( Disponible en anglais seulement )
Clarity in a lease is crucial because it defines the rights and responsibilities of both the landlord and tenant from the outset, thereby minimizing the potential for misunderstandings and disputes. When a leasing dispute results in legal proceedings, the court will closely examine the lease agreement, applying principles of contractual interpretation to determine the intention of the parties at the time of entering into the lease. A party seeking to enrich itself through deliberate misinterpretations of the lease may find itself penalized and forced to pay damages for violating the lease agreement. Additionally, the court’s perception of the witnesses’ honesty can be telling in determining the outcome of the proceedings.
The importance of a clearly drafted lease is evident in a recent decision by the Ontario Superior Court of Justice: Metro Ontario Real Estate Limited v. Hillmond Investments Ltd. (2024 ONSC 2625). This case involved a dispute between a landlord and tenant over costs charged to the tenant during a forty-year tenancy. The court considered three main issues in its analysis: (1) common area maintenance; (2) the replacement of the roof; and (3) the calculation of rent.
1. Common Area Maintenance
Common area maintenance (« CAM« ) refers to the costs associated with maintaining and operating shared spaces and facilities within the property in question. These areas may include hallways, lobbies, elevators, parking lots, and other communal facilities, and may involve charges relating to operation, repair, cleaning, and more. These charges are typically shared among tenants based on the proportion of their leased space or another agreed-upon method.
In this case, although the lease contained a provision that listed charges and areas falling under CAM, the landlord was found to have used the CAM charges as a tool to shift costs that it should have borne according to the lease. The court determined that the landlord charged the tenant for items that did not fall within the scope of the CAM charges (e.g., cleaning an independent office) and understated the gross leasable area of the shopping center to increase the tenant’s CAM share, among other issues.
The court held that “deliberately manipulating” the gross leasable area and conflating non-recoverable overhead expenses with recoverable maintenance charges may result in unclaimable charges beyond the amounts agreed upon in the lease, as well as the forfeiture of any interest payable on unpaid invoices for dues greater than the agreed-upon amount.
Furthermore, the court’s statement that, in its view, the landlord knew from the very start that the costs should not have been charged to the tenant clearly impacted the outcome of the case. When the court finds a party to be lying, one would predict, as seen in this case, that the lying party will not succeed in its claims.
2. The Replacement of Fixtures
Lease provisions involving fixtures and structural elements are important for defining property boundaries, responsibilities, and expectations by ensuring clarity in maintenance and replacement obligations.
In this case, the roof of the leased premises needed to be replaced, and the lease allocated replacement-related expenses to the landlord. The landlord refused to bear the burden of the roof-replacement expenses. The court stated in its decision that « although the parties could have agreed that the lease would not allocate responsibility to repair the exterior of the leased premises in any circumstance except land subsidence and structural defect, such sophisticated parties would have used much clearer language to achieve that result. » In its arguments, the landlord relied on a provision in the lease stating that it shall be a completely carefree net lease (i.e., the tenant takes on all responsibilities and expenses related to the property, leaving the landlord with minimal to no obligations). However, the court stated that this lease provision did not apply to express obligations the lease imposes on the landlord, such as the roof repair cost, which is specifically assigned to the landlord.
As such, it is noted that a carefree net lease provision is limited by its terms, which usually exclude express obligations imposed on the landlord by the lease.
3. The Rent Calculation
Rent calculation provisions in leases are crucial, as they ensure that both landlords and tenants clearly understand their financial obligations while providing a transparent basis for rent adjustments or escalations.
In this case, the landlord argued that the renewal provisions in the lease added a premium that was to be paid on top of the existing percentage rent, which changed at the beginning of each renewal period. In finding that there was no premium to be paid on top of the percentage rent based on the lease provisions, the court emphasized that the tenant’s payment of rent in a manner consistent with the landlord’s interpretation of the lease may not assist in interpreting the lease. This is because subsequent conduct is only considered in contractual interpretation if the contract is ambiguous. In this case, the court held that the wording of the contract was unambiguous.
The court further emphasized that the tenant’s failure to enforce its legal rights does not mean that it never had them. The court refused to apply the doctrine of laches, which was raised by the landlord as a means of denying the tenant’s claim. Rather, the court held that the tenant had not acquiesced to the waiver of its rights and determined that as soon as the tenant became aware that it was paying more rent than required under the lease, it promptly moved to reduce its rental payments and institute legal proceedings to recover the excess rent.
While the decision at first instance has been appealed, the takeaways can be succinctly summarized as follows: in order to avoid getting into a “food fight,” clarity of drafting is important, and honesty is always the best policy.
