Virtually every lease contains a quiet enjoyment clause and despite the name, it has little to do with decibel levels. Rather it is a promise by a landlord to allow a tenant to use a space for the purpose for which it was leased and to not substantially interfere with that use. What amounts to substantial interference? Erecting a brick wall outside the front door? Yes. Removing all of the doors and windows? Yes. A premises with unpleasant odours? Perhaps. Cockroaches? Maybe.

In Nanaimo, B.C. a clothing store tenant began noticing an unpleasant odour not long after moving in. The smell got worse over the course of several months and the tenant became concerned that the odour would damage the inventory, not to mention discourage customers from entering the store. The landlord consistently denied the existence of a problem and general repairs did not resolve the issue. Eventually, the tenant stopped paying rent and found an alternate location. The landlord sued but lost. The court held that the presence of “a strong and unpleasant odour” defeated the purpose of leasing the space by discouraging customers and ruining the products. This amounted to a “fundamental breach” which entitled the tenant to repudiate the lease. A fundamental breach occurs where one party is deprived of essentially the whole benefit of the lease as a result of a breach by the other party. There are no hard and fast rules as to what qualifies – the facts of each situation have to be assessed by a court to determine if the breach is sufficiently serious. Where such a breach is established, the innocent party has the right to treat the lease as at an end.

On the other side of the country, a Montreal optical store was alarmed to discover a cockroach infestation shortly after moving in. The landlord did multiple treatments to eradicate the problem but to no avail. After nearly two years and no signs of improvement, the tenant informed the landlord that the problem was intolerable and sought to cancel the lease. In Quebec establishing a breach of the covenant of quiet enjoyment or “peaceful enjoyment”, as it is referred to in the Quebec Civil Code, is more formalized than showing substantial interference. In Quebec a landlord is required to provide peaceful enjoyment of a premises to its tenant for the term of the lease. Establishing a breach of this obligation requires showing that the tenant notified the landlord of the problem and that once notified, the landlord failed to substantially perform its obligations under the Quebec Civil Code. Where a landlord’s action or inaction is sufficiently serious to constitute serious prejudice in the eyes of a court, a tenant may be entitled to cancel its lease.

As in BC, the Quebec court sided with the tenant. The landlord knew the extent of the problem and failed to fully comply with the exterminators’ recommendation to clean the entire building, not just the problem areas. This amounted to a failure by the landlord to live up to its requirement under the Quebec Civil Code to deliver the property in a good state of repair fit for the purpose for which it was leased. In the court’s view the infestation amounted to prejudice so serious as to entitle the tenant to cancel the lease.

So while neither of the tenants’ problems may seem like an obvious breach of the covenant of “quiet” enjoyment at first glance, both allowed the tenants to walk away from their leases.

Operating Costs: Chopped

Risk analysis plays a critical role in lease negotiations. What does one party absolutely need and on what is it prepared to compromise? One item that is frequently on the chopping block is the tenant’s responsibility to pay for capital and replacement costs. What’s the harm in excluding these costs? Nothing – if that’s the deal. But ambiguous wording might mean the costs are excluded even if the landlord intended to include them.

A lease in a recent case stated that the tenant was responsible for paying for “repairs”, excluding reasonable wear and tear, and “maintenance” of the common areas. The landlord repaved the parking lot and notified the tenant that it owed its proportionate share of the cost of the work. The tenant, which had 14 months remaining on its term, refused to pay. The court, in agreeing with the tenant’s position, reasoned that the pavement being replaced was close to 20 years old and as such fell under the reasonable wear and tear exception to the tenant’s repair responsibility. The work was also not maintenance, which the court viewed as work restricted to “keeping the property up”. According to the court, repaving went beyond the scope of the definition of maintenance. Moreover, the court commented that it would be unfair to require the tenant to be responsible for the costs given the expected 20 year lifespan for the new pavement and the time remaining on the lease.

Staying with the parking lot theme, the same court reached a very similar result a year earlier in another paving case where the landlord’s parking lot repaving was found to be a capital expense according to accepted accounting principles. As these costs were expressly excluded from operating costs, the tenant was not required to pay for the work.

Taken together these cases provide a cautionary tale for landlords which either exclude capital expenses or limit a tenant’s responsibility to maintenance and repair. While doing so may be appropriate in negotiated situations, landlords are advised to consider the particular aspects of the property and whether such capital or replacement costs should be carved out.

So what is a fair way to address this situation? For starters, if it is the parties’ intention that the tenant contribute towards capital or replacement costs, this should be clearly set out in the lease. The lease could also set out a non-exhaustive list of items to which the tenant is responsible for contributing, such as the roof and parking lot. Finally, consider including a provision whereby the tenant’s share of these costs are amortized over the useful life of the terms, as determined by your accountant in their sole discretion, and repayable on that basis, together with interest on the unamortized portion at a stipulated rate.