Whether you’re a commercial landlord or commercial tenant, you want to know, what happens if I breach my Ontario commercial lease agreement?
*Disclaimer: this guide is for informational purposes only. It does not constitute legal advice nor create a solicitor-client relationship between the author and reader. As with all legal matters, a lawyer should be properly retained and consulted where legal advice may reasonably be considered necessary.
What Happens If You Breach a Commercial Lease Agreement in Ontario?
This blog post provides an overview of the rights and remedies available to landlords and tenants on default of a commercial lease agreement in Ontario, including:
1. What happens if a tenant breaches a commercial lease agreement in Ontario?
a) Determining the type of default
b) How a default can be converted
c) Notice periods and cure provisions
d) Landlord’s remedies on tenant’s default: preserving the lease
e) Landlords remedies on tenant’s default: ending the lease
2. What happens if a landlord breaches a commercial lease agreement in Ontario?
f) Tenant’s remedies on landlord’s default: preserving the lease
g) Tenant’s remedies on landlord’s default: ending the lease
Ready? Here we go!
1. What Happens If a Tenant Breaches a Commercial Lease Agreement in Ontario?
a) Determining the Type of Default
The first step for a landlord when the tenant is in default of the lease agreement is to categorize the nature of the default. Determining the nature of the default will determine what rights the landlord has and what remedies are available to them.
Generally, there are two types of tenant defaults:
- Monetary Defaults – which occur (as the name implies) when the tenant fails to pay rent or other amounts payable under the lease such as: operating costs, realty taxes, or utilities. It is not unusual for the lease to be drafted so the definition of “rent” includes amounts payable by the tenant to third parties such as a utility company so that failure to pay these parties will be considered a monetary default under the lease as well.
- Non-monetary Defaults – which occur when the tenant fails to perform some other non-monetary obligation under the lease. This can include defaults such as: failing to conduct repairs to the premises as provided under the lease, failing to provide proof of insurance, or conducting a business in the premises outside of the permitted use.
b) How a Default Can Be Converted
Both landlords and tenants should be aware, that many lease agreements allow the landlord to convert non-monetary defaults into monetary defaults upon their occurrence. This is permitted by a properly drafted lease agreement which provides the landlord may rectify the default on the tenant’s behalf and recover the expense of doing so from the tenant in the form of rent. These types of provisions are particularly useful for landlords because, as the non-monetary default is now a monetary default, the landlord can resort to the broader rights and remedies available for monetary defaults which are usually easier to enforce.
c) Notice Period and Cure Provisions
Virtually every lease agreement will provide for what happens in the event of the tenant’s default. Most often the lease will provide for a notice period whereby the landlord must provide the tenant with written notice of the default and time to rectify the default before further action can be taken by the landlord. Landlords and tenants should both be aware, that these notice periods must strictly be adhered to. Failure to abide by the notice provisions could make the landlord’s exercise of a remedy such as distraint (seizing certain tenant property to satisfy amounts payable under the lease) invalid, and expose the landlord to liability for damages suffered by the tenant.
Again, the length of the notice and cure periods are defined by the type of default:
- Notice for Monetary Defaults – commercial leases typically provide for a short notice period to cure monetary defaults. Notice periods can be as little as 5 days or less. If the lease is silent on the length of the notice and cure period with regard to rent, the Commercial Tenancies Act provides the landlord may terminate the lease once rent has been outstanding for more than 15 days, without providing the tenant with prior notice or an opportunity to cure the default (Commercial Tenancies Act, s.18(1)).
- Notice for Non-monetary Defaults – commercial leases often provide longer notice and cure periods for non-monetary defaults. Notice periods are often around 10 days or more. This is one of the advantages of converting non-monetary defaults into monetary defaults as described above. Landlords and tenants must be aware though, that despite the notice and cure periods provided in your lease, the landlord must adhere to the non-monetary default provisions in the Commercial Tenancies Act. The Act provides, when the default is non-monetary, the landlord must give the tenant notice of the default and a reasonable amount of time to rectify it (Commercial Tenancies Act, s.19(2)). It is generally accepted that landlords must abide by these provisions of the Act, despite what is set out in the lease. Note, like section 18(1) above, these notice provisions apply to the landlord’s right to terminate and not other remedies.
d. Landlord’s Remedies on Tenant Default: Preserving the Lease Agreement
If the landlord determines the tenant is in default, they will have to decide whether to terminate the lease or rectify the default while preserving the landlord-tenant relationship. Where the landlord wishes to preserve the lease, the usual remedies are:
i) Distraining against the tenant’s property
ii) Commencing court proceedings to recover damages from the breach
iii) Commencing court proceedings to obtain an injunction or specific performance
These remedies will be expanded on below in turn.
Distraint (or distress) is exercised by the landlord entering the premises (usually with the help of the bailiff) and seizing and selling the tenant’s goods to satisfy outstanding rent payments. Distress is known as a “self-help remedy”, meaning it can be exercised without initiating legal proceedings. Distress is only available when there is a default in the payment of rent and the landlord tenant relationship is intact (meaning the lease has not been terminated).
When exercising this right, there are specific procedures the landlord must carefully follow. Distress cannot be exercised on a Sunday, must be exercised during daylight hours, and can only be used to seize chattels and not fixtures (an issue which itself has resulted in an abundance of case law of whether goods seized were in fact chattels and not fixtures). Any failure to properly exercise the right of distress could result in the landlord facing a claim for damages. The tenant’s claim could be in the form of trespass and/or termination of the lease. Distress can be further complicated by potential claims from third parties with security over the tenant’s goods, or claims by government authorities (like the CRA) for outstanding HST or employee remittances. Despite being a self-help remedy, distraint is an onerous and complicated process and legal advice should always be sought before exercising this right.
ii) Proceedings to Recover Damages
The complicated nature of distraint, and protections afforded to the tenant (such as strict notice requirements), are why many landlords forego distraint entirely and instead opt to simply commence court proceedings and sue the tenant for damages resulting from the breach. This process would take the form of initiating either an action or application where rent is outstanding, or the tenant has otherwise failed to make a payment. There are different types of damages the landlord may claim as a result of the tenant’s breach (for more information on this point see What Are the Remedies for Breach of Contract).
iii) Injunction or Specific Performance
Outside of commencing proceedings, other legal processes such as obtaining an injunction or specific performance are both viable options for landlords to consider. Injunctions are most often considered where the landlord wants the tenant to cease doing some act that puts them in breach of the lease. For instance, where the tenant is operating a business contrary to the permitted use specified in the lease. In this case, the Court would order an injunction to force the tenant to stop. Conversely, specific performance can be used to compel the tenant to act. For instance, where the tenant has failed to repair the premises, the landlord can use the courts to order them to conduct the repairs.
e) Landlord’s Remedies on Tenant Default: Ending the Lease
If in the landlord’s determination, a better course of action is to put an end to the landlord-tenant relationship, the landlord may use the tenant’s default as grounds for:
iv) Terminating the lease agreement (a process known as forfeiture)
v) Obtaining a writ of possession
vi) Commencing proceedings for damages
These options are expanded on below.
iv) Terminating the Lease
If in the landlord’s determination, a better course of action is to put an end to the landlord-tenant relationship, the landlord may use the tenant’s default as grounds for terminating the lease agreement and moving to repossess the leased premises (a process known as forfeiture). The most common way to terminate the lease is by the landlord delivering written notice of termination to the tenant in conjunction with physically baring the tenant from entry to the premises. Notice on its own is not sufficient to terminate the lease. The landlord must take some further act to demonstrate retaking possession of the premises. Retaking possession is normally effected by the landlord’s representative attending the premises with a bailiff and changing the locks (usually after business hours to prevent a disturbance to other tenants).
v) Obtaining a Writ of Possession
As an alternative to physically taking possession, the landlord may apply to the court under the Commercial Tenancies Act (Part III) to obtain a writ of possession. Obtaining a writ of possession is a prudent way of proceeding, where the physical retaking of the premises isn’t practical. It is also a good idea to obtain a writ of possession where the landlord’s right to retake possession is unclear due to the circumstances of termination, and/or ambiguity in the lease agreement.
vi) Commencing Proceedings for Damages
Similar to the rights of a landlord wishing to preserve the lease, on termination, the landlord will usually commence a court proceeding to sue the tenant for damages caused by the breach. In this case, the landlord is entitled to the present value of the rent and also future rents (as confirmed by the Courts in Highway Properties Ltd. V. Kelly, Douglas & Company Limited). In addition, the landlord may include in its claim other expenses attributable to the tenant’s breach of the lease such as legal expenses, the costs involved in retaking possession and re-leasing the premises (such as the bailiff’s fees, and commission paid to brokerages). Note, the landlord has a duty to mitigate these damages by for instance, re-leasing at a lower market rent and recovering the difference from the tenant in breach. The landlord will not be able to recover damages where they could have mitigated by lessening the impact of the breach and instead chose not to. In this case, the damages will be seen as being worsened by the landlord’s failure to act.
A Note on Waiver
Landlords must be careful not to waive the right to terminate. The right to terminate can be waived where the landlord has knowledge of the tenant’s breach and acts in some way to confirm the preservation of the lease for instance, by continuing to accept rent payments or exercising the right of distress (note, non-waiver clauses will not protect the landlord in these cases and neither will communications indicating the rent is accepted as without prejudice).
2. What Happens If a Landlord Breaches a Commercial Lease Agreement in Ontario?
The standard remedy for breach of contract is a monetary award for damages. The amount of the award is determined by performing calculations under specific heads of damages (which will be described below). Other remedies include specific performance, meaning a court order that the defendant perform its contractual obligations, or an injunction (an order to prohibit the party from continuing to breach the agreement). These remedies, while not exhaustive, will be examined in turn below.
f) Tenant’s Remedies on Landlord’s Default: Preserving the Lease
As a result of the often unequal bargaining power between landlords and tenants, tenants have far fewer remedies available to them where the landlord is in default of their obligations under the lease. Most often, the lease agreement itself will provide few explicit remedies when compared to those available to the landlord. In these circumstances, the tenant will usually need to turn to the common law (judge made law that exists independent of statute or the lease agreement) for protection.
Generally, relief for Tenants wishing to preserve the lease will take the following forms:
i) Applying to the courts for relief from forfeiture
ii) Commencing court proceedings to recover damages, and/or obtain an injunction, or specific performance
i) Relief from Forfeiture
Landlords and tenants should both be aware of the tenant’s rights under the Commercial Tenancies Act and Courts of Justice Act to apply to the courts for relief from forfeiture. A successful application for relief will void the landlord’s termination and preserve the lease agreement. The Court has rather wide discretion to decide whether the lease should be upheld (or eviction stayed), and will grant relief to the tenant where a combination of the following factors are present:
- the default is the tenant’s first
- the default was inadvertent
- the tenant has made reasonable and diligent efforts to comply with the lease
- hardship would be cause to the tenant, and
- whether the landlord has an ulterior motive (such as where they believe the rent is below market and they want to terminate so as to be able to re-lease the premises for higher market rates)
ii) Commencing Proceedings for Damages, Specific Performance, or Injunction
Similar to the landlord, the tenant may initiate a legal proceeding to claim damages from the breach, or seek other remedies under statute or equity. These may include seeking an order for specific performance or injunction, and the general power of the courts to provide relief from penalties and forfeiture under the Courts of Justice Act.
g) Tenant’s Remedies on Landlord’s Default: Ending the Lease
When the landlord is in default of the lease agreement, and the tenant determines it is in their interest to end the lease, the following remedies may be used:
iv) Argue the landlord has repudiated the lease or caused a fundamental breach of its terms to an extent the Landlord has in effect terminated the lease agreement
v) Set off monetary losses (incurred from the default) against rent payable, and
vi) Argue the landlord substantially interfered with the tenant’s reasonable enjoyment of the premises
iv) Repudiation and Fundamental Breach
Tenants should be aware of the concepts of repudiation and fundamental breach. In essence, these concepts give rise to an argument that the landlord’s default was so severe, the tenant was deprived of the essential benefit of what they bargained for under the lease agreement. There is a high threshold to argue the lease was breached in this manner, but has been successfully argued where, for instance, a landlord refused to grant its consent to the tenant assigning their interest in the lease or, where a landlord altered access to the premises so that the tenant could not receive deliveries of merchandise without great difficulty. In either of these cases, the tenant would argue the landlord’s breach, by their conduct, entitled them to regard the lease as terminated and to sue the landlord to recover damages. Such damages would include the difference in market value for a new lease agreement and costs involved in relocating to a new premises.
v) Set Off
Tenant’s may also choose to “set off” against the landlord’s breach. With this remedy the tenant applies a debt owing to them as a result of the landlord’s default against the rent payable under the lease. However, most commercial leases provide the tenant agrees to waive this right and, even if such a provision isn’t present, exercising this right often results in the landlord instigating an expensive legal dispute for the tenant such as eviction proceedings for non-payment of rent (despite the tenant having valid grounds to set-off against the payments). Tenant’s looking to set off against their landlord should carefully consider whether they have the legal right to do so, and whether the benefits outweigh the risks.
vi) Quiet Enjoyment
At common law, the tenant’s most basic right is the right to quiet enjoyment of the premises. This remedy, available at common law and under statute, creates an implied term in the lease that (1) the landlord has good title to the premises, and (2) (usually more relevant) the landlord covenants not to do anything that would substantially interfere with the tenant’s right to make use of the premises. Because this right is implied, regardless of being provided in the lease, the tenant’s right to quiet enjoyment is often expressly provided for. A breach of this term can entitle the tenant to a claim for damages and, in the most severe instances, can constitute grounds for termination.
Tenants and landlords both have a variety of remedies available in the event of the other’s default. Because of the harsh consequences that could result from an improper exercise of these remedies, both tenants and landlords would be well served to consult with a lawyer when faced with the other’s default.