Legal Blog

Chicken

We have a sophisticated tenant and a large and sophisticated landlord. They have a dispute over the terms of the lease and neither blinks. Sort of like playing chicken. This was the situation in McRae Cold Storage Inc. v. Nova Cold Logistics ULC, 2019 ONCA 452.

Lease

The lease was for 5 years with a term ending March 31, 2018. The tenant had an option to extend the term for two additional 5 year terms, which could be exercised only if the tenant were not in default of the lease at the time of extension.

In 2016, the landlord informed the tenant that, under the terms of the lease, the tenant had to pay a portion of the increased energy costs. The amount in issue to the end of the original term was $136,000. The tenant disagreed with the landlord’s interpretation and did not pay those increased costs. The landlord sent a notice of default in November 2017. Notwithstanding this notice of default, the tenant sent a notice exercising its right to extend the term for a further 5 years.

The landlord informed the tenant that, according to the landlord, the tenant was still in breach of the lease and that, therefore, the exercise of the option was invalid. One month before the end of the original term, the tenant brought an application for a declaration that it was not in default. Three days before the end of the original term, the court issued an injunction by which the tenant would be allowed to stay in the premises until the application was heard. At the same time, the tenant deposited $136,000 with its lawyers to be released to the landlord if the tenant were unsuccessful in the application.

Application

The judge spent most of the reasons for decision on the interpretation of the lease, which, in this case, is technical and of little interest to us. She ultimately decided that the landlord’s position was correct and that, accordingly, the tenant was indeed in default under the lease at the time that it purported to exercise its notice of renewal.

The judge noted that when a lease imposes a condition on the exercise of an option to renew, the tenant must comply with that condition. In this case, the tenant did not comply with the condition that it not be in default of the lease and therefore had no right to exercise its notice of renewal. The judge also noted that the landlord did not even have to notify the tenant of the default; by doing so, it merely gave an added warning, which the tenant ignored.

Relief

The tenant requested relief from forfeiture. The case law distinguished between relief from forfeiture of an existing right and relief from a failure to perform conditions precedent. The court’s ability to grant relief from observance of conditions was far more limited. The tenant had to demonstrate that it “made diligent efforts to comply with the terms of the lease which are unavailing through no default of his or her own.”

The judge held that the tenant was unable to show the requisite degree of diligence. It knew of the landlord’s interpretation and the landlord’s calculation of the additional costs. The landlord had rejected the tenant’s suggestion that a third party calculate the amount due. The tenant knew that litigation was its only alternative. Accordingly, the tenant should have paid the amount requested under protest and then moved for a resolution of the dispute. The tenant was given ample time to rectify its default and did not avail itself of the opportunity.

Appeal

The tenant appealed the decision, but, interestingly, did not appeal the judge’s interpretation of the amount due under the lease. It just appealed the decision relating to relief from forfeiture. The Court agreed with the application judge as to the law she applied and her application of the facts to the law.

The tenant was liable for costs of $40,000 for the application and the appeal. Whether the tenant made a deal with the landlord to remain in the premises, we do not know. However, we can safely assume that, if it did, the terms were not as favourable as in the original lease.

The tenant played chicken and lost.

Image courtesy of sxx.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.