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Can a party in default of a commercial lease successfully claim relief for forfeiture? This was the question recently considered by the Ontario Court of Appeal (ONCA) when a tenant who had been found in default of its commercial lease sought to exercise its right to renew and was refused by the landlord.

Dispute Over Terms

The plaintiff in the case was a commercial tenant renting space in a cold storage facility owned by the defendant landlord. The lease was for a term of five years and contained a clause allowing the landlord to pass on certain increases in energy costs to the tenant. The lease granted the tenant the right to renewal, providing the tenant was not in default of any terms of the lease at the time of renewal.

Approximately three years after the start of the lease, an issue arose around the term with respect to the increased energy costs. The landlord took the position that it was entitled to additional payment under the clause, while the tenant refused. The tenant continued to make its rent payments each month but refused to pay the additional fees charged for the increased energy costs. A few months into this dispute, the landlord informed the tenant that it considered the tenant’s failure to pay these costs a default under the terms of the lease. The landlord reiterated its position two more times and notified the tenant that it would not be permitted to renew the lease if it failed to pay the energy costs.

The Initial Application

A few months later, the tenant informed the landlord that it wished to exercise its option to renew. The landlord rejected this, owing to the tenant’s default. Five years after the start of the original lease, the tenant brought an application seeking an interpretation of the increased energy clause of the lease. The tenant sought the following relief:

  1. a declaration that it was not in default under the terms of the lease and that it had properly exercised the option to renew; and
  2. if the tenant was found in default, then a declaration that it was entitled to relief from forfeiture.

The application judge held that the tenant was, in fact, in default under the terms of the lease and as such, was not entitled to exercise its option to renew. With respect to relief for forfeiture, the judge looked to the reasoning in 120 Adelaide Leaseholds Inc. v. Oxford Properties Canada Ltd., and determined that the court’s equitable jurisdiction to grant relief for forfeiture was limited in cases where there is a failure to perform a condition precedent to a right, as in the case at hand. The court held that the tenant had failed to complete its due diligence with respect to securing the right to renew, and therefore was not entitled to relief for forfeiture.

The Appeal

The tenant appealed the application’s judge finding with respect to forfeiture. The tenant argued that the judge had applied the wrong test when determining the court’s discretion to grant relief for forfeiture and that the test from Saskatchewan River Bungalows Ltd v. Maritime Life Assurance Company should have been used instead.

The ONCA dismissed the appeal, finding that the applications judge had used the appropriate test. There was no question the tenant was in default of the lease. The court stated:

[W]here preconditions to the renewal of a lease are in issue, the jurisdiction to grant relief from forfeiture is narrower than the three-pronged test applied in cases such as Saskatchewan River Bungalows. With respect to the renewal of a lease, a precondition for the exercise of any such equitable discretion 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[.]

The tenant in this case would have been better off paying the increased energy costs and maintaining its good standing under the lease. It could have then sought a return of those funds had the court found that the clause did not require they pay additional funds to the landlord. By refusing to pay, the tenant found itself in default with no options for relief, and without a place to operate its business.

At Baker & Company in Toronto, our real estate lawyers take the time to meet with you and understand your unique needs in order to guide you through your real estate matter, whether commercial or residential.  We rely on our broad base of experience and expertise to provide exceptional legal advice and risk management in a variety of transactions, or through litigation. Call us at 416-777-0100or contact us online for a consultation.

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