Landlords and tenants often seek advice on what happens when the tenant wishes to remain in the leased premises after the lease term expires, but the parties have not extended or renewed the lease. At law, there is an implied obligation that the tenant must vacate the leased premises when the lease term expires. If the tenant remains in the leased premises after the lease term expires without the landlord’s consent, the tenant is generally considered a trespasser. If the tenant remains in the leased premises after the lease term expires with the landlord’s consent, a new tenancy is deemed to arise. The term of such new deemed tenancy is either month-to-month (if the expired lease term was less than one year) or year-to-year (if the expired lease term was one year or more), unless the parties have agreed otherwise.
In order to avoid a year-to-year tenancy arising after a lease term expires (which year-to-year tenancy may only be terminated on six months’ notice), commercial leases typically contain an overholding clause. Such clauses set out the terms and conditions for the tenant to remain in the leased premises beyond the term, including the term of the overholding tenancy (e.g. month-to-month), the amount of rent payable, and the procedure to terminate the overholding tenancy. Overholding clauses may also state that the landlord’s consent is required before the tenant can overhold.
If the overholding clause is silent on landlord consent, it may appear from the clause’s wording that the tenant has a unilateral right to remain in the leased space after the expiry of the term. This was argued by the tenant in AIM Health Group Inc. v. 40 Finchgate Limited Partnership, 2012 ONCA 795, http://canlii.ca/t/fttft (the “AIM case”). In this case, the Ontario Court of Appeal ultimately rejected the tenant’s interpretation and held that a landlord must consent to an overholding, regardless of whether the overholding clause specifically requires it.
Landlord Consent is Required to Overhold
In the AIM case, the lease between the landlord and tenant was set to expire on December 31, 2011. Several months prior to expiry, the tenant notified the landlord that it would not exercise its option to renew the lease, but it wished to remain in the leased premises for some time beyond expiry. The landlord did not agree to such overholding and instead sought a new tenant. On December 19, 2011, the landlord advised the tenant that a new tenant had been secured and vacant possession of the leased premises was required on expiry of the term. The tenant continued to occupy the premises after the term expired and, on January 1, 2012, the landlord changed the locks. On January 6, the tenant obtained a declaration that it was entitled to re-enter the leased premises pursuant to the overholding clause, which provided in part:
If, at the expiration of the initial Term or any subsequent Term or any subsequent renewal or extension thereof, the Tenant shall continue to occupy the Leased Premises without further written agreement, there shall be no tacit renewal of this Lease, and the tenancy of the Tenant thereafter shall be from month to month only and may be terminated by either party on one month’s notice. […]
The tenant interpreted the overholding clause as providing the tenant with the unilateral right to remain in the leased premises beyond the term. The landlord appealed.
The majority of the Court of Appeal agreed with the landlord, stating that “for an overholding tenancy to arise, the landlord must agree that the tenant may stay in the premises, which agreement is normally evidenced by the landlord’s acceptance of rent.” Such requirement for landlord consent is implied where the overholding clause is silent. The dissenting judge had a different view, stating that if landlord consent was a necessary precondition to the tenant remaining in the leased premises after expiry of the term, the lease should have been drafted so as to specifically require landlord consent.
The take-home message from the AIM case is that the landlord’s consent is necessary for the tenant to remain in the leased premises after expiry of the term, even if the overholding clause does not specifically require it. Acceptance of rent by the landlord will be evidence of consent.
Landlords and tenants should carefully review the overholding clauses in their leases to ensure such clauses accord with their intentions. The clauses should address the term of overholding, the amount of rent payable, how the overholding tenancy is terminated, and whether the tenant has a unilateral right to overhold. On the latter issue, the result in the AIM case means that if a tenant wishes to have the unilateral right to overhold after the lease term expires, the overholding clause must be drafted to specifically provide such right. For their part, landlords must be aware that merely accepting rent from a tenant after the term expires, and nothing more, may be sufficient evidence that the landlord consented to an overholding.