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Delays in Delivery Seldom Entitle Breaking of Lease: Critical Dates Should be Stipulated in Negotiations
October, 2008
By Brennan Carroll
A recent decision of the Ontario Court of Appeal, Spirent Communications of Ottawa Ltd v. Quake Technologies (Canada) Inc., considered issues that arise when a commercial landlord fails to deliver the premises to its tenant within the time periods set out in the lease.
In Spirent, the tenant claimed that the landlord committed an anticipatory breach of its obligations under the lease, primarily because the landlord had notified the tenant that the landlord could not deliver possession on the scheduled move-in date. Furthermore, the tenant would not have access before the move-in date to complete necessary fit-ups as contemplated in the offer to sublease.
Based on these delays, the tenant informed the landlord that it considered the lease at an end. The tenant never moved in, the rental market subsequently declined and the landlord sued the tenant for the loss it suffered due to leasing out the premises to a third party at a much lower rate.
The Ontario Court of Appeal found that the delay in this case was not a fundamental breach and thus the tenant was not entitled to consider the lease at an end. The Court awarded the landlord the rent it would have earned from the tenant minus what it recovered from its new tenant.
The test for fundamental breach requires the innocent party to be deprived of "substantially the whole benefit" of the contract in question. When the tenant declared anticipatory breach by the landlord, the approximate delay was estimated to be six weeks out of a three-year lease.
The Court determined that the tenant did not lose substantially the whole benefit of the lease by such a delay:
* The tenant argued that missing the move-in date was tantamount to placing it "out on the street." The Court rejected this argument. The tenant neither sought emergency swing space, nor agreed to pay additional rent to stay an extra three months at its existing location. Additionally, despite the alleged importance of the fit-up work, the tenant did not apply for a building permit until three months before the move-in date.
* The tenant did not protest when first informed of the delay and waited more than a month before sending its letter purporting to treat the lease at an end. Despite early signs that the building might not be completed on schedule, the tenant also never asked the landlord about possible delay. Viewed together, these factors demonstrated to the Court that the breach was less serious than the tenant claimed.
* Combining this finding with the comparatively short duration of the breach, the Court concluded that the tenant did not lose substantially the whole benefit of the lease. No fundamental breach had occurred.
Although each situation will be based on its own unique facts, the Court's decision suggests that in most situations of delay by a landlord in delivering possession, the delay will not allow the tenant to break the lease. This case provides comfort for landlords, but landlords should still take measures that provide protection against issues arising from delay.
CONSIDER TIMING IN OFFER TO LEASE
The offer to lease is typically a short document between the landlord and tenant that sets out the key terms and conditions governing their relationship. The parties and their respective real estate agents often negotiate the offer to lease. However, legal advice at this stage may reduce costs in negotiating the formal lease and in dealing with matters that arise following offer to lease execution even if it creates greater upfront time and expense.
Timing issues are often not well planned in the offer to lease. Many events following execution of the offer to lease will have dates attached to them.
Some typical examples include:
* Delivery of tenant's financial information
* Tenant's condition to obtain senior management approval
* Landlord's condition to review the tenant's financial information and/or obtain senior management approval
* Obtaining head landlord approval if the premises are being subleased
* Tenant's requirements to provide evidence of insurance to the landlord
* Delivery by landlord and ultimate execution by both parties of a formal lease document.
Very often, the obligations of the landlord to commence landlord's work, the tenant's right to commence tenant's work and/or the tenant's right to commence business from the premises are conditional upon items such as those noted above being completed or satisfied. Creating a table of critical dates is therefore highly recommended.
Be aware of dates being based on days versus business days, and the ramifications of using these terms. Also, be aware of certain obligations on either party that do not have any time frames attached to them. For example, if the parties are obligated to complete the formal lease within 15 days of delivery of the form of lease by the landlord, there must be a corresponding obligation on the landlord to deliver such form within a certain number of days following execution of the offer to lease.
Failure to appreciate timing intricacies can cause numerous problems for both parties. Consider a situation where the tenant wants to begin its fixturing work on the premises within six weeks of execution of the offer to lease. Under the terms of the offer to lease, the tenant is not permitted to begin fixturing until a formal lease has been signed.
A problem will arise if the offer to lease allows for a period of time for the formal lease to be finalized that runs significantly past the tenant's six-week goal. If this potential problem is identified during negotiation of the offer to lease, the parties may attempt to resolve it by shortening the time frames for finalizing the formal lease.
TENANT AND LANDLORD CONTINGENCIES
Spirent demonstrates that courts will only allow a tenant to break a lease for the landlord's delay in extreme circumstances. If delay in commencing tenant's work and/or commencing business from the premises is a critical issue for the tenant, the tenant cannot rely solely on the law of fundamental breach.
The tenant may try to negotiate rights and remedies connected with delay into the offer to lease. Three examples include:
* A self-help remedy where the tenant could assume the landlord's work if certain milestones are not met within the predetermined time frames.
* A monetary penalty associated with delay.
* A contractual drop-dead date - being a date on which, if the landlord's work is not complete and/or occupancy is not granted to the tenant, the tenant can terminate the lease.
Acceptance of such contractual tenant remedies will depend upon the relative bargaining power between the landlord and tenant, and the landlord's analysis of the likelihood of risks that might result in delay.
Where the landlord anticipates delay, it should take measures to demonstrate its intent to remain bound by the lease. Such measures include working with the tenant to manage the delay, and being diligent in dealing with items that are within the landlord's own control or that could contribute to delay.
In Spirent, the Court rejected the tenant's allegation of anticipatory breach because the landlord gave no indication that it wanted to repudiate the lease. There was a record of correspondence that demonstrated the landlord worked to complete its obligations and meet the tenant's demands from the first acknowledgement of delay.
Even after the tenant stated that it considered the lease fundamentally breached, the landlord continued to address the tenant's concerns and minimize the delay in occupancy. Any commercial landlord facing delay would be wise to follow this example.
Brennan Carroll is a partner in the Commercial Real Estate practice group in Borden Ladner Gervais LLP's Toronto office. For more information, see the web site at www.blgcanada.com.
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