The Ontario Superior Court of Justice's contentious judgement in 1251614 Ontario Ltd. v. Gurudutt Inc., 2015 ONSC 2141 provides a cautionary lesson for tenants entering into leases and those exercising lease extension or renewal options (referred to as extensions hereafter). The judgment is the first of its kind by an Ontario court directly addressing the issue of a landlord's option to impose a current standard form lease on a tenant exercising an extension.
Facts & Decision
A party (franchisor) entered into a commercial lease for a ten year period with the option to extend the lease for two terms of five years each. The franchisor assigned the lease to the current tenant (franchisee). The tenant sought to exercise its extension option. Pursuant to the extension clause, the landlord had the option to present the tenant with a new lease in the landlord's then current standard form. The extension clause provided:
Any such renewal to be on the same terms and conditions as are contained in this Lease except: (iii) the form of renewal Lease shall be, at the landlord's option, a lease extension agreement or a new lease in the landlord's then current standard form.
The landlord presented the tenant with its standard form lease which was in all respects similar to its existing lease, except for the inclusion of a demolition clause permitting the landlord to demolish the building upon providing six months' notice. The tenant refused to sign the standard form lease, asserting that it should be able to extend on the same terms as its existing lease.
Ruling in favour of the landlord, the Superior Court maintained that the tenant must sign the landlord's standard form lease as a consequence of exercising its extension option. In doing so, the Court suggested that the parties to the lease were sophisticated business entities each with legal counsel. Further, the Court noted that the tenant and its counsel had failed to make any objection to the extension clause when the lease was assumed.
The Superior Court's recent decision in Gurudutt raises important considerations for landlords, tenants and their counsel.
From the tenant perspective, Gurudutt is a strong reminder that a tenant should be diligent in negotiating the removal of a landlord's option to use a new standard form lease on extension. Should a landlord refuse to remove this option, a tenant should negotiate for the opportunity to make reasonable revisions to the standard form and ensure it contains, at minimum, those same revisions to the new form of lease that were made to the current standard form. Where a tenant has already entered into a lease which contains a Gurudutt type clause, the tenant ought to review the new standard form lease prior to exercising an extension in order to determine what material changes will be binding should it choose to extend.
From the perspective of a landlord, the inclusion of a clause that requires the use of a new standard form lease with modified terms on extension allows a landlord to accommodate new development considerations, ensuring the lease agreement evolves over the course of time. As such, when pushed by a tenant with some leverage, the landlord may consider amending its then standard form lease to reflect the revisions made to the current lease. This would allow for evolution of the document while recognizing the terms that had been specifically negotiated with the tenant and which the tenant could reasonably expect to continue during the extension term or terms.
Ultimately, there is little doubt that the decision in Gurudutt will bring greater attention to the issues raised by the mandatory use of a new standard form lease in an extension clause.