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Why you should not be a "hedging" tenant.

One of the most crucial clauses in a lease agreement is the "option to renew" clause. Essentially, this clause provides a tenant with the option to renew the lease for another term after the expiration of the initial lease term. As explained in a previous post, this clause usually depends on the tenant not being in default of the terms in the lease. The renewal clause will often be based on the same terms as the initial lease, except rent. The rent for the new period is dependent on the market rent. Tenants need to state whether they would be employing the renewal clause unequivocally; otherwise, they risk losing their investment in the property.


In today's blog post, we would examine the case of 2324702 Ontario Inc. v. 1305 Dundas W Inc., 2020 ONCA 353 and the implications it creates for tenants and landlords in renewing lease agreements.


Facts

2324702 Ontario Inc. (the "Tenant") leased a commercial lounge and event space in Toronto called 'Remix' from the predecessor of 1305 Dundas W Inc. (the "Landlord") under a lease and lease amending agreement (collectively the "Lease") with a term that expired at the end of September 2018. The lease contained a renewal clause for an additional five years, as long as the tenant gave the landlord no less than nine (9) months and no more than eleven (11) months' written notice before the expiry of the initial term. During the notice period, the parties communicated via email to negotiate the market rent of the leased premises for the renewal period. However, the tenant did not commit to a renewal of the lease. Subsequently, the tenant failed to pay the February 2018 rent, and the landlord terminated the lease. The bone of contention between the parties was whether the landlord had validly terminated the lease.


Findings

The application court found that the tenant did not validly and unequivocally exercise its option to renew the lease as it did not provide written notice of extension within the notice period. This decision was also upheld by the appellate court, the Ontario Court of Appeal. The appellate court stated that the tenant was "hedging" and was not committing to the lease renewal unless the parties had agreed on the renewal rent. The court also rejected the tenant's argument that the landlord had waived its right to strict compliance with the renewal option because the landlord had not, by its conduct, given the tenant that indication.

Finally, the court did not grant relief from forfeiture to the tenant because the tenant's conduct did not warrant such a grant, as the tenant had missed its rental payment, including under a court order.


Takeaway

The case emphasizes the need for tenants to be clear and precise when exercising the option to renew. Tenants also need to exercise their renewal option within the timeframe stated under the lease and not behave in a manner that suggests they would not renew unless the rent is determined. Many lease renewal clauses provide that if the parties cannot agree on the market rent for the renewal period then the matter can be determined by arbitration, which the parties should rely on when they cannot come to an agreement between themselves.

Additionally, the case places a caution on landlords who continue to negotiate with tenants even after the renewal time has lapsed. The court may find that the landlord has waived strict compliance with the notice provisions provided under the lease.


If you have any questions regarding lease agreements and rent renewal clauses, Northview Law offers a free consultation available on this link, or you can contact us at 416-639-7639 to discuss any real estate questions you may have. We look forward to hearing from you soon.