Recent Developments of Importance in Property Leasing: Part II
By: Stephen Posen and Stephen J. Messinger
This article is an excerpt from the 2016 Canadian Legal Lexpert Directory.
USE OF PREMISES: Where is the Line Drawn between Permitted and Prohibited Use?
Three recent cases from across Canada remind us of the far-reaching impact that a Use clause has on a tenant’s ability to operate its business. The case of 0764673 B.C. Ltd. v. Amacon Dawson Development Partnership illustrates that a tenant who uses its premises for a purpose wholly inconsistent with the terms of a lease — and such a contravening use imposes a considerable risk to a landlord — cannot expect a court to fault a landlord for not expressly carving out certain restrictions.
On the other hand, the Ontario Court of Appeal decision in 2249778 Ontario Inc. v. Smith signals the court’s unwillingness to step in and imagine what uses might be prohibited under a lease when the parties have a clear opportunity to contemplate and draft the parameters of use before the lease is signed. With both 0764673 B.C. Ltd. and 2249778 Ontario Inc. in mind, landlords who wish to limit uses that are naturally or logically ancillary to a primary use should draft accordingly in order to avoid a court’s expansive interpretation of a permitted use.
The case of Corydon Village Mall Ltd. v. Tel Management Inc., deals with a tenant’s requested change in use and a landlord’s limited obligation to provide its consent in the face of other tenants’ exclusive use rights and the general character and retail mix of a shopping centre. However, while a landlord’s obligation might be limited, a tenant’s inability to carry out its permitted use due to financial constraints is certainly an area of concern for both landlords and tenants.
In 0764673 B.C. Ltd., the Lease provided that the Tenant’s Use of the Premises was for the purpose of a light industry masonry warehouse and business headquarters. During an inspection, the Landlord found a licensed marijuana grow operation in the Premises. The Lease did not provide for a cure period and the Landlord terminated on the basis that the grow operation was not a permitted use. The Tenant removed the marijuana plants and sought a declaration that the termination was invalid, or alternatively, it should be granted relief from forfeiture.
The British Columbia Supreme Court held that the grow operation constituted a violation of the Use clause and the Landlord was entitled to terminate the Lease. The Tenant was not entitled to relief from forfeiture because it entered the Lease with no intention of complying with the Use. Further, the Tenant knowingly put the Landlord at risk of suffering extensive losses. The Court noted that the Tenant’s conduct had irrevocably destroyed the normal landlord-tenant business relationship contemplated by the Lease. Furthermore, the fact that the grow operation was removed from the Premises did not mean there was no longer any breach of the Lease to support termination, as the Lease had already been properly terminated.
In 2249778 Ontario Inc., the Lease specifically provided that the Premises was to be used for the operation of a fast food restaurant and “for no other purpose.” After signing the Lease, the Tenant immediately installed an ATM in the Premises. The Landlord sought a declaration that the ATM was not a permitted use of the Premises and brought an order requiring the ATM’s removal.
The Ontario Superior Court held that the ATM was a permitted use under the Lease because it did not alter the purpose of the Premises. The ATM was merely a tool that the Tenant used to achieve its business objective of running a fast food restaurant and did not signify (as the Landlord suggested) that the Tenant was offering banking services.
The Landlord unsuccessfully appealed the Superior Court’s decision. The Court of Appeal found that the Lease did not specifically prohibit the installation and operation of an ATM in the Premises nor did it define “fast-food restaurant”. The Court of Appeal noted that “it is open to parties to a commercial lease” to specifically prohibit the installation and operation of an ATM in the Premises.
In Corydon Village Mall Ltd., the Tenant leased space in the Landlord’s shopping centre for the retail sale of women’s shoes and related accessories and “for no other purpose whatsoever.” Within months of signing the Lease, the Tenant experienced financial difficulties that it attempted to resolve by changing its business. The Landlord refused to permit the proposed amended use because it violated existing exclusive use rights granted to other stores. The Landlord also rejected the Tenant’s subsequent request to sublet the Premises to a pole dancing school. The Tenant eventually abandoned the Premises and the Landlord brought a claim for damages.
The Manitoba Court of Queen’s Bench held that the Landlord had not unreasonably withheld its consent with respect to the Tenant’s proposed amended use and the proposed sublease. The Court found that the Tenant’s requested change in business to sell seasonal giftware and clothing was prohibited under the Lease and the Tenant was not entitled to reasonable consent. Further, the Landlord was entitled to reject the Tenant’s request to sublease. The Landlord gave proper consideration to the Tenant’s proposal and its decision was objectively reasonable given that: (1) the proposed subtenant’s use would not fit in with the family-oriented character of the shopping mall, (2) the proposed subtenant desired to operate outside of normal business hours, and (3) the Landlord had previously declined to enter into a lease directly with the proposed subtenant. The Landlord was awarded the full amount of rent owing under the lease plus interest.
Special acknowledgment and thanks to Carrington Hickey, Student-at-Law, for her assistance in preparing this article. Reprinted in part from The 2016 Canadian Legal Lexpert Directory. This article is intended to provide general information only and not legal advice. This information should not be acted upon without prior consultation with legal advisors.