By: Rajesh K. Sharma, Advocate (LinkedIn)

Commercial Leasing in Ontario

Commercial leasing involves renting out property for business purposes (i.e. industrial office and retail purposes), governed by the Commercial Tenancies Act (CTA) in Ontario. It encompasses various types of leases and specific legal requirements to ensure a valid and enforceable agreement between landlords and tenants.

Leases and licences are two different legal arrangements for occupying property, each with distinct characteristics and implications. The primary difference between a lease and a licence lies in the nature of the interest in the property and the level of legal protection afforded to the occupier. Leases grant an interest in land with exclusive possession and greater legal security, while licences provide a personal permission to use the property without exclusive possession and with fewer protections.

PART 1 - The Nature of Commercial Leasing

Commercial leasing involves the rental of property for business purposes, and it is characterized by a blend of contract and property law principles. This dual nature affects how leases are negotiated, structured, and enforced.

Dual Legal Framework:

Contract Law: Commercial leases are contracts that involve negotiations over terms such as rent, duration, starting date, maintenance responsibilities, and tenant rights.
Property Law: Leases also convey an interest in land, giving tenants certain property rights, such as the right to occupy the space and the right to quiet enjoyment.
Contractual and Property Rights:
Property Rights: These include the right to collect rent, the right of quiet enjoyment for the tenant, and the rights of assignment and sublease. These rights typically run with the land and are enforceable against third parties.
Contractual Rights: These may include special provisions negotiated by the tenant, such as expansion rights, parking rights, tenant inducements, and exclusive-use rights. These rights are generally enforceable only between the landlord and the tenant and do not run with the land.

PART 2 - Basic Legal Requirements of a Valid Lease or Agreement to Lease

To ensure that a lease or agreement to lease is legally valid and enforceable, certain key elements must be clearly defined and agreed upon by the parties involved. These requirements provide the foundation for the lease and help prevent disputes. Here are the basic legal requirements:

I. Identification of Parties

Landlord and Tenant: The lease must clearly identify the parties involved, typically the landlord (property owner) and the tenant (person or entity leasing the property).

Guarantors or Indemnifiers: If applicable, the lease should also identify any guarantors or indemnifiers who will be responsible for the tenant's obligations.

II. Description of the Premises

Specific Premises: The lease must clearly describe the property or portion of the property being leased. This includes the address, floor, unit number, and any specific boundaries.

III. Commencement Date

Commencement / Start Date: The lease must specify the commencement date when the tenant's right to occupy the premises begins.

IV. Duration of Term

Term /Duration of Lease: The lease must outline the duration of the lease term, including the end date or the method for determining the end date. This can be a fixed term or based on an ascertainable event (e.g., completion of construction).

V. Rent

Amount and Payment: The lease must specify the rent amount, payment frequency (e.g., monthly, annually), and the method of payment. This includes base rent and any additional rent such as operating costs, taxes, or utilities.

Adjustments: If applicable, the lease should outline any rent adjustments, such as annual increases, escalation clauses, or percentage rent based on sales.

VI. Agreement on Important Issues

Critical Terms: Any issues raised by either party that are important to them and are not normal incidents of the landlord-tenant relationship must be agreed upon. This includes matters like:

Special Conditions: Terms specific to the lease, such as tenant improvements, parking rights, or exclusive use rights.
Outside Dates: In cases where the lease commencement is based on a future event, an outside date after which the deal can be aborted to avoid indefinite waiting.

VII. Material Terms

Essential Provisions: The lease must include all material terms that are important to the relationship between the landlord and tenant. These may include:

Use of Premises: Specifying permitted and prohibited uses.
Maintenance and Repairs: Detailing responsibilities for maintenance and repairs.
Insurance: Specifying required insurance coverage for both parties.
Indemnity: Outlining indemnification provisions for liabilities.
Termination Rights: Specifying conditions and procedures for terminating the lease.
Assignment and Subletting: Detailing conditions under which the lease can be assigned or sublet.

VIII. Writing and Signature

Statute of Frauds Compliance: Generally, leases must be in writing and signed by the party to be charged or their authorized agent, especially for leases longer than three years. This ensures compliance with the Statute of Frauds.

According to the Statute of Frauds, any lease agreement for a term longer than three years must be in writing and signed by both parties to be enforceable. There are two key exceptions to this requirement:

Part Performance Exception: This applies when one party has taken significant steps to perform their part of the agreement, and these actions are unequivocally referable to the agreement.

Fact Pattern Scenario: Alice and Bob orally agree on a lease for a warehouse for a term of five years. Alice immediately starts making improvements to the warehouse, spending a significant amount of money on renovations, and moves her business inventory into the premises. Despite the lease not being in writing, Bob later attempts to evict Alice, claiming the lease is unenforceable due to the Statute of Frauds. Alice can argue the part performance exception, demonstrating that her substantial actions (renovations and moving inventory) are unequivocally referable to the lease agreement. Thus, the oral lease may be enforceable despite not being in writing.

Short-Term Lease Exception: This applies to leases for terms of three years or less, which do not need to be in writing to be enforceable.

Fact Pattern Scenario: Carlos agrees to lease a retail space to Diana for a term of two years. They agree on the rent and other essential terms orally but do not put the agreement in writing. After a few months, Carlos tries to terminate the lease early, arguing that it is unenforceable without a written agreement. Diana can invoke the short-term lease exception. Since the lease term is only two years, it does not need to be in writing to be enforceable under the Statute of Frauds. Thus, the oral agreement is valid, and Carlos cannot terminate the lease based on the lack of a written document.

IX. Form and Format:

While there is no specific form required, the lease must be a clear written agreement, which can include correspondence or other written documents evidencing the agreement.

Case Law

Ossory Canada Inc. v. Wendy’s Restaurants of Canada: The Court of Appeal for Ontario highlighted that for a binding agreement to lease, all material terms raised by the parties must be agreed upon. In this case, issues such as the garbage enclosure and pylon sign were important to Wendy’s and communicated to the landlord, thus no concluded contract existed until agreement on these points was reached.

PART 3 - Types of Commercial Leases

Commercial Leases can be classified on the basis of Subject Matter and Financial Structure. On the basis of Subject Matter, Commercial Leases can be further divided into three types:-

Industrial Leases: Used for manufacturing, warehousing, and distribution. Generally simpler, with tenants often responsible for maintenance and repair. Environmental provisions are crucial due to the nature of industrial operations.
Office Leases: Pertaining to spaces used for professional services. More detailed, with tenants relying on landlords for various services like HVAC and elevator maintenance. Restoration obligations are often a focus.
Retail Leases: For businesses that sell goods or services directly to consumers. Highly integrated, with landlords exerting control over use, signage, and tenant mix to maintain the retail center's viability. Exclusive-use rights and continuous operation clauses are common.

The following chart outlines the key differences and characteristics of industrial, office, and retail leases.

Aspect	Industrial Leases	Office Leases	Retail Leases
Typical Provisions	Basic, with fewer additional provisions	Moderate complexity, more service dependencies	High complexity, many additional provisions
Maintenance & Repairs	More responsibilities on the tenant	Landlord provides many services, tenant depends on landlord	High integration, responsibilities vary
Environmental Issues	Significant, detailed environmental provisions	Less focus on environmental issues	Variable, depending on the type of retail space
Use Restrictions	Often fewer restrictions	Moderate restrictions	Strict restrictions to maintain tenant mix and use
Signage Rights	Usually fewer signage rights	Moderate signage rights	Critical, includes pylon sign rights
Occupancy Obligation	Typically not required	Not necessarily required	Often required to continuously occupy the premises
Relocation Rights	Rarely included	Sometimes included	Often included
Measurement of Area	To exterior face of all exterior walls	To inside face of glass or exterior walls, center line of interior walls	To exterior face of exterior walls, center line of interior walls
Common Area Inclusion	Usually no inclusion of common areas	Includes a pro-rata share of common areas	Generally no gross-up for common areas
End-of-Term Restoration	Less focus, depends on tenant's use	Often more focus, can be costly	Variable, but often includes obligations to refresh or restore
Landlord-Tenant Relationship	Less integrated, more self-sufficient	Moderately integrated	Highly integrated, akin to a partnership

Commercial Leases on the basis of Financial Structure

Commercial leases can be categorized based on their financial structure, determining how rent and additional costs are allocated between the landlord and tenant. The three main types are net leases, gross leases, and percentage leases.

1. Net Leases

Net leases require tenants to pay a base rent plus additional expenses associated with the property. There are several variations:

Single Net Lease (N): The tenant pays base rent plus property taxes. The landlord covers other expenses like maintenance and insurance.
Double Net Lease (NN): The tenant pays base rent, property taxes, and insurance premiums. The landlord remains responsible for maintenance costs.
Triple Net Lease (NNN): The tenant pays base rent, property taxes, insurance, and maintenance costs. This structure shifts most financial responsibilities to the tenant, providing predictable income for the landlord.

Example: A tenant leasing a retail space under a triple net lease would pay the base rent and also cover property taxes, insurance premiums, and maintenance costs for the building.

2. Gross Leases

Gross leases involve a single, all-inclusive rent payment that covers all property-related expenses. The landlord is responsible for paying property taxes, insurance, and maintenance costs from the rent collected.

Full-Service Gross Lease: The landlord provides a range of services, such as utilities, janitorial services, and building maintenance, included in the rent.

Example: In an office lease with a full-service gross lease, the tenant pays one monthly rent amount, and the landlord covers all other costs associated with operating and maintaining the property.

3. Percentage Leases

Percentage leases are commonly used in retail properties, where the tenant pays a base rent plus a percentage of their gross sales. This structure aligns the landlord’s income with the tenant’s business success.

Standard Percentage Lease: The tenant pays a lower base rent and a percentage of gross sales over a specified breakpoint.

Modified Percentage Lease: Similar to the standard, but the percentage rent is calculated differently or includes other specific conditions.

Example: A tenant in a shopping mall might pay a base rent plus 5% of gross sales exceeding a certain amount each month, providing the landlord with additional income if the tenant’s business performs well.

4. Mixed Financial Structures

Some leases combine elements of the above structures, creating semi-gross leases or escalating leases. These arrangements might fix certain costs for the initial period and include provisions for increases over time, often tied to inflation or other indices.

Example: A semi-gross lease might include base rent with fixed utility costs for the first year, with adjustments for inflation in subsequent years.

PART 4 - The Lease Transaction Process

The lease transaction process refers to the series of steps involved in negotiating, drafting, finalizing, and executing a lease agreement between a landlord and a tenant. This process ensures that both parties understand their rights and obligations and that the lease terms are legally binding and enforceable. Here’s a breakdown of the typical stages involved in the lease transaction process:

1. Preliminary Documents

The preliminary document deals with the legal certainties (parties, premises, commencement date, rent and duration of lease) for a valid lease or agreement to lease. Preliminary document also sets out the process of getting to the final lease document. A preliminary agreement can, however, be a valid lease in spite of an express stipulation that a formal lease agreement will be entered into in the future. Different types of preliminary documents are discussed below :-

Term Sheets and Letters of Intent:

These initial documents outline the basic terms and conditions agreed upon by both parties, such as rent, lease duration, and special provisions. They can be binding or non-binding and serve as a basis for drafting the formal lease agreement.

Offer to Lease:

Most common document used for finalizing commercial lease is an offer to lease. It is a more detailed document that often includes conditions to be satisfied before the lease is finalized. It is usually binding and forms the foundation for the lease agreement.

2. Preliminary Conditions and Due Diligence

The preliminary document sets out any preliminary conditions that either party wants to satisfy (or waive) before the deal proceeds further.

Landlord’s Credit Check:

Creditworthiness of the Tenant. The landlord may perform a credit check on the tenant to assess their financial stability and ability to meet lease obligations.

Tenant’s Due Diligence:

The tenant may investigate the property’s zoning, availability of necessary permits, and the landlord’s title to ensure there are no restrictions that would impact their intended use of the premises.

Inspections:

Both parties may conduct inspections of the premises to identify any issues that need to be addressed before the lease is finalized. Since in many leases the tenant takes the space “as is,” and in those circumstances, provision should be made for the tenant to inspect the building and the heating, ventilation, air-conditioning, and other systems.

3. Negotiation of Terms:

Following the fulfilment of preliminary conditions or waiver of any of them, the landlord typically provides the first draft of the lease, which includes standard terms and any specific provisions agreed upon in the preliminary documents. The tenant and their legal counsel review the draft, proposing amendments to ensure their interests are protected.

Both parties negotiate the terms, which may include rent, lease duration, renewal options, maintenance responsibilities, and any special conditions. Negotiations may involve several rounds of revisions and discussions to reach mutual agreement.

4. Priority Issues and Non-Disturbance Agreements

Priorities Between Leases and Mortgages

The relationship and priority between leases and mortgages are critical considerations in commercial real estate transactions. The priority determines whose interests take precedence when conflicts arise, such as a landlord defaulting on a mortgage. Understanding these priorities helps protect the rights of tenants and mortgagees (lenders) and ensures clarity in legal standing.

General Rule of Priority:

The general principle in property law is "first in time, first in right," meaning the first registered interest typically has priority over subsequent interests. However, specific rules and exceptions can affect this general principle.

Lease Priority:

A lease is an interest in land and must be registered to provide notice to third parties and to protect the tenant's rights.

If a lease is registered before a mortgage, it generally takes priority over the mortgage. Conversely, if the mortgage is registered before the lease, the mortgage typically has priority.

Mortgage Priority:

A mortgage is a security interest in the property, and its priority is determined by the date of registration. The first registered mortgage generally has priority over later registered interests, including leases.

Common-Law Position

The common-law position on the interplay between leases and mortgages was notably addressed in two key cases:

Goodyear Canada Inc. v. Burnhamthorpe Square Inc.:

This case affirmed the principle that a tenant under a lease that has priority over a mortgage is bound by the lease if the mortgagee enters into possession. The mortgagee must honor the lease and cannot oust the tenant.

Conversely, if the mortgage has priority over the lease, the mortgagee is not bound by the lease and can terminate the tenant's occupation upon default.

1420111 Ontario Ltd. v. Paramount Pictures (Canada) Inc.:

This case reinforced the principles established in Goodyear, emphasizing that tenants must be aware of the registration dates of leases and mortgages to understand their rights and obligations.

Non-Disturbance Agreements

To mitigate the risks associated with the priority of mortgages over leases, tenants often seek non-disturbance agreements from mortgagees.

These agreements provide that if the landlord defaults on the mortgage and the mortgagee takes possession, the mortgagee will not terminate the lease or disturb the tenant's occupancy.

In exchange, the tenant agrees to "attorn" to the mortgagee, recognizing the mortgagee as their new landlord under the same lease terms.

Practical Implications and Steps for Protection

(a). Title Search and Registration:

Tenants should conduct a thorough title search before signing a lease to identify any existing mortgages and their priority.

Registering the lease or a notice of lease can protect the tenant's interest and establish priority over subsequent mortgages.

(b). Negotiating Non-Disturbance Agreements:

Tenants should negotiate non-disturbance agreements with existing and future mortgagees to ensure their lease rights are protected if the landlord defaults.

Including a clause in the lease that requires the landlord to obtain non-disturbance agreements from mortgagees can provide additional security.

(c). Subordination, Non-Disturbance, and Attornment (SNDA) Agreements:

SNDA agreements are comprehensive documents that combine subordination, non-disturbance, and attornment provisions. They outline the relationship between the tenant, landlord, and mortgagee, ensuring clarity and protection for all parties.

(d). Mortgagee Rights:

Mortgagees may require tenants to acknowledge the priority of the mortgage and agree to subordination clauses, making the lease subordinate to the mortgage. This ensures that the mortgagee’s interests are protected in case of landlord default.

Fact Pattern:

John, the landlord, takes out a mortgage from Bank A and later leases part of the property to Sarah. Sarah registers her lease after the mortgage is registered. John defaults on the mortgage, and Bank A takes possession.

Analysis:

Priority: Since the mortgage was registered before the lease, Bank A’s interest takes priority. Bank A is not bound by Sarah's lease and may choose to terminate it.

Non-Disturbance Agreement: If Sarah had obtained a non-disturbance agreement, Bank A would be obligated to honor her lease, allowing her to remain in the property despite the foreclosure.

5. Registration of Commercial Lease Deed in Ontario

The registration of a commercial lease deed in Ontario is a vital process that secures the legal standing of the lease, establishes priority, and provides notice to third parties. By registering a lease or notice of lease, tenants and landlords protect their interests and ensure that the lease terms are recognized and enforceable in the event of property transactions or disputes.

The registration of a commercial lease deed in Ontario is a crucial step to protect the interests of both landlords and tenants. It ensures that the lease is legally recognized and provides public notice of the tenant’s rights under the lease.

Here’s an overview of the registration process and its significance:

Importance of Registration

Legal Recognition:

Registration provides formal recognition of the lease, making it legally binding and enforceable against third parties.

It ensures that the lease is documented in public records, providing transparency and clarity.

Priority and Protection:

Registering a lease establishes the priority of the tenant’s interest in the property. This is particularly important if there are multiple interests or claims on the property.

It protects the tenant’s rights in the event of a sale or transfer of the property, ensuring that the new owner is aware of and bound by the existing lease.

Notice to Third Parties:

Registration serves as notice to potential buyers, lenders, and other interested parties about the existence and terms of the lease.

This prevents disputes and ensures that all parties are aware of the tenant’s occupancy and rights.

Registration Process

(1). Preparation of Lease or Notice of Lease:

The lease or a notice of lease must be prepared, detailing essential terms such as the parties involved, the property description, the lease term, and any significant provisions.

A notice of lease is a summarized version that omits sensitive information like rent amounts but includes enough details to inform third parties of the lease's existence and key terms.

(2). Execution and Attestation:

The lease or notice of lease must be signed by the landlord and the tenant. In some cases, it may also need to be witnessed or notarized.

Proper execution ensures the document is legally valid and ready for registration.

(3). Submission to the Land Registry Office:

The executed lease or notice of lease is submitted to the Land Registry Office in the jurisdiction where the property is located.

The document is reviewed for completeness and accuracy before being accepted for registration.

(4). Payment of Fees:

Applicable registration fees must be paid at the time of submission. These fees vary based on the type of document and the jurisdiction.

(5). Issuance of Registration Number:

Once registered, the lease or notice of lease is assigned a registration number, and an official record is created in the land registry.

The registration number serves as a reference for future searches and legal proceedings.

Legal Framework

Registry Act (Section 70(2)):

Under the Registry Act, a lease of property does not need to be registered to bind third parties if the lease term does not exceed seven years and there is actual possession under the lease.

Land Titles Act (Section 44(1)(4)):

In the land titles system, a property is deemed encumbered by an unregistered lease if the lease has a period yet to run that does not exceed three years and if there is actual occupation under the lease.

Practical Considerations

A. Standard Lease Terms:

Most commercial leases prohibit tenants from registering the lease itself but permit the registration of a notice of lease to protect confidentiality and sensitive information.

Landlords typically reserve the right to approve the content of the notice of lease before registration.

B. Estoppel Certificates:

Tenants may also use estoppel certificates to provide evidence of the lease terms and their rights without disclosing sensitive details in the public registry.

Estoppel certificates confirm the status of the lease and are often requested by lenders or prospective purchasers.

6. Landlord Security

In commercial lease agreements, landlords often seek various forms of security to ensure that tenants fulfill their financial and contractual obligations. This security is crucial for mitigating risks associated with tenant defaults, such as non-payment of rent or failure to maintain the property. Here is a detailed overview of the types of security landlords may require and the legal considerations involved in commercial lease deeds in Ontario.

Types of Landlord Security

(a). Security Deposits

Purpose: Security deposits provide a financial buffer for landlords against potential losses due to tenant defaults, property damage, or unpaid rent.

Amount: Typically, security deposits amount to one to three months' rent, but the specific amount can vary based on negotiations.

Usage: Landlords can use security deposits to cover unpaid rent, repair damages beyond normal wear and tear, and address other breaches of the lease agreement.

Return Conditions: The conditions for returning the security deposit at the end of the lease term should be clearly outlined in the lease agreement.

(b). Prepaid Rent

Purpose: Prepaid rent serves as a guarantee for future rental payments, often covering the first and last months of the lease term.

Usage: It is applied to the rent due at the beginning and end of the lease term, reducing the risk of non-payment during these periods.

Legal Considerations: Landlords must ensure that the lease clearly specifies the application of prepaid rent and conditions for its return if applicable.

(c). Guarantees and Indemnities

Purpose: Guarantees and indemnities provide additional security by holding a third party responsible for the tenant’s obligations under the lease.

Guarantors: Common guarantors include corporate affiliates, business partners, or individual principals of the tenant.

Indemnity vs. Guarantee: An indemnity obliges the indemnifier to cover losses directly, while a guarantee requires the guarantor to fulfill the tenant's obligations if the tenant fails to do so.

Legal Standing: Guarantees and indemnities must be in writing and clearly outline the scope of the guarantor’s or indemnifier’s responsibilities.

(d). Letters of Credit

Purpose: A letter of credit is a financial instrument issued by a bank that guarantees the tenant’s payment obligations up to a specified amount.

Usage: Landlords can draw on the letter of credit if the tenant defaults, providing immediate funds to cover losses.

Renewability: The lease should specify the terms for renewing the letter of credit to ensure continuous coverage throughout the lease term.

(e). Personal Property Security Interest (PPSA)

Purpose: A personal property security interest allows landlords to claim a security interest in the tenant's personal property located on the leased premises.

Registration: Landlords must register the security interest under the Personal Property Security Act (PPSA) to perfect the interest and ensure priority over other creditors.

Scope: The security interest can cover various assets, including inventory, equipment, and fixtures, providing the landlord with collateral to recover losses in case of default.

7. Reporting to the Client

Effective reporting to the client is a critical aspect of managing commercial lease transactions. It ensures that the client is fully informed about the lease terms, their obligations, and any potential issues that might arise. This process involves providing clear, concise, and comprehensive information to the client, tailored to their level of sophistication and involvement in commercial leasing.

PART 5 - Remedies to the Landlord and Tenant under the Commercial Tenancies Act

In the context of commercial lease agreements, both landlords and tenants have various remedies available to address breaches or defaults by the other party. These remedies are designed to enforce the terms of the lease, ensure compliance, and provide recourse in the event of disputes.

Remedies Available to Landlords

1. Remedies for Tenant Defaults

Monetary Defaults

Notice and Cure Period: Most leases provide a specific period for the tenant to cure monetary defaults, such as unpaid rent. The landlord must provide written notice of the default, specifying the amount due and the time frame to rectify the default.

Termination and Re-Entry: If the tenant fails to cure the default within the specified period, the landlord may terminate the lease and re-enter the premises. The landlord may change the locks or physically take possession of the property.

Distress (Distraint): This self-help remedy allows the landlord to seize and sell the tenant's goods on the premises to recover unpaid rent. It is a drastic measure and must be executed with care to avoid legal complications.

Non-Monetary Defaults

Notice and Cure Period: Similar to monetary defaults, non-monetary defaults (e.g., failure to maintain the premises) require the landlord to provide written notice and a reasonable cure period.

Specific Performance: The landlord can seek a court order compelling the tenant to perform their obligations under the lease, such as making necessary repairs.

Injunctive Relief: The landlord can seek an injunction to prevent the tenant from engaging in prohibited activities or to enforce specific terms of the lease.

2. Other Remedies

Claim for Damages

Legal Action: The landlord can sue the tenant for damages resulting from the breach, including lost rent, repair costs, and other expenses incurred due to the tenant’s default.

Mitigation of Damages: After terminating the lease, the landlord must make reasonable efforts to re-let the premises to mitigate losses. The landlord can claim damages for the difference between the original rent and the rent received from a new tenant.

Security Enforcement

Security Deposits: The landlord can apply the tenant’s security deposit to cover unpaid rent or repair costs resulting from the tenant’s breach.

Guarantees and Letters of Credit: The landlord can enforce guarantees or draw on letters of credit provided by the tenant to recover losses.

3. Relief from Forfeiture

Court Application: The tenant can apply to the court for relief from forfeiture, seeking to nullify the lease termination. The court has discretion to grant relief if it deems it just and equitable, considering factors such as the tenant's efforts to remedy the default and the hardship faced by both parties.

Remedies Available to Tenants

1. Remedies for Landlord Defaults

Failure to Provide Possession

Specific Performance: The tenant can seek a court order compelling the landlord to provide possession of the premises as agreed in the lease.

Damages: The tenant can claim damages for any losses incurred due to the landlord's failure to provide possession, such as relocation costs or lost business opportunities.

Breach of Quiet Enjoyment

Injunctive Relief: The tenant can seek an injunction to stop the landlord or third parties from interfering with their quiet enjoyment of the premises.

Damages: The tenant can claim damages for any losses resulting from the breach of quiet enjoyment, such as lost profits or business disruption.

2. Other Remedies

Repair and Deduct

Self-Help Remedy: If the landlord fails to perform necessary repairs, the tenant may carry out the repairs and deduct the cost from future rent payments. This remedy must be explicitly allowed in the lease agreement.

Rent Abatement

Partial Reduction: If the premises become partially unusable due to the landlord's actions or inaction, the tenant may be entitled to a rent reduction proportionate to the unusable portion of the premises.

Termination of Lease

Fundamental Breach: If the landlord's breach is so severe that it fundamentally undermines the lease, the tenant may terminate the lease and vacate the premises. This is typically a last resort and requires clear evidence of a fundamental breach.

Relief from Forfeiture

Court Application: Similar to the landlord, the tenant can apply for relief from forfeiture if they believe the lease termination was unjust. The court will consider the tenant's conduct, the nature of the default, and the potential impact on both parties.

PART 6 - Common Lease Issues in Commercial Lease Deeds

Commercial lease agreements in Ontario often involve various complex issues that can impact both landlords and tenants. Addressing these issues effectively in the lease deed is crucial to ensure a smooth leasing relationship and to prevent disputes. Here is a detailed overview of some of the most common lease issues encountered in commercial lease deeds in Ontario.

1. Operating Costs

Definition and Allocation: Operating costs, also known as additional rent, typically include expenses related to the maintenance, repair, and operation of the property, such as utilities, property taxes, insurance, and common area maintenance (CAM).

Gross-Up Clauses: Many leases include gross-up clauses that allow the landlord to adjust the operating costs to reflect what they would be if the property were fully occupied. This ensures that the landlord recovers a fair share of expenses from all tenants.

Exclusions: Tenants often negotiate exclusions from operating costs, such as capital expenditures, costs of correcting structural defects, and expenses covered by the landlord’s insurance or warranties.

2. Repairs, Maintenance, and Restoration

Responsibilities: Leases should clearly delineate the responsibilities for repairs and maintenance between the landlord and tenant. Typically, the tenant is responsible for interior maintenance, while the landlord handles exterior and structural repairs.

Restoration Obligations: At the end of the lease term, tenants may be required to restore the premises to their original condition. This can include removing leasehold improvements and repairing any damage beyond normal wear and tear.

Disputes: Ambiguities in the lease regarding repair obligations can lead to disputes. It is essential to clearly define what constitutes ordinary maintenance versus capital repairs.

3. Insurance

Coverage Requirements: Leases usually stipulate the types of insurance coverage required for both the landlord and tenant. This includes property insurance, liability insurance, and business interruption insurance.

Allocation of Risk: Leases often include provisions that allocate risk between the parties through indemnities and releases. Landlords typically seek to shift as much risk as possible onto tenants.

Mutual Waivers: Some leases include mutual waiver clauses, where each party waives their right to claim against the other for certain types of losses covered by insurance.

4. Assignment and Subletting

Landlord’s Consent: Most leases require the tenant to obtain the landlord’s consent before assigning the lease or subletting the premises. The consent should not be unreasonably withheld, delayed, or conditioned.

Conditions and Restrictions: The lease may specify conditions under which assignment or subletting is permitted, such as the assignee’s financial stability and the proposed use of the premises.

Recapture Rights: Some leases grant the landlord the right to terminate the lease and recapture the premises if the tenant seeks to assign or sublet, effectively allowing the landlord to re-lease the space at potentially higher rates.

5. Use of Premises

Permitted Use: The lease should specify the permitted use of the premises. This is crucial in retail leases where the landlord may want to control the tenant mix and prevent competition.

Prohibited Uses: Leases often list prohibited uses to maintain the character of the property and prevent activities that could harm other tenants or the property’s reputation.

Continuous Operation: Retail leases often include clauses requiring tenants to continuously operate their business during specified hours to maintain the vitality of the shopping center.

6. Options to Renew or Extend

Renewal Terms: The lease should specify whether the tenant has an option to renew or extend the lease term and the conditions for exercising this option.

Market Rent: Renewal terms often include provisions for determining the rent during the renewal period, commonly based on the current market rate.

Notice Periods: The lease should clearly define the notice period required for the tenant to exercise their renewal or extension option to avoid disputes over timing.

7. Good Faith and Fair Dealing

Implied Duty: In Canadian contract law, including Ontario, there is an implied duty of good faith and fair dealing, as established by the Supreme Court of Canada in Bhasin v. Hrynew. This duty requires parties to act honestly and not mislead each other about their contractual performance.

Lease Clauses: While good faith is implied, some leases explicitly include clauses requiring both parties to act in good faith in fulfilling their obligations, providing additional clarity and reducing the risk of disputes.