Commercial Leases: Tenants, Comply With Legal Authorities or Risk Termination

A standard provision of most commercial leases requires a tenant to comply with all legal authorities in relation to the tenant’s use of the leased premises. In Dimitri’s Service Centre Inc. v. Ocean Sands Developments Limited, the Ontario Superior Court of Justice recently held that where a tenant carried on certain automotive operations without the necessary governmental approval, the landlord had the right to terminate the lease and obtain vacant possession of the leased premises.

In Dimitri’s Service Centre Inc., the tenant leased the subject premises for the purpose of operating an automotive service centre. Approximately 1 year after entering into the lease, the tenant sought to expand its use of the premises to operate a tire shredding business. However, the tenant failed to apply for a Certificate of Approval from the Ministry of the Environment which was required for the tenant’s new operation. The Landlord sought to restrain the Tenant from continuing to shred tires on the leased premises. As a result, the Tenant commenced an action against the Landlord for an injunction prohibiting the latter from interfering with its quiet enjoyment of the premises, and alternatively, sought damages for wrongful termination of the lease.

The landlord’s concerns regarding the tenant’s tire shredding operation were not unwarranted: the landlord was advised by its insurer that the latter would not continue to insure the leased premises if a tire shredding operation was performed thereon given the inherent environmental risks arising from such an operation. Further, the lease in this case provided that where the tenant defaulted on any provision thereunder for a period of 10 consecutive days after receiving notice from the landlord of the default, the landlord was entitled to re-enter the premises forthwith, without any notice to the tenant. By failing to comply with “all legal authorities” in operating its tire shredding business, the tenant was in default of the the lease. In the result, the Court determined that the Landlord actions in re-entering the leased premises and preventing the tenant from continuing its tire shredding operations were lawful.

This case highlights the importance to both landlords and tenants regarding the activities carried on in leased commercial premises. Landlords have a clear interest in knowing the nature of their tenants’ commercial activities they may be refused insurance on their premises for certain high risk activities. Similarly, tenants must be diligent to ensure that their activities do not contravene any statutory or regulatory requirements, given that most commercial lease agreements require that a tenant comply with all legal authorities.

The Purchaser's Remedy, Part II: Damages

In my previous post I discussed the remedy of specific performance, which is available to a purchaser when a vendor refuses to close a real estate transaction. In this post, I discuss the purchaser’s alternative entitlement to an award of damages for the vendor’s breach of the agreement of purchase and sale and more specifically, how such damages are quantified.

It is a basic principle of contract law that where a party breaches one of its contractual obligations, the innocent party is entitled to commence an action to recover the damages it sustained as a result of that breach. In the context of a failed real estate transaction, this basic principle entitles an innocent purchaser to seek damages against a vendor who has refused to close. Determining whether the purchaser is entitled to damages may be a straightforward exercise in contract interpretation. However, determining the amount of damages that should be awarded as a result of that breach is rarely as straightforward.

In an action for damages based on a vendor’s breach of the agreement of purchase and sale, the purpose of an award of damages is to put the plaintiff into the position that he or she would have been in had the transaction been carried out. The starting point in quantifying the purchaser’s damages in this regard involves a determination of the difference between the value of the subject property on the date of the vendor’s breach, and the value of the property at the time the action is heard. Because an action can, and often does take years to proceed from the initial stages through to trial, this price differential can be substantial. Further, the purchaser always has a duty to mitigate his or her damages. In the context of a failed purchase of an investment property, the Court in Mutual Apartments Inc. v. Lam recently held that the innocent purchaser could satisfy this duty by “returning to the marketplace to find a substitute” for the subject property. In that case, the Court held that 12 months was a reasonable period of time for the plaintiff to do so. The Court went on to say that “where the plaintiff mitigates his or her losses, then the plaintiff must give credit for the recovery”, such that the plaintiff should not receive a windfall for the vendor’s breach.

Therefore, where a purchaser seeks damages for a vendor’s failure to close a transaction, the plaintiff’s damages will be calculated in accordance with the price differential noted above, and reduced to the extent by which the purchaser mitigated, or should have mitigated its damages. As a final note, a purchaser will normally be entitled to an award of damages for the incidental costs it incurred in relation to the failed closing, such as additional storage fees, increased borrowing costs (if there has been an increase in mortgage rates), and other costs ordinarily incurred in closing a real estate transaction.

The Purchaser's Remedy, Part I: Specific Performance

When a vendor refuses to close a real estate transaction, the purchaser has the option of commencing legal proceedings for damages, or for specific performance in lieu of damages. In this post, the circumstances under which a Court may order specific performance is discussed.

Where a vendor refuses to close a real estate transaction, the Court may order that the purchaser be entitled to an order for specific performance, whereby the vendor is required to close the transaction pursuant to the terms contained in the agreement of purchase and sale. Until 1996, the remedy of specific performance was granted to purchasers as a matter of course. However, the Supreme Court of Canada’s decision in Semelhago v. Paramadevan imposed strict restrictions on the availability of that remedy.

Under the current state of the law, specific performance will only be ordered where the purchaser demonstrates that the property is unique, such that a substitute property is not readily available. For example, a Court will be required to determine whether the purchaser intends on using the property for a purpose which requires specific zoning, or whether the property was purchased purely for investment purposes. In the latter case, specific performance will rarely be ordered since it would be difficult for the plaintiff to prove that another investment property would not be available.

Based on the limited circumstances under which specific performance may be granted, it is clear that the purchaser of a residential property will rarely succeed in obtaining an order for specific performance. However, the same does not necessarily hold true for purchasers of commercial property. For instance, in Kyriacopoulos v. Peters, a recent case involving the the plaintiff's purchase of a rural lot for the purpose of operating an automobile business at a high traffic intersection, the Court ordered specific performance on the basis that there were no alternative sites in the area for the purchaser to operate its intended business. If a substitute was readily available, the Court would likely have limited the purchaser’s claim to one for damages.

While the remedy of specific performance is beneficial to purchasers in that it has the effect of requiring a transaction to close, it is clear that a purchaser’s right to this remedy is not automatic. Rather, a purchaser will be required to establish that the subject property is unique, and that an award of damages would not adequately compensate the purchaser for the vendor’s breach of the agreement of purchase and sale.

Commercial Leases: Landlords Beware, Tenants, Check Your Leases

The Ontario Court of Appeal recently affirmed the long-standing, but frequently overlooked principle that where a landlord requires its tenant to contribute to the operating costs of a lease premises, the risk of loss covered by such insurance transfers to the landlord.

In 1044589 Ontario Inc. (Nantucket Business Centre) v. AB Autorama Ltd, the defendant/tenant operated an automotive repair shop from a unit it leased from the plaintiff/landlord in a multi-unit commercial plaza. The terms of the lease required the tenant to “pay all costs in respect of … Insurance” and to pay its proportionate share of “all costs incurred in the operation, maintenance, repair, replacement, management and insurance” of the entire premises. In 2005, a fire ignited inside the tenant’s leased premises, causing property damage, business interruption and a loss of profits. Accordingly, the landlord commenced an action against the tenant in negligence for the resulting damages. The parties asked the Court, by way of motion, to determine whether the lease precluded the landlord from maintaining its action against the tenant.

The motions judge held that since the landlord was not required to insure the premises, the risk of loss remained with the tenant, who was required to procure insurance under the lease. The Court of Appeal disagreed. Relying on a trilogy of Supreme Court of Canada decisions from the 1970s, the Court of Appeal held that by requiring the tenant to contribute to the costs of its costs of insurance, the risk of loss was allocated to the landlord.

At first glance, the Court of Appeal’s decision appears contradictory. Why should a landlord be deemed to assume the risk of loss for damages negligently caused by its tenant, by requiring the tenant to contribute to its overall insurance costs? This result seems especially curious since the tenant in this case was specifically required to procure its own insurance. A close examination of the Court of Appeal’s reasoning provides useful insight. First, the Court held that where a tenant pays for insurance, it is entitled to the benefit of such insurance. By commencing an action against its tenant for a loss covered by that insurance, a landlord would be effectively depriving the tenant of the benefit which it was required to pay for in the first place. The Court noted that this benefit could only be revoked by an express provision in the lease. The Court held that this result made commercial sense: although the landlord was not required to insure its premises, it would defy commercial reality for the landlord not to do so.

The Court’s reasoning in this case may be of interest to tenants involved in litigation with their landlords. Specifically, this decision can likely be extended to stand for the proposition that where a tenant is required to contribute to its landlord’s insurance costs, the risk of loss covered by that insurance is allocated to the landlord, and the tenant is immune from an action for any resulting damages.