECRA. However, after the landlord demanded for the owed rent, the tenant paid all outstanding arrears. Subsequently, the tenant sought to renew the lease agreement. The landlord refused on the ground that the tenant had lost its renewal right by failing to pay the rent.
The renewal clause under the lease agreement stated:
“Provided the Tenant is not at any time in default of any covenants within the lease, the Tenant shall be entitled to renew this lease for 1 additional term(s) of 60 months (each) on written notice to the Landlord given not less than 6 months [12 months in the case of unit 3] prior to the expiry of the current term at a rental rate to be negotiated.”
With regards to the CECRA application, the Court held that the landlord was not obliged to apply for it as it was a voluntary program. The initial inclination made by the landlord to apply was not intended to affect the parties’ legal relationship. Also, both parties had agreed that the Rent Relief Agreement would only subsist for the period of the lockdown, which had been lifted. Therefore, the landlord could demand for his full rent.
Interestingly, the Court also held that despite the Tenant's initial breach of the lease agreement, it was still entitled to renew the lease. The Court based its decision on the doctrine of “spent breach” which provides that a Tenant will not lose a renewal right so long as the Tenant cures its breach by the time the option to renew is exercised.
One key takeaway from this case is the cautionary steps that must be taken by landlords when preparing lease agreements moving forward. This is because courts are taking into consideration factors such as the impact of the pandemic on tenants' finances and allowing tenant rights despite a breach of the lease agreement. Landlords may therefore expressly exclude or limit the doctrine of “spent breach” to protect their interests. An example of how to accomplish this would be to limit the number of defaults a tenant can make before losing its right to renew.
If you have any questions about the proper drafting of lease agreements and how to properly structure them to protect your interest in future real estate matters, kindly book a free consultation with Northview Law on this link, or contact us at 416-639-7639. We look forward to hearing from you soon.