What's Fair When Terminating a Commercial Lease? The Court of Appeal's Diverging Views in Bennett Law Chambers Professional Corporation v. Camcentre Holdings Inc., 2022 ONCA 658
On September 22, 2022, the Ontario Court of Appeal revisited the interpretation of termination notice provisions under commercial leases in Bennett Law Chambers Professional Corporation v. Camcentre Holdings Inc., 2022 ONCA 658 (“Camcentre”). Although the Court agreed on the applicable law and facts of the case, the Court diverged strongly in their interpretation of the termination provision at issue. The majority upheld the application judge’s finding that a termination notice was invalid because the landlord failed to comply with the preconditions set out in the lease. The dissent, on the other hand, called the application judge’s position “patently unreasonable.”
The Court of Appeal’s stark contrast of reasons presents a discouraging lack of clarity as to how termination notice provisions will be interpreted in the future. Nonetheless, the case highlights the importance for commercial leasing parties to pay close attention to the specific language set out in a lease and consider whether all termination preconditions have been strictly adhered to.
The landlord, Camcentre Holdings Inc. (the “Landlord”), and the tenant, Bennett Law Chambers Professional Corporation (the “Tenant”), were parties to a lease for a suite of a commercial building in Mississauga, which was set to expire on January 31, 2023.
Pursuant to a “Termination by Demolition” provision (the “Termination Provision”) in the lease, the Landlord cited a planned demolition of the leased premises as the reason for terminating the Tenant’s lease. On October 31, 2019, the Landlord provided the Tenant with a six-month termination notice in writing, which required vacant possession of the leased premises by April 30, 2020 (the “Notice of Termination”). Under the Termination Provision, the Notice of Termination could only be valid if the Landlord obtained “all requisite permits and authorization for the commencement of … demolition” by the end of the six-month notice period (the “Notice Period”).
For clarity, the Termination Provision and Notice of Termination stated as follows:
15.05 TERMINATION ON DEMOLITION
If at any time the Landlord shall have decided to substantially redevelop or reconstruct the Project to the extent that vacant possession of the Leased Premises is necessary or expedient or to demolish the building of which the Leased Premises form a part, the Landlord may terminate this Lease by giving six months notice in writing to the Tenant. Such termination shall not be effective unless at the end of the notice period the Landlord shall have obtained all requisite permits and authorizations for the commencement of such redevelopment, reconstruction or demolition.
Notice of Termination
Please be advised that, pursuant to Section 15.05 of the Lease, the Landlord has decided to demolish the building of which the Leased Premises forms a part and is hereby exercising its right to terminate the Lease as set out herein. The Landlord does hereby provide six (6) months written notice of the termination of the Lease and the Tenant is required to deliver vacant possession of the Leased Premises by April 30, 2020.
There was no dispute as to whether the Landlord intended to demolish the leased premises. The Landlord planned to develop the property into a condominium complex and the Landlord had already sold 943 condo units in advance of construction, totalling $557 million in sales.
As was the case with other large-scale demolitions, the Landlord planned its demolition in stages. Before physical demolition of the structure took place, asbestos removal within the building was required. This was the first stage in the Landlord’s demolition process. Given that the Landlord required vacant possession of the building to begin the asbestos abatement, this first stage was set to occur after the end of the Notice Period. Importantly, the Landlord required no permits or authorizations for the asbestos abatement.
Near the end of the Notice Period, the Tenant discovered that the Landlord failed to obtain any permits for demolition. Given that the Landlord was obligated to obtain “all requisite permits and authorization for the commencement of… demolition” by the end of the Notice Period, the Tenant took the position that the termination was ineffective and refused to vacate the leased premises.
The Tenant applied for a declaration that the Notice of Termination was ineffective.
The Landlord defended the Tenant’s application and filed a cross-application, claiming that the lease was terminated by the Tenant’s various unrelated breaches of the lease agreement. In connection with these other breaches, the Landlord delivered notices of default to the Tenant (the “Notices of Default”), which indicated that they were brought “without prejudice” to the Landlord’s position that the lease was terminated by the Notice of Termination:
As a result of the position you have taken with our application, we are delivering two notices of default. These notices of default are without prejudice to our position that the lease has been terminated as a result of the Notice of Termination dated October 31, 2019.
The Application Judge’s Decision
The issues before the application judge were: (1) whether the Notice of Termination was effective to terminate the lease; and (2) whether, in the alternative, the Landlord’s subsequent Notices of Default terminated the lease.
On the first issue, the Landlord claimed that the Notice of Termination was effective because the asbestos abatement was considered the “commencement” of demolition under the language of the Termination Provision. Accordingly, the Landlord argued that it complied with the Termination Provision because all requisite permits and authorizations had been obtained for such “commencement” (i.e., zero permits or authorizations were required and zero were obtained).
In considering the language of the lease and the Landlord’s argument, the application judge relied upon two authorities on contractual interpretation: Goodyear Canada Inc. v. Burnhamthorpe Square Inc. (1998), 41 O.R. (3d) 321 (ONCA) (“Goodyear”) and Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (“Sattva”).
In Goodyear, the Ontario Court of Appeal ruled that a “flexible approach” focused on “fairness over technicality” should be taken when interpreting notices of termination in commercial leases where the date of termination is in dispute. The Supreme Court of Canada in Sattva similarly held that courts should engage in a “common-sense” and practical approach to contractual interpretation while considering “the intent of the parties and the scope of their understanding.”
Relying on these principles, the judge reasoned that the Notice of Termination was not effective and the lease therefore continued beyond the end of the Notice Period. Although the judge agreed that the decision hinged on the interpretation of “commencement” in the Termination Provision, he disagreed with the Landlord’s argument that it meant the asbestos abatement.
The evidence indicated that the Landlord was not precluded from seeking a demolition permit or a conditional demolition permit prior to the completion of the asbestos abatement. Accordingly, the judge reasoned that the “commencement” referred to a stage in the demolition in which the permit had been obtained. The judge held that the Landlord should have sought such a permit before the Notice Period ended in order to give effect to the Notice of Termination. In the absence of such a permit, the judge concluded that the Landlord could not terminate the lease.
Turning to the Landlord’s cross-application, the judge found that the Notices of Default did not operate to terminate the lease. Rather, the Notices of Default operated to have the unintended effect of waiving the Landlord’s right to rely on the Notice of Termination. Notwithstanding the fact that the notices of breach were brought “without prejudice” to the Landlord’s position, the application judge held that they were “intended to operate with prejudice, and therefore had the effect of recognizing that the lease remained in effect… and constituted a waiver of the Notice of Termination under the demolition clause.”
The Court of Appeal’s Decision
On appeal, the Court was faced with two potential issues: (1) was the Notice of Termination valid to terminate the lease at the end of the Notice Period; and (2) if the Notice of Termination was valid, did the Landlord nonetheless waive its right to terminate the lease by serving the Notices of Default after the Notice Period.
The Majority’s Decision
Feldman J.A., writing for the majority, held that the Notice of Termination was not effective and upheld the application judge’s ruling.
Justice Feldman agreed with the application judge’s conclusion that the asbestos abatement could not be the “commencement” of demolition under the Termination Provision. Although the asbestos removal was a precondition to demolition, the language in the Termination Provision was clear that the Landlord needed to obtain a demolition permit in order to terminate the lease on that basis. The “commencement” therefore referred to the first step in the demolition process that is permitted to occur because the requisite permit has been obtained. As the application judge pointed out, the Landlord was not precluded from obtaining this type of “conditional permit” prior to the asbestos operation and before the end of the Notice Period.
Justice Feldman further affirmed that the application judge was correct to rely on the decisions of Goodyear and Sattva. The courts’ approach to interpreting commercial leases should be focused on fairness over technicality and considering what the recipient of a termination notice would have reasonably understood the notice to intend. Based on these principles, the Notice of Termination required the Landlord to obtain the requisite demolition permits by the end of the Notice Period. Such requirement was “not unfair,” as it would provide clarity to the Tenant on the Landlord’s precise obligations by the end of the Notice Period.
Finally, given that the Notice of Termination was held to be invalid, the Court declined to consider whether the application judge was correct in finding that the Notices of Default operated to waive the Landlord’s reliance on the Notice of Termination.
Although in general agreement with the facts and applicable law relied upon by the application judge and the majority, L.B. Roberts J.A. wrote a compelling dissent, ruling that the Notice of Termination was effective and allowing the appeal on the basis that the application judge’s decision was unreasonable.
There was no doubt, in Justice Roberts’ view, that the asbestos removal process was the “commencement” of demolition. The uncontroverted evidence on the record was that the Landlord planned the demolition in stages and that the asbestos removal process was the “first stage” of the demolition for which no permit was required. No other stage of the demolition could occur before the asbestos removal. The fact that other permits for later stages of the demolition process may be required had no bearing on the interpretation of the Termination Provision, which only referenced the “commencement” of “demolition,” neither of which terms were defined in the lease.
Further, Justice Roberts notes that, on the specific and undisputed facts of the case, there was no concern about the Landlord evoking the Termination Provision to terminate the Tenant’s lease for an improper purpose or in bad faith. Considering the Termination Provision purposefully, the clause was intended to ensure that the Landlord genuinely intends for the imminent demolition or redevelopment of the leased premises before requiring vacant possession. There was no question that the Landlord’s intent of demolition was genuine and imminent.
In the final part of her dissent, Justice Roberts briefly touched upon the application judge’s finding that the Landlord waived the Notice of Termination by delivering the Notices of Default. Although Justice Roberts did not find it necessary to determine the issue as it was not under appeal, Justice Roberts stated that she would have found that the application judge erred on the issue of waiver. Justice Roberts stated:
Waiver must be clear and unequivocal. Here, the tenant’s alleged breaches simply constituted an additional and different basis on which the landlord relied to terminate the lease, which was not inconsistent with the first Notice of Termination based on s. 15.05 of the lease.
When interpreting termination notice provisions of a commercial lease, Camcentre affirms that courts should use a common-sense and flexible approach focused on fairness and the intentions and understanding of the parties; however, this case demonstrates that this approach remains to be consistently applied. Justice Roberts’ dissent illustrates that judges can reach completely opposite conclusions on the same set of facts when interpreting such clauses.
Landlords of commercial leases are encouraged to carefully review all requirements and preconditions of termination when contemplating a termination notice. Even where a precondition set out in a termination provision seems unreasonable or impractical, a landlord may nonetheless be required to strictly adhere to it in order to enforce a termination notice. In this case, although obtaining a conditional demolition permit did not seem practical from the Landlord’s perspective, obtaining such a permit likely would have prevented the Notice of Termination from being ineffective. This highlights the tension between the specific legal requirements contained in commercial leases and the commercial realities of those that are parties to them.
Further, the application judge’s decision casts uncertainty on the use of notices of default after a termination notice period has ended. The application judge ruled that if the Landlord’s Notice of Termination had been effective, the Landlord’s subsequent delivery of the Notices of Default after the Notice Period had the effect of recognizing the lease and waived the Landlord’s right to rely on the Notice of Termination. In the absence of a more direct rejection of this principle, Justice Roberts’ finding that the application judge was incorrect on this issue is shaky ground for landlords to stand on. Until courts provide a clear ruling on this issue, commercial landlords should think twice about delivering notices of default after a termination notice period has passed.
Given the risk and complexity involved, commercial landlords and tenants should approach termination of commercial leases with vigilance and seek legal advice when contemplating or facing a termination notice.