Unfolding Overholding

2 avril 2013

( Disponible en anglais seulement )

The recent decision of the Ontario Court of Appeal in AIM Health Group Inc. v. 40 Finchgate Limited Partnership, 2012 ONCA 795 provides a useful refresher course of landlord and tenant rights at the end of the term of a commercial lease. The court considered the various commercial lease provisions that deal with rights arising at the end of the term. For those of you reading this article who want to be spared the details, you may rest assured that the current lease clauses still work. The landlord still has the right to require that the tenant deliver up vacant possession at the end of the term assuming the tenant does not have or did not exercise any renewal or extension options.

In this case, the term of the lease ended on December 31, 2011. The tenant, AIM Health Group Inc. (“AIM”) had not exercised its renewal option. 40 Finchgate Limited Partnership (“Landlord”) looked for and found a new tenant and therefore required possession on expiry of the term. As often happens in these situations, there were numerous e-mails, correspondence and discussions between AIM and the Landlord. AIM advised that it needed approximately two more months to complete its relocation to its new premises. The Landlord, in turn, advised that it needed vacant possession by the end of the term, namely December 31, 2011. On January 1, 2012, the Landlord changed the locks and a few days later removed AIM’s property from the premises. AIM brought an emergency application. The application judge (Fragomeni, J.) found in favour of AIM namely that it was validly overholding and therefore entitled to re-enter. By the time the appeal was heard, the dispute between the Landlord and AIM had long been resolved by the Landlord giving AIM one month’s notice to terminate and AIM paying one month’s overholding rent. The appeal court agreed to hear the appeal even though the dispute had been resolved.

The decision of the majority (Feldman, J.A. with Epstein, J.A. concurring) confirmed the right of a landlord to require vacant possession at the end of the term without giving any notice. At issue was the proper interpretation of the overholding and surrender clauses in the lease. The overholding clause in the lease in question is a typical clause used in many commercial leases. Based on its strict wording, this clause does not require the consent of a landlord for a month to month tenancy to be created. This clause reads in part as follows:

If, at the expiration of the initial Term, or any subsequent Term or any subsequent renewal or extension thereof, the Tenant shall continue to occupy the Leased Premises without further written agreement, there shall be no tacit renewal of this Lease, and the tenancy of the Tenant thereafter shall be from month to month only and may be terminated by either party on one month’s notice.

The second part of this clause sets out the usual provision increasing the rent during the overhold period. In addition to the overholding clause there is also a surrender clause that required AIM « [a]t the expiration or sooner termination of this Lease … [to] give up unto the Landlord vacant possession of the Leased Premises…” (emphasis added). In her dissenting judgment, Gillese, J.A. points out the difference between termination of the lease and expiry of the term. The initial term may have expired on December 31, 2011 but the lease did not. Furthermore, no Landlord’s consent was required according to the overholding clause. Gillese, J.A. held that, in this case, AIM could stay for an additional one month. By letter dated December 19, 2011, the Landlord gave AIM notice that the Landlord required vacant possession by December 31, 2011. Gillese, J.A. found that this was not a valid notice because technically it did not comply with the notice provisions of the lease. It is difficult to understand why any notice was required in the first place. How can a landlord be obligated to give the required one month notice to terminate pursuant to the overholding clause before the overholding period begins? The dissenting judgment essentially gives a tenant an additional month and, in this case, makes a five year lease a five year one month lease.

The majority followed the decisions of Imperial Oil Ltd. v. Robertson, [1959] O.R. 655, [1959] O.J. No. 701 (C.A.) and Rafael v. Crystal, [1966] 2 O.R. 733, [1966] O.J. No. 1041 (H.C.J.). These two Ontario decisions essentially hold that “[a]n overholding clause that does not refer to the consent of the landlord has nevertheless been interpreted and applied to mean that it is only with the consent of the landlord that a month to month tenancy is created when the tenant overholds by remaining in possession following the termination of the lease.” In other words, the tenant cannot unilaterally stay as an overholding tenant. With respect to the surrender clause, the majority pointed out that such a clause is not really required because there is an implied obligation on the tenant to deliver up the premises to the Landlord upon the expiration or earlier termination of the tenancy. A landlord’s agreement or consent to create a month to month tenancy can be implied if a landlord accepts rent for the overhold period. Much of the discussion in Imperial Oil (supra) centered on the fact that the landlord’s representative had inadvertently accepted a rent payment after the landlord had expressly stated that the tenant had to leave. In this case, AIM did not tender any rent until after the ruling by the application judge. Although not expressly stated in its reasons, the majority recognized that a lease is more than a contract. It is also an interest in land – a point that is often forgotten.

Based on this decision, there is no need to revise either the overhold or the surrender clauses. That said, it is important for landlords and tenants to state their intentions clearly as the end of the term approaches and to act consistently with those stated intentions. If the Landlord accepts rent for the overhold period, this will more than likely be interpreted as consent to overhold. Tenants should also be aware that the overholding clause does not give them a unilateral right to extend, even for a month.

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