August 23, 2021
The Ontario Court of Appeal has given the duty of good faith in performing contracts a narrow reading, refusing to apply it to grant relief from forfeiture in a situation where a commercial tenant was outside the agreed dates for attempting to renew its lease.
The case involved a Subway restaurant franchise location. The option to renew had to be exercised at least 9 months and not more than 12 months before the expiration of the term. Like many commercial leases, the expiration date was not clearly set out in the lease, because it depended upon calculating the commencement date, which in turn depended upon how long it took the tenant to complete leasehold improvements – the rent free period for construction not being included in the term.
Subway’s property manager’s database recorded the expiration date as May 31, 2018. However, an estoppel certificate provided to the landlord when it purchased the property from the original landlord certified that the expiration date was August 23, 2018. This appears to have been the only document which set out the termination date. Both parties had a copy of the certificate. The property manager was aware that the date on the certificate differed from their database.
So, renewal had to occur between August 24, 2017 and November 23, 2017.
Subway’s property manager had sent several letters to the landlord indicating its mistaken understanding of the term of the lease, and requesting that the landlord correct any error in that understanding. The letters included the line: “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 landlord never responded.
Subway attempted to renew the lease May 19, 2017 – outside the permitted window.
Subway applied to court for relief from forfeiture, the equitable remedy that allows a party to a contract to be excused from imperfect performance in certain circumstances. The original application judge rejected the request, finding that it was not within the landlord’s interest to assist the tenant (they had a buyer for the building), and, more importantly, that the onus is on the tenant to get the dates for renewal right, and cannot shift that burden to the landlord.
The tenant could not shift its due diligence requirements to the landlord. Since it had a copy of the estoppel certificate, it could and should have known about the correct dates.
The tenant attempted to have that principle reconsidered in light of recent developments in the law of good faith performance, in particular the recent Supreme court of Canada decision in CM Callow Inc v Zollinger, about which we wrote recently, which found in favour of an innocent party misled by the dishonest actions of the other party.
The Court of Appeal rejected this argument. In the Subway case, the landlord was completely “upfront and transparent”. The court finds no obligation for the landlord to correct the tenant’s error. This is based upon a passage in Callow which states that “the question is whether the defendant’s active conduct contributed to a misapprehension that could be corrected only by disclosing additional information” and then stated clearly that “a contracting party is not required to correct a misapprehension to which it has not contributed” (emphasis added by Court of Appeal).
Along with the most recent Supreme Court decision in Wastech Services, about which we have written, this may represent a trend of courts restraining the growing reliance upon the duty of good faith. It will take a few more appeal level decisions before we see how far this trend extends.
It is interesting that neither the application judge nor the Court of Appeal discussed the fact that the error was in sending the notice too soon, not too late, and thus, the landlord suffered no harm from the error – which often is enough to allow relief from forfeiture. This therefore is a significant move also to restrain the recent expansion in the reach of that remedy.
The takeaways from this decision include:
- The onus remains on the tenant to comply with the lease terms regarding renewal
- Self-serving efforts to shift that burden to the landlord are likely to fail
- Early notice is just as defective as late notice
- Relief from forfeiture is likely not available
- The duty of honest performance of contracts extends only to affirmative acts of dishonesty, not to silence in the face of a mistaken belief
- Parties to a contract are still usually held to their bargain
Neither court here discussed or relied upon the sophisticated nature of the tenant in this case. It would be interesting to see if the result would be different in a future case involving a small “mom and pop” tenant and a sophisticated landlord. Although strict application of the Subway ruling suggests otherwise, there is always sympathy for the underdog. Unless and until that happens though, all tenants of any size need to be careful about strict compliance with lease terms about renewal.