We all take some comfort on the acquisition of commercial real estate when the purchaser is able to obtain a reasonable number of estoppels [covering a good portion of the rentable area of the building(s) being purchased]. But what happens if a tenant asserts something in an estoppel but the tenant is incorrect? Can a tenant later take a different position? Or perhaps the bigger question is can you rely on the statement made in the estoppel? Not if you could have determined the correct state of affairs from doing proper due diligence of the lease documentation. This is what the British Columbia Supreme Court held in a recent case discussed below. The case also reminds us of the important distinction between renewals of a lease and an extension of the term of a lease, and is an important case to consider for anyone involved in lease due diligence or in dealing with estoppels.
In Vancouver City Savings Credit Union v. New Town Investments Inc., 2008 Carswell BC 2525, New Town Investments Inc. (the "Landlord") was the assignee of a commercial lease originally entered into by Park Georgia Properties Ltd. ("Park Georgia") as landlord and Vancouver City Saves Credit Union (the "Tenant") as the tenant. The term of the lease was ten years and it granted three renewal options to the Tenant, each for a five year period. Park Georgia and the Tenant entered into an agreement to renew the lease which contained a number of changes to the original lease (the "2002 Agreement"). Sometime thereafter the Tenant provided an estoppel to the Landlord upon the Landlord’s purchase of the subject property from Park Georgia which indicated that the Tenant had exercised the first renewal right (so only two renewal periods remained). Further, the Tenant later gave written notice exercising its second renewal option.
During the process of attempting to document the second renewal term, the Tenant took the position that the term earlier referred to in the estoppel as the first renewal term (and documented in the 2002 Agreement) was not in fact a renewal term, but was an extension of the term (which would mean that all three renewal terms were still preserved at that point). The Tenant relied on the wording of the 2002 Agreement as using the words "extension" throughout (not "renewal") as well as the fact that the extension term ran for a different period of time than the five year renewal period would have run (though not a significantly different period). The Landlord disagreed and the parties wound up in court on this and other lease interpretation issues.
The Court restated the long-held common law position that a renewal and an extension are two different concepts at law. In doing so the Court quoted the definitions of those terms from Black’s Law Dictionary, 8th ed., which defines an "extension" to be a continuation of the same contract for a specified period, and a "renewal" as the re-creation of a legal relationship or the replacement of an old contract with a new contract, as opposed to an extension.
Further, the Court held that the term had been previously extended by the 2002 Agreement, rather than renewed, due to the wording of the 2002 Agreement and therefore all three renewal options remained (and therefore the notice provided to exercise the second renewal option really exercised the first renewal option and two further renewal options remained).
Although the Landlord sought to rely on the fact that the Tenant had referenced the first renewal term in its estoppel and in subsequent correspondence, the Court quoted Massawippi Valley Railway v. Reed (1903), 33 S.C.R. 457 (S.C.C.) at p.470 that "subsequent conduct cannot be used to interpret an agreement when the words of the written agreement are clear and unambiguous." The Court in the present case found the wording of the 2002 Agreement to be clear and that the term was extended and therefore the statement in the estoppel to the contrary and the exercise of the notice provided to exercise the second renewal option, both of which were incorrect, could not be used as subsequent conduct to overcome the clear wording of the 2002 Agreement.
It is a scary proposition for purchasers that they may not be able to rely on the contents of an estoppel, however in this case, a proper inspection and interpretation of the lease documentation by the purchaser should have revealed that the term had been in fact extended by the extension agreement entered into by the parties and therefore all three renewal terms remained (rather than two renewal terms). If the lease documentation available for due diligence had not been clear, the Court may have held the Tenant to the statements made in the estoppel.
The Court did distinguish cases where a purchaser could not determine a matter from reviewing lease documents alone, but went on to hold (as per existing common law) that the "Estoppel Certificate cannot have the effect of altering the terms of the Lease."
In some transactions, a vendor wishes to only provide a purchaser the actual lease agreements, but not the tenant correspondence, etc., however the entire tenant file is important for due diligence purposes and a purchaser should insist on obtaining all documents, correspondence and materials in respect of tenant files. It is not clear what a court would hold in the event that clear documentation existed that was not made available to a purchaser, which contradicts a tenant’s statement in an estoppel. Although it would seem unfair to not hold a tenant to its misstatement in an estoppel where the purchaser did not have documentation to review to discover the misstatement, it would also seem unfair to hold a tenant to a mistaken statement in an estoppel that could have been discovered if all lease documentation and correspondence had been available and properly reviewed. However, it is more in the purchaser’s control in negotiating the agreement of purchase and sale to ensure that all lease documentation and tenant files will be provided. The best way for a purchaser to protect itself is to insist on all lease documentation and tenant files be delivered and to have them inspected and reviewed diligently, together with the estoppels. It may be prudent to involve a commercial leasing lawyer in your due diligence and in dealing with estoppels where the stakes are high. For instance, where a purchaser wants to ensure that demolition rights in favour of the landlord are enforceable and when they can be exercised if a future redevelopment of the subject property is planned.