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What happens when a commercial tenant does not follow the proper procedures to renew a lease?

leaseA recent case from the Ontario Court of Appeal sets out an interesting chain of events. In the case of North Elgin Centre Inc v McDonald’s Restaurants of Canada Limited, 2018 ONCA 71, the tenant (“McDonald’s”) had entered into a 20-year lease with North Elgin Centre Inc. (the “Landlord”) and had spent time and money on building their restaurant.

The lease had a term that the parties could renew for two additional 10-year terms. In order for the renewal to come into effect, McDonald’s was required to provide notice of its intention to renew at least 12 months before the expiry of the existing term. Upon notice being provided, the parties were to negotiate the new rental rate and if they could not agree at least 9 months prior to the expiry of the term, then McDonald’s could either revoke its notice of intention to renew or choose to go to arbitration to determine the new rental rate.

Was the lease renewed?

McDonald’s provided the Landlord with proper notice of its intention to renew but then the parties could not agree on the rental rate. The time limit of 9 months before the end of the term came and went without McDonald’s taking the next step of either revoking its notice of intention to renew or choosing to go to arbitration. Therefore, the lease became uncertain as to the rental rate and therefore was unenforceable.

However, the analysis does not end here. For the Landlord to rely on the fact that the lease was not renewed, the Landlord would have had to actually treat the lease as terminated. The Landlord did not do so.

Did the Landlord waive its right to terminate the lease?

Rather, the Landlord told McDonald’s that it was working on its proposal for the new rental rate. More than two months after the expiry of the 9-month period, the Landlord told McDonald’s that it was ready to discuss the rental rate for the renewal term. Two days after that meeting, the Landlord sent a letter to McDonald’s saying that it assumed McDonald’s intended to let the lease expire since it had not chosen to go to arbitration (unfortunately, we do not have information on what occurred at the meeting between the Landlord and McDonald’s).

Accordingly, by continuing to negotiate with McDonald’s after the expiry of the 9-month period, the Landlord waived its right to rely on termination of the lease because McDonald’s did not comply with the 9-month timeline to either revoke its notice of intention to renew or choose to go to arbitration to determine the new rental rate. So, the lease had not been terminated.

Did the Landlord revoke its waiver?

The Trial judge initially found that the Landlord did revoke its waiver. However, the Court of Appeal overruled the trial decision holding that the Landlord did not take the proper steps to revoke the waiver of its right to terminate the lease. A party may revoke its waiver of rights, but certain steps must be taken in order to do so. This is to provide fairness to the other party or parties. The Court of Appeal held that for the revocation of the waiver to be effective two steps must be taken:

  1. the notice of the revocation of waiver must be clear that the party who granted the waiver will insist upon the strict enforcement of its legal rights; and
  2. the notice must provide the other party with an opportunity to cure any defect resulting from its reliance on the waiver.

In this case, these steps mean that the Landlord would have had to provide clear notice to McDonald’s that it would be insisting on the strict enforcement of its right to terminate the lease since the parties could not agree on the rental rate and the Landlord would have had to provide McDonald’s with a reasonable period of time to fix the breach that McDonald’s did not refer the determination of the rental rate to arbitration or decide to withdraw its notice to renew the lease.

The Landlord did not take the steps set out above and accordingly, the Court of Appeal referred the issue of fair market rental rate to arbitration.

The main takeaway for both landlords and tenants in commercial leases is to ensure that you pay attention to all terms in the lease and if you intend to rely on them, be sure to follow them exactly and do not delay in enforcing your rights.

By Paul Tonita, Pushor Mitchell LLP

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