Having a signed commercial lease does not necessarily prevent a dispute from arising. Several issues can crop up during the term of the lease, such as the rights of both commercial landlords and tenants if the other party does not comply with the terms of the lease.

This article will provide an overview of the options available to commercial landlords if a tenant defaults, for example, by failing to pay the rent due and owing under the lease. This article will focus on terminating the lease and the legal constraints that the landlord is under. Although terminating the lease is not the only option in the event of a default, it is important to obtain legal advice to understand if it is the best option for your particular circumstances.

Types of commercial tenant defaults

A failure of the tenant to comply with the terms of the lease is often categorized as either a:

  • Monetary default – occurs when the tenant does not pay an amount due under the lease, such as rent, or
  • Non-monetary default – occurs when the tenant does not comply with a non-monetary obligation of the lease, for example, to conduct repairs. 

Often the lease will allow the landlord to convert a non-monetary default into a monetary default. This can occur when the agreement allows the landlord to correct the default and reclaim the expense from the tenant. 

Notice periods to correct the default

The commercial lease agreement will likely contain provisions about what flows from a tenant’s failure to comply with its terms. Often, the first step set out in the agreement is for the landlord to provide notice to the tenant requesting that they rectify the default within a particular period of time. The agreement will often specify the period in which the landlord’s notice will allow for the default correction. 

If it is a monetary default and the lease does not specify the notice period, the Ontario Commercial Tenancies Act states that if the rent remains unpaid for fifteen days, the landlord may terminate the lease and repossess the premises.

However, if the tenant has defaulted in respect of a non-monetary obligation, the Commercial Tenancies Act provides that a right to terminate under the lease is not enforceable unless the landlord serves a notice on the tenant requiring the tenant to remedy the default within a reasonable time.  

Potential remedies if the tenant does not correct the default

If the tenant defaults on the lease agreement, the landlord may elect to keep the agreement in place. If they choose to do so, they can seek to remedy the tenant’s default, which may include:

  • Seizing and selling the tenant’s goods located on the premises (called “distress”), after complying with strict procedural requirements,
  • Suing the tenant for damages for breach of contract, or
  • Applying to the court for an injunction requiring the tenant to stop doing something or for an order for specific performance to require the tenant to do something.

Termination of the lease agreement following default

Alternatively, the landlord may decide that their best option is to terminate the lease (also called “forfeiture”), after complying with the notification requirements in the lease and, where necessary, the Commercial Tenancies Act.

Terminating the lease does not remove the landlord’s entitlement to sue for damages caused by the tenant’s breach of the lease agreement. However, the landlord must mitigate their damages, for example, by seeking to re-lease the premises. 

It is vital for the landlord to strictly comply with the terms of the agreement and the Commercial Tenancies Act when exercising their rights that flow from a tenant’s default, such as termination of the lease. It is important to note that if the landlord wishes to terminate the lease, they must ensure that they avoid waiving their right to do so. A waiver may occur if the landlord takes action to confirm the lease after a default, such as by accepting rent payments for the current period.

Landlord purported to terminate a lease after default in payment of rent

The recent decision of the Court of Appeal for Ontario in Art For Everyday Inc. v Canarctic J.F.K. Inc. demonstrates the degree of care that landlords need to take in the aftermath of a tenant default.

The lease allowed the landlord to terminate by notice following an event of default, which included where “any Rent due is not paid within five (5) days after notice in writing from the Landlord to the Tenant.” The lease required the notice to be in writing, state the amount of arrears owing with interest and demand that payment be made within five days.

The landlord emailed the tenant eight times over two months concerning rent arrears. Some of these communications specified the amount owing and referred to the interest accruing but did not allude to the possibility of lease termination. The landlord emailed the tenant a final time to notify of the default but did not specify the amount owing. After this, the landlord purported to terminate the lease.

Courts determined lease remained in force

The Superior Court and Court of Appeal decided that the purported termination was invalid and that the lease remained in force. The final email notice did not comply with the requirements of the lease to notify the amount owing and demand payment, so the subsequent termination notice was invalid.

The Court of Appeal also said:

“Because the landlord sent multiple emails to the tenant about rent arrears and warned the tenant only that interest was accruing on such arrears, we agree with the application judge that fairness required that the landlord warn the tenant before resorting to termination in this case.” 

Contact Campbell Litigation for Assistance with Commercial Leasing Disputes – Serving Waterloo, Kitchener and the Surrounding Area

Disputes between commercial landlords and tenants can quickly disrupt business operations. Contact Campbell Litigation, led by litigator Richard Campbell, for advice on your options and vigorous representation of your interests. We aim to resolve disputes before litigation is necessary so you can return your focus to running the business. However, we are ready to represent our clients in court when litigation is required. To arrange an initial consultation with a member of our team, please call us at 519-886-1204 or contact us online.