Doctrine Of Spent Breach Raises Uncertainty For 'No Prior Default' Stipulation In Lease Renewal Terms

• Published date: 27 July 2021
• Subject Matter: Real Estate and Construction, Landlord & Tenant - Leases
• Law Firm: Clark Wilson LLP
• Author: Mr Roy Nieuwenburg and Manveer Sall

A common feature of many commercial lease agreements is an option to renew the lease for an additional term, provided that the tenant has not breached any covenants of the lease agreement.

In British Columbia, it has long been established that a tenant will not be granted relief from forfeiture by the court where a landlord relies on the "no prior default" stipulation in a renewal option clause, where the tenant has been in breach. In Clark Auto Body Ltd. v. Integra Custom Collision Ltd., the BC Court of Appeal concluded:

"there is no compulsion on the tenant to exercise the renewal option, but if it does so, the tenant must comply with the conditions precedent. If the tenant fails to comply, it does not suffer a penalty or forfeiture of an existing tenancy. Equity will not intervene."¹

This line of reasoning has since been followed in numerous decisions in British Columbia where the courts have upheld the conditions precedent of a renewal option.² However, a recent decision out of Ontario goes in a different direction.

Background

In H.A.S Novelties Limited v. 1508269 Ontario Limited, a tenant's prior breach of a commercial lease agreement was determined not to prevent them from exercising a lease renewal option.³

The applicant tenant and respondent landlord entered into a Rent Relief Agreement at the outsight of the Covid-19 pandemic whereby the tenant was only required to pay 1/3 of the rent for the duration of Ontario's COVID-19 lockdown. The remaining 2/3 of the rent would be paid over six months after the conclusion of the lockdown.

Shortly after the Rent Relief Agreement was signed, the tenant requested the landlord to apply for the Canada Emergency Commercial Rent Assistance (CECRA) program. Under CECRA, eligible landlords and tenants could enter into an agreement whereby tenants pay 25% of the rent, the government would pay 50% of the rent, and the remaining 25% is absorbed by the landlord. The landlord ultimately decided not to apply for CECRA, but a lapse in communication resulted in the tenant being unaware of the landlord's decision.

The miscommunication allegedly led to the tenant not paying 1/3 of the rent pursuant to the Rent Relief Agreement, hence, breaching the lease agreement.

Overriding the Express Terms of the Lease Agreement

The lease contained the following clause:

"Provided the Tenant is not at any time in default of any covenants within the lease, the Tenant shall be entitled to renew this lease for 1 additional term(s) of 60...