Commercial lease agreements can be a lucrative source of income for landlords in that tenants pay monthly rent and typically sign leases for extended terms. There is also value to be gained for tenants from continuous business operations located at a particular premise which is recognizable and known by its customer-base. Thus, commercial lease agreements usually contain renewal clauses, allowing tenants to extend an already lengthy lease for another term.
The case of 1251614 Ontario Ltd v Gurudutt Inc. 2015 ONSC 2141 concerns the affect of a renewal clause contained in a commercial lease agreement. This particular renewal clause was somewhat unique in that the clause required the tenant to execute the landlord’s current standard form lease in order to execute its rights to renew its lease. In most other cases, the renewal provision in standard form leases speaks to the rights of the tenant to renew the lease originally executed rather than the landlord’s current standard form lease.
Gurudutt Inc., a franchisee of Quiznos Sub, had become a tenant of 1251614 Ontario Ltd. The original lease was executed on October 8, 2002 and was for a ten (10) year term which was set to expire on March 31, 2013. Upon exercising its right to renewal under the original lease the tenant, Gurudutt Inc., was served by its landlord with another lease which was largely similar to the original lease, except that it contained a demolition clause requiring six months notice prior to allowing the landlord the right to demolish the building.
Gurudutt Inc. objected to the use of this new lease and argued that the addition of such a clause with only six months notice undermines the benefit of a long-term lease; the tenants would have no real security in terms of having a location for their business – they would have difficulty planning beyond 6 months not knowing if the landlord may choose to exercise their demolition option.
THE COURT’S ANALYSIS AND DECISION
After establishing that the wording of the clause is consistent with the lease agreement, is clear in its intention and effectively known by the tenant, the court proceeded to analyze the matter at hand. The approach the court took was comprised of two elements: a finding concerning whether the terms of the new lease offered by the landlord are in fact the landlord’s new standard form lease, and a finding concerning the validity of the landlord’s right to exercise the renewal clause concerning the facts of the case at bar.
The court examined the leases signed by the other tenants and noted that five of the ten tenants, all of whom exercised the renewal clause in their original lease agreements with the landlord and had also recently signed the landlord’s new lease with the demolition clause. There was sufficient evidence in those circumstances to allow the court to accept that the new lease is the landlord’s new standard form lease and not a unique lease agreement. The court’s analysis then shifted to the second element.
The court asked whether the renewal clause was reasonably known by the tenants and whether they had an opportunity to examine the original lease agreement and seek legal advice. The court concluded that both the original tenants, the franchisors, and the current tenants, the franchisees, did not object to the clause even after having their lawyers review it.
Thus the court found that the clause was binding, and the new lease agreement was a standard form lease agreement in use by the landlord at the time. The court was swift in its decision in favour of the landlord stating that the tenants would have to renew on the terms of the new agreement that contains the demolition clause.
The court cited the advice of Harvey M. Harber, who elaborated in his textbook, The Commercial Lease: A Practical Guide (2003), about the nature of such renewal clauses. Harber confirmed that renewal clauses could allow for the landlord to introduce a new standard form lease as the terms of renewal. Harber therefore advised that the “Tenant should adamantly insist that this subsection be modified so that the only obligation of the Tenant is to enter into a renewal Lease on the terms set out in the renewal option. Under no circumstances should the Tenant agree to sign a new net Lease form, which could be substantially different from (and much more costly than) that originally negotiated with the Landlord in the first instance.”
OUR THOUGHTS
Harber’s advice is sound and should be adhered. Renewal clauses that allow landlords to substitute the terms of the lease on renewal are invariably drafted in favour of the landlord. Such clauses although offering great flexibility going forward for landlords, are onerous for tenants. Tenants should object to such clauses as they allow uncertainty into a commercial lease agreement. It is prudent for tenants to protect any future interest they may have in the property by ensuring that the terms for renewal are explicitly set out in their lease.
