Does “Repair” Mean “Replace”?

July 14, 2021

By Brian Babcock

Most commercial leases contain clauses that describe the respective responsibility of the landlord and the tenant to repair or replace parts of the building.  There is no single standard clause, because buildings and relationships differ. Sometimes these clauses are negotiated, but sometimes a drafter simply inserts a precedent from another lease, without much thought. If the parties do not review the suitability, it can become an expensive surprise.

They often fail to clearly draw the line between repair (often the responsibility of the tenant) and replacement (often the landlord’s responsibility).

There are few cases that provide guidance, and most of them are getting old, so reasonable opinions might disagree. A law suit may be the only solution. These cases can be expensive and the outcomes are unpredictable.

The Ontario Court of Appeal has now provided some guidance that might assist in interpreting existing clauses, and help future drafting reflect a clearer understanding of the likely outcomes, so the parties can see before signing if it matches their expectations.

Orillia (City) v. Metro Ontario Real Estate Limited involved a shopping center owned by the City in which Metro operated a grocery store. The lease commenced in 1979, and the store was expanded after 1999, at which time the City contributed to the construction costs, and the available options to renew the lease were extended an extra ten years expiring as late as 2029.

The building was new at the start of the lease, but the typical service life of a built up roof is 20 to 25 years – half of the maximum length of the lease.

Starting in 2016, the roof began to leak, requiring Metro to replace many ceiling tiles. The parties agreed that the roof needed to be replaced, but the issue was, at whose cost?

The lease required that Metro “must maintain and repair the Leased Premises”. This obligation took priority over the city’s duty to make repairs or replacements in limited situations.

The decision under appeal was that the definition of “Leased Premises” in the lease included the roof, and that the word “repair” under the particular clause setting out Metro’s responsibility included “replacement”.

More significant going forward is that the court provides a set of analytical frameworks to interpret the clause.

First, the court explained that under a lease with this structure the approach is to determine:

  • Whether the roof work is included in the tenant’s obligation to repair;
  • If so, is there any exception which applies?
  • If the work is not the tenant’s obligation, does it fall under the landlord’s obligations?

The court then summarizes the correct approach to interpretation:

  • Does the repair give the landlord back something different than what they leased to the tenant?
  • What is the specific wording of the lease, the terms of the lease, the nature of the premises, and the condition at the start of the lease?
  • Is it part of the premises that is being replaced or renewed, or the entire building?

On the facts of the case, the Court of Appeal did not consider this to be a replacement. Given the length of the lease, Metro will enjoy most of the benefit of the new roof, and at the end of the lease, the city will own a building with an older roof, not the new roof they initially leased to Metro.

Therefore, in this case, the Court of Appeal agreed with the result of the original decision, but for different reasons. Metro must pay for the new roof.

This approach would apply not only to roofs but other building systems – HVAC systems being a frequent item of dispute, for example.

Whether you have this issue arise under an existing lease or are negotiating a fresh lease, this case should result in fewer disputes over repair clauses.

It also serves as a reminder when negotiating your lease that you need to consider not just the term and price, but you should also take the time to understand the “boilerplate” and make sure that it matches your expectations. Unless you want to pay for replacing the boiler.