The Court of Appeal recently considered a lower court decision that interpreted the meaning of “premises” in a real estate contract as it pertained to a new landlord seeking to renovate commercial premises.

Tenant Gives Notice to Terminate Lease for Retail Store

In Meridian CC Int. Inc. v. 275206 Ontario Inc., the defendant landlord had recently purchased the building in which the appellant tenants rented commercial premises and operated a retail store. In 2020, the prior landlord had renewed the plaintiff’s lease for another five-year term and “guaranteed” that the tenant could operate her store. The defendant, however, gave the tenant 180-days’ notice to terminate the lease for remodelling and demolition under the lease.

The lease dealt expressly with the circumstances where the landlord desired to remodel or demolish any part of the rented premises, providing:

11 (1) If the Landlord desires at any time to remodel or demolish the Premises or any part thereof, to the extent that renders continued possession by the Tenant impracticable, the Tenant shall, upon receiving 180 clear days’ written notice from the Landlord:

(a) surrender this Lease, including any unexpired remainder of the Term; and

(b) vacate the Premises and give the Landlord possession.

The lease further defined the “Premises” as the garage, the basement, and the whole main floor of the building. The tenant uses the garage and basement for storage. She uses half the main floor for her retail store and half for storage. The remodelling plan proposed the demolition of the garage, the remodelling of the main floor into two separate units, the replacement of windows, wiring and plumbing throughout the premises, and the use of part of the basement for building services and utilities.

The tenant resisted the termination and asserted “among other things, that the termination was in bad faith because the respondent had sought to terminate the lease, which had been in existence since 2013, shortly after purchasing the building in which the leased premises were located.” The tenant further argued that the landlord breached its duty of good faith, citing evidence of the “evolution and expansion of the landlord’s plans from a simple sketch to detailed renovations of the tenant’s store unit in face of the tenant’s resistance.”

Planned Renovations Were Bona Fide

The motion judge found that the planned renovations were bona fide and that the premises as described under the lease would cease to exist because of the planned renovations. As a result, he concluded that continued possession by the tenant was impracticable. He rejected as irrelevant the issues surrounding the evolution of the landlord’s plans and whether the tenant could possibly remain in the part of the premises during renovations because, as he explained, “the proposed remodelling and demolition deprive the tenant of substantial portions of the “Premises” defined under the lease.” As a result, the court determined that “continued possession by the tenant was impracticable.”

He determined that the landlord properly gave notice to terminate the lease in accordance with the parties’ bargain. He dismissed the tenant’s action and allowed the respondent’s counterclaim to terminate the lease, with costs to the respondent for $75,000. The tenant appealed to the Court of Appeal.

Court of Appeal Overturns Lower Court Finding

The Court of Appeal noted that the motion judge was required to consider whether it was “impracticable” for the landlord to carry out the proposed remodelling while the tenant continued in possession. This was a fact-specific exercise for the motion judge to undertake based on his interpretation of the particular lease and the evidence in the record before him. In considering the motion judge’s analysis, the Court of Appeal held that the motion judge undertook a flawed approach and erred by focussing too narrowly on the definition of the leased premises and the results of the proposed renovations. This was a flawed approach.  Instead of giving effect to para. 11(1) in its entirety, the motion judge’s approach would give rise to the unintended and commercially unreasonable result that any change that reduces the leased premises’ area would allow the landlord to terminate the lease. The motion judge’s approach further caused him to interpret para. 11(1) of the lease in a manner that was inconsistent with the whole of the parties’ agreement. Most notably, said the Court of Appeal, the motion judge’s narrow interpretation would untenably permit the landlord to terminate the lease in order to make alterations, such as partitioning the main floor, and lease parts of the leased premises to other tenants when, with the approval of the landlord, the tenant is permitted to carry out the same kinds of alterations and sublet parts of the premises under other paragraphs of the lease.

As a result of these errors, the motion judge failed to determine the principal question that he had to decide whether the proposed renovations rendered continued possession by the tenant impracticable. Accordingly, whether the tenant could remain in possession and continue its operation in part of the premises during the renovations were relevant questions, among others, that the motion judge should have determined.

Given that it is not appropriate for the Court of Appeal to make the factual findings to determine these issues, the Court set aside the dismissal of the action and the judgment in the counterclaim, such that the action will continue in the Superior Court.

Oakville Real Estate Lawyers Helping Clients in Commercial Real Estate Matters

Our knowledgeable team of commercial real estate lawyers at Campbells LLP will continue to monitor this case through the courts and its impact on commercial real estate contracts. We regularly assist business owners with a wide array of commercial real estate matters and can skillfully defend you in any disputes or litigation that may arise in a commercial lease, such as a lease termination or business disruption as a result of a renovation. To speak with a lawyer, contact us online or at 905-828-2247 to schedule a consultation.