Many commercial leases contain at least one right in favour of the tenant to renew or extend the lease at the end of its initial term. While it may be five or 10 years down the road before this provision becomes operative, the actions taken by the tenant then to exercise the right and the conduct of the tenant during the lease term can have an impact on the availability of the right. Accord ingly, when negotiating and drafting renewal rights, particular care should be paid to the wording used.
In this article I will be referring to “renewal” rights. Sometimes (and perhaps more often) these are structured as “extension” rights. Although there are some technical differences in law, the issues discussed in this article generally apply equally whether the tenant’s right is labeled a renewal or extension, and accordingly I will simply refer to renewals.
Notice of Exercise
In almost all cases, the tenant will be required to give a formal notice to the landlord in order to exercise a renewal right. It is likely that elsewhere in the lease the manner of giving notice will be prescribed (such as, for example, by registered mail). If that method of notice is manda - tory, in order to properly exercise its renewal right the tenant must follow it strictly. If, rather than being set out as the only allowed method of giving notice, the lease sets out only a permissible method of notice, then the tenant may use other methods so long as the method chosen by the tenant is not less advantageous to the landlord and the notice is actually communicated to the landlord (see Ross v. T. Eaton Co. (1992), 11 O.R. (3d) 115 (C.A.) and DW Squared Ltd. Partnership v. Oxford Properties Canada Ltd. (2002) 43 R.P.R. (4th) 165 (Ont. C.A.)). Since the onus would be on the tenant to show that an alternate method was contemplated by the terms of the lease, no less advantageous to the landlord and actually received by the landlord, it is obviously much safer to follow a particular method described in the lease.
The lease will also prescribe the time period by which the notice must be given. If the tenant does not exercise its renewal right, the landlord will obviously be taking the space to market and will need some time to do so prior to the end of the tenant’s lease. Accordingly, landlords require a range of six to 12 months notice prior to the end of the term. Typically, the more unique the space, the longer the notice period (as a longer period will be re quired to lease the space). Landlords may also have an outside date before which the notice cannot be given for administrative purposes.
Since a renewal right is a benefit to one party only, the courts have generally required strict compliance by a tenant with the prerequisites to exercising such rights. Accordingly, if the tenant misses the notice period, courts will generally not grant any relief to the tenant, with the result that the renewal right is lost. See, for example, Bedard v. 1526924 Ontario Ltd.,  O.J. No. 2439 (S.C.J.), where the tenant missed the renewal deadline and the court held that there was no basis for granting any relief in favour of the tenant. Like all rules, there are exceptions. Situations where a court may grant relief from strict compliance are discussed below.
It is very common for renewal provisions prepared by landlords to require other prerequisites to the exercise of the renewal right by the tenant.
One very common prerequisite deals with defaults by the tenant. A wide variety of language is seen in leases. You might see requirements such as “the tenant not then being in default and never having been in default,” “the tenant not then being in material default,” “the tenant not then being in default beyond any curative period,” “the tenant not then being in default and not having been previously in persistent or continuing default,” or a variation or combination of the foregoing.
From the landlord’s perspective, the renewal right is seen as a privilege in favour of the tenant, that the tenant should only be entitled to retain if it has been in good standing throughout the term. This is what many landlord standard form leases provide for. On the other hand, the tenant will not want a technical or minor default, which has been cured, or a default that is unknown to it, to put it off side and result in it not being able to exercise the renewal right. Accordingly, parties often get to a negotiated middle ground, such as a requirement that the tenant not then be in default for which a notice of default has been issued and not having been in material or persistent default in the past.
Another common prerequisite insisted on by landlords is that the tenant at the time of exercising the renewal right be the original tenant. In the landlord’s view, this right is being granted on the basis of the identity of the original tenant and, should the lease be assign ed, the landlord will argue it should not be obligated to accept a renewal term with somebody it did not do the original deal with.
From the tenant’s perspective, there are situations where it may feel that an assignment should not result in the renewal right being lost. For example, many tenants will negotiate a right to assign to affiliates or related companies and will want the renewal right to continue in that circumstance. Also, if the business at the premises is sold as a going concern (and perhaps as part of a sale of a larger portfolio of locations) the tenant can again make a reasonable argument that this should not result in the renewal right being lost. These issues must be dealt with when the option is negotiated and drafted.
A related requirement might be that at the time of the exercise of the renewal right the tenant actually be in possession or occupation of the premises. In this situation, a sublease to another party would put the tenant off side. Also, having the premises unoccupied may result in the tenant being unable to exercise a renewal right. Of course, if the premises were not occupied it is far less likely that the tenant would have any interest in renewing the lease. Landlords should note, however, that occupancy has been defined by the courts to mean either physical occupancy or legal occupancy, the latter being the right to have occupancy even though not physically in occupation (see Nortel Networks Ltd. v. Kanata Research Park Corp. (2005), 73 O.R. (3d) 598 (S.C.J.)).
Relief from Non-Compliance
Occasionally, tenants will not exercise their renewal rights in strict compliance with the terms and prerequisites of the lease and look to the courts to give them some relief.
As indicated above, the law regards an option to renew as a privilege given to one party only and in view of such being a privilege, generally tenants must strictly comply with the terms and conditions. However, there are exceptions.
The first exception is where a court finds the landlord, by its conduct, waived strict compliance with the renewal requirements. The concept of waiver arises where a contractual provision benefits one party and the other party is held to have waived compliance. Once waiver has been established, the provision cannot be suddenly reinserted by that other party and insisted upon. For example, in 1357277 Ontario Inc. (c.o.b. Pape Village Coin Laundry) v. Grekos  O.J. No. 2535 (C.A.)), the court held that where the tenant had written to the landlord requesting a renewal after the notice period had passed and the landlord responded by submitting an offer to renew, the landlord waived the requirement for timely notice.
As for an ongoing requirement to not be in default, a landlord’s activities of accepting rent and not acting on the defaults throughout the lease term could be held as a waiver of strict compliance with that precondition. See, for example, Gordstone Enterprises Ltd. v. 622559 Saskatchewan Ltd. (2006) 49 R.P.R. (4th) 266 (Sask. Q.B.). In DW Squared (supra), the court found the landlord had accepted notices and rent payments through its security desk on numerous occasions without complaint, and as a result the landlord had waived strict compliance with the notice pro - visions for the purposes of delivery of the renewal notice.
A second (and somewhat similar) legal principle that might be available to protect the tenant is the doctrine of estoppel. This principle applies where one party makes a representation to another which affects the legal relations be - tween them. If the party receiving the representation acts upon it to its disadvantage, the party that made the rep re sent - a tion cannot revert back to its original position.
Applying the principle of estoppel, where a landlord deliberately fails to bring to the attention of a tenant a default, with the intention by the landlord to defeat the option to renew, the landlord will be estopped from relying on that default to defeat the renewal. See Kelly, Douglas & Co. v. Ladner Shopping Centre Ltd. (1979), 106 D.L.R. (3d) 265 (B.C.S.C.), as quoted in Gordstone Enterprises Ltd. (supra).
Courts have a general right to grant relief from forfeiture in leasing situ ations. A common example is where a landlord reenters the premises and/or terminates a lease for non-payment of rent. If the tenant brings the lease into good standing shortly thereafter, the courts will generally grant the tenant relief from forfeiture and put the lease back into place.
However, this right to relief from forfeiture is very unlikely to be successful to relieve the tenant from noncompliance with a prerequisite to a renewal right. The courts have distinguished between their jurisdiction to grant relief from forfeiture for the nonobservance of terms and conditions in a lease as opposed to failure to comply with conditions precedent to the exercise of a renewal right. In Clark Auto Body Ltd. v. Integra Custom Coalition Ltd.  B.C.J. No. 61 (B.C.C.A.), the court applied the English decision of Union Eagle Ltd. v. Golden Achieve - ment Ltd.  A.C. 514 (H.L.), in noting the principle that contractual provisions should be upheld. Specific - ally, if the parties have come to an agreement on terms and conditions to be complied with in order for the renewal to be exercised, those parties should be able to act with certainty on the basis that the terms of the contract will be enforced. The existence of an undefined discretion to refuse to enforce the contract would create unwanted uncertainty.
In Clark Auto Body Ltd. (supra), the renewal provision required that there be no outstanding notice of default when the tenant exercised. At the time of the exercise there was about $1,200 of rent unpaid, for which a notice had been issued. The court refused to relieve the tenant from the consequences of this, and the renewal notice was not effective.
The principles from the case law referred to above can be applied to the renewal provisions negotiated at the time the agreement to lease and lease are entered into. By paying attention to the terms and conditions at that time, the potential for subsequent disputes will be minimized. Speci fically, the landlord can strive to limit the ability of the tenant to exercise the renewal option to those situations where the landlord feels it is appropriate. On the other hand, a tenant facing a landlord’s standard renewal clause can negotiate for some protection, so that what it sees as minor variations from the strict terms do not have the drastic consequence of resulting in the renewal right being lost.