Renewal of a Commercial Lease – A Landlord’s Silence Does Not Amount to Bad Faith

Published on: August 2021 | What's Trending

Legal document Commercial Lease Agreement on paper

When it comes to the renewal of commercial leases, courts have always remained adamant that deadlines must be strictly met.  As in, if a tenant is required to exercise its option to renew its lease by a certain date, the renewal right will be lost if it’s not exercised on time.  In a recent decision from the Ontario Court of Appeal, it was affirmed that this rule remains true regardless of whether the landlord cooperates with the tenant in informing them of when the right to renew must be exercised.  In coming to its ruling, the court also confirmed the limits on the duty of good faith set out by the Supreme Court late last year.

In Subway Franchise Restaurants of Canada Ltd. v. BMO Life Assurance Company, 2021 ONCA 349, a Subway location was required to renew its lease at least nine months and not more than one year prior to the expiration of the term.  Subway signed its lease with a previous landlord, which was later taken over by BMO.  When BMO assumed the lease, Subway executed an estoppel certificate which indicated that the lease expired on August 23, 2018 and it was therefore required to exercise its option to renew the lease between August 24, 2017 and November 23, 2017.

In its central database, Subway incorrectly noted that the expiry date was May 31, 2018.  In early 2017, it sent a letter to the landlord and asked it to confirm the expiry date and the deadline to exercise the renewal option.  The letter stated that “in the event that any of these dates differ from your records, please contact us in writing immediately as your silence will be an acknowledgement and authorization of their accuracy and our reliance”.  The letter was not answered by the landlord and Subway sent numerous follow-up letters, which also went unanswered.

Subway ended up relying on the inaccurate renewal date in its database and therefore exercised its option to renew outside of the required deadline.  The landlord, in turn, did not accept Subway’s renewal of the lease.

Subway then commenced an application seeking relief from forfeiture of its lease.  It contended that, by ignoring its requests for confirmation about the renewal date, the Landlord failed to act in good faith under the lease.  In making its argument, Subway relied on the recent Supreme Court case of C.M. Callow Inc. v. Zollinger, 2020 SCC 45 (“Callow”), which set out some recent changes to the duty of honest contractual performance.

In Callow, the Supreme Court expanded the duty of honest performance in contract law and held that no contractual right can be exercised dishonestly.  It is also held that dishonesty will include conduct that knowingly misleads another party or fails to correct a false impression created by the conduct of the parties.  Please see our article and newsletter on Callow for more information.

In the Subway decision, the application judge (and subsequently the Court of Appeal) held that the landlord’s conduct did not amount to the sort of bad faith identified by the Supreme Court in Callow.  Specifically, there was nothing to suggest that the landlord made any attempt to knowingly mislead Subway or create any sort of false impression regarding the renewal of its lease.  Although BMO did not respond to Subway’s inquiries regarding the renewal date, its silence did not amount to the sort of bad faith conduct set out in Callow.  Subway was therefore denied relief from forfeiture of its lease.

This is not the first time a lower court has examined and applied the duty of good faith set out in Callow.  Earlier this year, in Brandt Tractor Ltd. v BOMAG (Canada) Inc., 2021 ABQB 71, the Court of Queen’s Bench of Alberta considered Callow in the context of a distribution agreement gone wrong.  In that decision, the allegation of bad faith was also rejected on the basis that there was no intentional attempt to mislead.  Please see our article for more information.

Both the Brandt and Subway decisions confirm that the expansive duty of good faith set out in Callow has its limits.  In order to breach the duty to act in good faith, there has to be an intention to knowingly mislead, which must be demonstrated by a party’s acts.  Merely staying silent and not taking positive action will not amount to bad faith.  Therefore although the duty of good faith has been expanded, it will still only be applied in clear circumstances.

Author: Daniel Waldman, Lawyer