The recent Manitoba Court of Appeal case of 441 Main Inc. v Silver Pawn Pictures Inc., 2013 MBCA 70 is a reminder of how important it is to be precise when exercising renewal or extension rights.
Many commercial leases contain an option in favour of the tenant to renew or extend the term of its lease. Usually such renewal or extension is at a new market rent and otherwise on the same terms. A process to settle the rent by negotiation and, failing that, by arbitration is usually set out.
Since such an option benefits only one of the parties, the tenant, the law regards it as a privilege. As a result of this privileged status, the tenant must strictly comply with the terms and conditions of the renewal or extension right in order to obtain its benefit. This includes compliance with all the stipulations set out in the lease as to the time, place and procedure for exercising. As indicated in the 441 Main Inc. case, it is also critical that the wording used to exercise such an option be "clear, explicit, unambiguous and unequivocal."
The lease in this situation between 441 Main Inc. (the "Landlord") and Silver Pawn Pictures Inc. (the "Tenant") provided the Tenant with an option to renew the lease for a period of either 3 or 5 years.
Prior to the time period for exercising the option, the Tenant had continually asserted that it had a right to purchase the building as well. The correspondence between the parties demonstrated that the Landlord clearly did not accept that position.
The Tenant exercised its option to renew with a notice that included the following:
"As required under the lease, herein is our notice that we have elected to proceed with the 5-year lease option outlined in the lease.
It is anticipated that the building will, as you committed in order to secure the lease from Silver Pawn Pictures, be sold to me prior to this extension running its course."
The Landlord did not accept the notice and issued a notice to the Tenant to vacate. The Tenant filed an application for a declaration that the notice of renewal was valid notice. The matter was heard and the application judge concluded the Tenant has validly exercised its option to renew. The Landlord appealed.
The Landlord took the position that this was not a valid exercise of the option to renew. The Landlord asserted that the notice was ambiguous and/or conditional because it referred to a purchase commitment that did not exist and was therefore not effective.
On the other hand, the Tenant argued that the second sentence set out above did not create any new condition or intention to modify the lease and was clearly separate from the option to renew.
The Court of Appeal reviewed the law and, in particular, noted that an option to renew is a unilateral offer giving a tenant the right to renew on the terms specifically set out in the option. Trying to obtain anything more renders the notice a counter-offer, as opposed to an acceptance of an existing offer, and does not bind the landlord unless that counter-offer is accepted.
The court held that by inserting the second sentence noted above the Tenant was attempting to impose a new term or condition into the relationship that did not exist under the lease. Applying the law referred to above, the effect of doing this was to make the notice a counter-offer and not the exercise of an existing right. The Tenant was asserting its allegation that there was an agreement to sell in place and attempting to confirm a commitment to that effect in this notice. In trying to do this, the Tenant cost itself the option.
In other situations tenants have failed by loose wording such as indicating an "intention to exercise" rather than an actual exercise. Stating that the renewal will be subject to some further agreement has also been held to result in an ineffective notice.
Having a clear and unequivocal notice is accordingly required to protect the rights. All other terms of the lease must be adhered to as well, such as providing the notice in the manner contemplated by the lease (which may be by registered mail, delivery, electronic communication or as otherwise stated in the lease) to the proper address shown in the lease. Careful consideration of all terms of the option in the lease are required to protect the right.