Terminating Commercial Leases for Non-Rent Defaults

Lawyers Krista Chaytor and Caitlin Steven discuss termination issues in the commercial leasing context. Understand your rights, obligations and risks when there’s a breach of a lease for something other than the payment of rent.

Narrator: You are listening to WeirTalking Leasing, an eight-episode podcast series from WeirFoulds LLP’s Commercial Leasing Group. Educating landlords, tenants and property managers on today’s commercial leasing landscape in Ontario. Our legal specialists will be discussing everything new and interesting, from lease terminations, office sharing, unattractive properties, cannabis, and so much more.

Krista Chaytor: Hello everyone. I’m Krista Chaytor.

Caitlin Steven: And I’m Caitlin Steven. Krista and I are both dispute resolution lawyers here at WeirFoulds. We handle all kinds of disputes involving commercial leases. There are a lot of interesting disputes that we come across in our daily lives that come up in these landlord and tenant relationships, but today we’re going to focus in on one of them. We’re going to talk to you about the potential risk involved with terminating a lease for a default that is not related to arrears of rent.

Krista Chaytor: Okay, so I think the best way to get started on this is to tell the story about a situation that I recall that should have gone really well for a landlord but ended up in a mess. So here’s the situation. A landlord gets sued for a wrongful termination of a lease. And the landlord’s story is that the tenant was consistently in default of the lease because it refused to provide proof of insurance. The lease was pretty clear that the tenant was required to have insurance and it was pretty clear that the tenant was required to deliver a certificate of insurance to the landlord every year. So after repeatedly asking the tenant for the insurance certificate, the landlord was completely fed up and delivered a notice of default to the tenant. The notice of default wasn’t bad. It had the required parts. It specified that the breach was the failure to provide proof of insurance and it gave the tenant time to come up with the certificate of insurance.

Krista Chaytor: Even after that notice was delivered, the tenant still refused to provide proof of insurance. The landlord was actually pretty concerned about this because the tenant was a nightclub and it was possible that it had trouble getting insurance and maybe it didn’t even have insurance at all. Because not having insurance is a pretty big risk to the landlord, it felt it was a pretty serious breach of the lease. So when the time came to cure the default and that time expired without a certificate of insurance, the landlord called up its locksmith, changed the locks and terminated the lease. Sounds pretty straightforward. The landlord was pretty adamant that the tenant was in default of the lease and that the landlord was justified in terminating the lease, but unfortunately for the landlord in this case there actually was a problem.

Caitlin Steven: Let me guess. The problem is that the landlord didn’t take a close enough look at its lease and it actually didn’t have a clause that gave it the right to terminate the tenancy as a result of this type of non-rent related default.

Krista Chaytor: That actually is exactly right. And what happened is the landlord realized too late that it had a problem with the termination.

Caitlin Steven: So to back it up a little bit, let’s just talk a bit about landlord’s rights and obligations around terminations and where they come from. There’s two sources for these rights. The first is, of course, the lease and the other is the Commercial Tenancies Act. So the Commercial Tenancies Act has a section that deals specifically with non-rent related defaults, and it’s Section 19(2) if you care to take a look at the language.

Krista Chaytor: Do not read it right now, Caitlin. It is deathly boring.

Caitlin Steven: Right. And this section is often misused. Contrary to what landlords sometimes believe, this Section 19(2) doesn’t give a landlord a right to terminate the lease. I’ll paraphrase what the section says. If a lease contains the right for a landlord to terminate the tenancy because of a non-rent related default, then regardless of what the lease says, the landlord is required to give the tenant a reasonable time to remedy the default. So in other words, the section doesn’t create a statutory right to terminate the lease for a non-rent related default. Instead, it actually restricts a contractual right to terminate for a non-rent related default, and only if that right already exists in the lease. So Krista, in your example, we’ve got a situation where there’s a requirement in the lease that the tenant have insurance. There’s also a requirement in the lease that the tenant deliver proof of insurance to the landlord on a yearly basis. But in spite of those requirements and for no explained reason, the tenant refused to provide the landlord with that proof of insurance.

Caitlin Steven: Now in those circumstances the tenant is in breach of the lease for failing to provide the landlord with proof of insurance, but because there’s this other issue of the lease not including a right for the landlord to terminate the lease for a non-rent related default, the landlord can’t just come in, engage in self-help, change the locks and terminate the lease, even though the tenant’s breach in this case is very serious. Because that right does not exist in the lease, the landlord could actually be in breach of the lease itself for changing the locks.

Krista Chaytor: So you’re probably wondering why a landlord would leave that kind of clause out of the lease since it’s a pretty important because if you want to use self-help and regain possession of the premises. I don’t think it’s that landlords intentionally leave it out of the lease, I think sometimes landlords don’t know that it’s required in the lease and misunderstand what the act says. There are a couple of other situations where it could happen.

Krista Chaytor: One is that sometimes landlords, tenants, they just want to put together a really basic form of lease. It just has the major things that are required, like the rent, the premises, the term, commencement date, things that are absolutely needed. But the other time where I actually see it a lot, and more often, is when the relationship starts out with an offer to lease and there’s an intention and perhaps a requirement in the offer to lease that the landlord’s standard form of lease gets signed, but then once everyone gets rolling, the tenant opens for business, the honeymoon is over, everyone forgets about the documents and the actual standard form of lease never gets signed. So the offer itself doesn’t have a termination right because it’s going to be caught in the standard form of lease, and then for one reason or another, it never actually gets signed up. So that’s a situation where you have to be super careful that your offer to lease actually has the right to terminate for a non-rent default.

Caitlin Steven: So the landlord in your situation, now, if we go back in time for that landlord, realizes, oh, I don’t have a right to terminate the lease, but this tenant hasn’t given me proof of insurance and this is seriously concerning me. What am I supposed to do in this situation? Well, there’s very few options, but the main thing the landlord has to do is contact a lawyer and go to court.

Krista Chaytor: And that’s where we come in.

Caitlin Steven: Exactly. The landlord can come to us, tell us what’s going on, and we can start the proper application or action to get things rolling. The landlord can seek an order to terminate the lease due to the tenant’s non-rent related default, but the outcome of any such application or action will depend on how serious the breach is, along with all the other facts of the case. The court may only terminate the lease if the default is extremely serious and deprives the landlord of substantially the whole benefit of the contract. In this case, arguably the insurance could be pretty serious and that could go to the heart of the contract and they could end up with an order terminating the lease.

Caitlin Steven: But in situations with more minor breaches, the court may not be inclined to actually terminate the lease, it just may grant damages to the landlord, if that. The landlord could come out with no remedy at all, it really just depends on the situation. The landlord could also seek an order for specific performance of the lease and that order would require the tenant to comply with the terms of the lease. Basically, without the proper provision in the lease that allows the landlord to terminate for a non-rent related default, the landlord is likely going to be forced to litigate in order to deal with this problem tenant and terminate the tenancy.

Krista Chaytor: Okay, so no one really likes to litigate, so make sure that your lease actually has that provision in it that allows a termination for a non-rent default. But even if you have that provision in your lease, Caitlin, the other thing you mentioned is that what Section 19(2) actually does is impose restrictions on the ability to terminate a lease. So assuming for the moment that you have a lease, it has a right to terminate for a non-rent default, what are some of the restrictions that Section 19(2) imposes on that right?

Krista Chaytor: So first of all, the notice has to be specific about what the default is. Ideally, the notice should refer to the exact section of the lease that the tenant is not complying with. Usually what I do is I refer to the exact section number of the lease, and even if there’s a subsection or a letter, I refer to that as well. However, even that might not be completely sufficient. Sometimes you may have a section of the lease that can be breached in a number of different ways. So for example, this is an easy one to think about. Most leases have a clause that requires the tenant to comply with all municipal by-laws. So obviously, there’s a ton of municipal by-laws. So a notice that advises the tenant that it’s in default of that particular section of the lease as a result of its failure to comply with municipal by-laws, doesn’t actually provide the tenant with very much information, and certainly not enough information to remedy the default. The first thing the tenant is going to wonder is, is it a by-law concerning signage? Is it a by-law concerning noise? Is it-

Caitlin Steven: A by-law that prevents me from keeping a prohibited animal like a hyena or a flamingo on the premises?

Krista Chaytor: Is that actually a by-law?

Caitlin Steven: Yeah.

Krista Chaytor: That’s right, Caitlin. It could be absolutely anything. So what the notice needs to do is tell the tenant that it’s in default of not just the particular section of the lease, but in that case, also specify exactly why. For example, it could say… All right, so I know signage by-law, not hyena by-law, so I’ll use that example. It could say, “You’re in breach of the lease as a result of your failure to comply with Mississauga signed by-law 54-02 by not having a permit for your exterior sign.” And that way the tenant knows exactly what’s wrong and how it has to fix the default. That’s the sort of specificity that a notice under Section 19(2) requires.

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Caitlin Steven: Another restriction that Section 19(2) imposes is that the notice has to give the tenant a reasonable amount of time to remedy the default. Why is this so important? Well, notice is the protection for the tenant. The reason for the notice is to warn the tenant that its leasehold interest is at risk and it gives the tenant a chance to preserve the interest by remedying the default. The tenant might not have known that this actually was an issue if the landlord never gave any prior informal notice at all, so this gives the tenant a chance to fix the issue.

Caitlin Steven: So what amount of notice is reasonable? Well, that depends on the situation. If the default is breaching a noise by-law, then it might be sufficient for the landlord to give the tenant only five days to stop making the noise. If the default is getting a sign permit, then five days is not going to be sufficient to get that permit, and in fact, 15 days might not even be enough time.

Krista Chaytor: How long do you think you need to give someone to get rid of a hyena? Probably have to find a place for it to go?

Caitlin Steven: We have to find out how many hyenas you have.

Krista Chaytor: True.

Caitlin Steven: If you have both hyenas and flamingos, the hyenas might take care of the flamingo problem, but you’re still stuck with those hyenas. So getting back to sign permits, unless of course that sign permit has to do with the hyenas you have on your premises, and I’m not quite sure how that interplay works, but a regular sign, the landlord’s notice of default might say something like, “You have to obtain a sign permit or make an application for a sign permit within a period of 15 days.” What the landlord is doing here is requiring that the tenant take a positive step to actually remedy this breach, even if the actual breach can’t be dealt with in the time period given. This may put you in a situation where further notices of default are required because the tenant takes this first step but then doesn’t follow up. But that will depend on the actual situation.

Caitlin Steven: Most breaches of contract are settled in court. The landlord’s ability to take matters into its own hands by changing the locks and terminating the lease is actually a pretty extraordinary right. I would preface this by saying that if there is a concern about hyenas in the back of the premises, you might not want to change the locks on a tenant because then you’re the ones stuck with those hyenas.

Krista Chaytor: That’s a different podcast where we talk about abandoned property.

Caitlin Steven: Stay tuned. But these self-help rights that the landlord is trying to engage, they’re actually a pretty extraordinary right. For this reason, courts are pretty strict in ensuring that landlords comply with their obligations under Section 19(2) of the Commercial Tenancies Act. The termination will be wrongful if the landlord does not strictly comply with these obligations.

Krista Chaytor: So that’s a good point. And another thing to keep in mind is that you actually can’t contract out of Section 19(2). So even if your lease says that you can terminate a lease for a non-rent default without giving any notice to the tenant, you as a landlord
actually can’t do that. Section 19(2) will still apply. And another thing to keep in mind is that the lease may actually have requirements that are more strict than Section 19(2), and in that case you’ll have to comply as a landlord with the stricter of the two.

Krista Chaytor: So if you have a situation like, I think you said the noise, you may be able to deliver a notice. Five days may be reasonable for the notice, but if the lease says 15 days for a non-rent default, then you’ll have to give the 15 days as required by the lease, even though maybe five days is reasonable. On the other hand, like the sign permit we talked about, if the lease says 15 days and there’s no way you’re going to get it in 15 days, then you’re stuck with reasonable under the act and you have to give more than 15 days, even though the lease says 15 days.

Caitlin Steven: So Krista, in that situation, what happens if the landlord’s idea of reasonable notice doesn’t actually end up being reasonable? So if I’m a tenant, I get this notice from my landlord saying that I have to fix my sign issue because I don’t have a permit for my exterior sign, within a month. So I take that notice, I’m treating things seriously. I go to make a permit and I’m told, “Okay, well, you’re not going to be able to get your permit for four months because you have to fill out all this extra paperwork and get an engineer involved.” What am I supposed to do in that case?

Krista Chaytor: Okay, so if I’m the tenant in that situation, what I would do is go to the landlord, show the landlord I’ve made the application for a permit, provide that information to the landlord. Tell the landlord your 30-day notice actually isn’t a reasonable amount of time. It’s going to take four months. It’s out of my hands. And then as the landlord, if I get that information and I know the tenant has done what it has to do and it just takes four months because of the city of Mississauga or city of Toronto, then as the landlord I would really reconsider whether I’ve given reasonable notice.

Caitlin Steven: We’ve covered a lot of various topics within this issue of terminating a lease for non-rent related defaults. So Krista, what are the takeaways that we can pull out of our discussion today?

Krista Chaytor: Okay, so number one, check your lease. If your lease does not have a clause allowing the landlord to terminate for a non-rent default, then the landlord can’t do it. The act doesn’t give the landlord that right and the landlord will probably have to sue to enforce its rights. I think as part of that number one takeaway is if you’re dealing with an offer to lease and you’ve never signed up the standard form lease, consider getting it signed up or be really careful with the offer to lease.

Caitlin Steven: So number two takeaway. If the lease allows a landlord to terminate for a non-rent related default, then the landlord has to give a very specific notice to the tenant and make sure that it follows all the requirements under the lease and under the Commercial Tenancies Act, Section 19(2).

Krista Chaytor: Number three, the notice has to be specific. It has to clearly identify the default and it has to provide enough information so that the tenant knows exactly what it has to do to remedy that default.

Caitlin Steven: And number four, the notice has to give a tenant a reasonable amount of time to cure that default, and what is reasonable will depend on the circumstances and may also depend on the terms of the lease.

Krista Chaytor: Thanks for listening. If you have any questions about lease disputes, you can find contact information for me, Krista Chaytor, and for Caitlin Steven on the WeirFoulds website. And if you liked our podcast, please rate, review, and subscribe.

Narrator: Thanks for joining us for this episode of WeirTalking Leasing by WeirFoulds LLP. Please take a moment to rate, review, and subscribe, and if you’d like to hear from our lawyers on another topic, send us an email at publications@weirfoulds.com.

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