Leasing lawyers are very quick to point out to their clients how critical it is that renewal or extension options are exercised precisely in the manner set out in the lease. Cases to date have strictly interpreted renewal clauses, and failure to exercise renewal rights at the time and in the manner set out in the lease can mean the loss of the right of renewal. The recent case of Velouté Catering Inc. v. Bernardo, 2016 ONSC 7281, however, provides some hope to tardy tenants in limited circumstances.
The tenants in the Velouté case, Alise Matos and Fawzi Kotb (the “Tenant”), a married couple, were running a restaurant on the ground floor of a building owned by Frank Bernardo Ciddio (the “Landlord”) and his mother Lydia Bernardo under a five year lease with a right to renew for a further five year term. The renewal clause of the lease provided that:
“The Tenant shall exercise its right to renew this Lease in each such case by giving written notice thereof to the Landlord not less than Six (6) full calendar months prior to the last day of the then current term of this Lease or such right shall be lost.”
The term of the lease expired in April 2016 and the renewal notice had to be given by October 20, 2015. The Tenant did not provide written notice until January 18, 2016, well beyond the exercise date. The Tenant applied to the court seeking an order declaring that the lease had been renewed as the Landlord had waived strict compliance with the renewal clause or, in the alternative, granting relief from forfeiture relating to the time and manner of the exercise of the renewal.
The Tenant had spent $60,000 in leasehold improvements in anticipation of a ten year term and had discussed renewing the lease with the Landlord on a number of occasions. In fact, these tenants had more than a business relationship with the Landlord, they had both previously worked for the Landlord at his restaurant, had known him for 25 and 15 years, respectively, and the Landlord had been the best man at the Tenant’s wedding.
Written communications between the Landlord and Tenant in April and November of 2015 reflected the Landlord’s mistaken belief that the lease expired in April 2017, not April 2016. The Tenant testified that each time he asked the Landlord about renewal issues, the Landlord told him that they were in the fourth year of the lease and so did not have to deal with the renewal.
Meanwhile, in November of 2015 the Landlord approached a real estate agent to discuss the redevelopment of the property. He had drawings prepared by an architect. The Landlord testified that he believed the lease was in its fourth year at the time the drawings were made and was not relying on the lease expiring in April 2016 when he had the plans prepared.
At the end of November 2015, the Landlord told the Tenant that the right to renew the lease had expired and that he had applied to add another apartment to the upstairs property. The Tenant was willing to close the restaurant while the apartment was being constructed if the Landlord received municipal approval for the addition.
When the Tenant had not heard from the Landlord by January 15, a lawyer was hired and the Tenant formally exercised its renewal right under the lease, noting in the renewal letter the mistaken information that the Landlord had relayed about the lease being in its fourth year and the Landlord’s failure to meet with the Tenant to discuss the renewal.
The court was asked to look at two questions: (a) Did the Landlord waive his right to receive notice of the renewal by October 20, 2015?; and (b) If the Landlord did not waive his rights with respect to notice, should the Tenant be granted relief from forfeiture?
The court looked at relevant cases dealing with waiver and found that the Landlord’s conduct did not meet the standard required for a finding that the Landlord had waived his right to strict compliance with the lease. Even with the friendly relationship of the parties, the judge was not satisfied that the Landlord led the Tenant to believe that the notice requirement had been waived.
On the question of relief from forfeiture, the judge found that the court did have the power to grant relief for failure to properly renew a lease and that it was appropriate to grant the Tenant relief from forfeiture in this case for the following reasons:
- The judge looked at the fact that the Landlord was told many times before the deadline that the Tenant wished to renew the lease and that the Landlord had told the Tenant that a renewal notice would not be required until October 2016. The judge found that the Tenant’s failure to renew the lease was a result of the Landlord’s miscommunications.
- When the mistake was discovered, the Tenant attempted to set up an appointment with the Landlord to discuss the lease extension and then waited for his response. The judge found that this delay was reasonable given the parties’ friendly relationship.
- The Tenant had made a large investment in the premises which would have been lost if relief were not granted.
As a result, the court has opened a small window within which tenant’s counsel could argue for relief from forfeiture on a failure to exercise a renewal option on time. For future cases of this type, tenants will likely need to show that they have invested in the property to their detriment and that the landlord has contributed in some way to the tenant’s failure to meet the lease deadline.