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In a recent Ontario Court of Appeal decision, the court allowed a landlord’s appeal, finding that the application judge had erred in finding ambiguity in a lease where none existed.

Parties Go to Court over Term of Lease

A grocery store signed a lease in a shopping mall in March 1979 with an initial term of 25 years. The expiry date was February 28, 2004. The store also had a right to five successive renewal periods of five years each. As such, the ultimate expiry date was to be February 2029, or a maximum of 50 years from the date the lease commenced. 

However, in 1999, when the store was planning the construction of an addition, the parties negotiated an amendment to the lease which, among other things, extended the term of the lease by ten years, commencing on March 1, 2004 and expiring on February 28, 2014. The amendment gave the store the option to extend the term of the lease for three additional periods of five years each for a total of five options or 25 years. 

The landlord brought an application for a declaration that the maximum term of the lease was 50 years, expiring in 2029. The store argued that the lease extended until February 2039, at the latest.

There was also an issue raised regarding the replacement of the property’s roof, which will not be covered here.

Lower Court Finds in Favour of Tenant

The application judge dismissed the landlord’s application on the lease issue, finding in favour of the store and declaring that the lease would expire in 2039 at the latest. He found that the lease was ambiguous because there were two reasonable interpretations of the lease term clauses. 

The first interpretation, advanced by the landlord, was that the maximum 50-year term of the lease was not altered by the amendment. As such, it argued that the lease would expire in 2029 at the latest. 

However, the second interpretation, advanced by the store, was that the parties had wanted to extend the length of the lease and the amending agreement had added an additional ten years to the maximum potential length of the lease. Therefore, the lease would expire in 2039 at the latest.

Faced with such differing interpretations, the application judge held that the factual matrix did not help resolve the ambiguity in the lease. As a result, the application judge examined the extrinsic evidence presented. He found that the extrinsic evidence, including the notice of lease registered on title and an estoppel certificate (both of which stated that the lease could be extended to 2039), supported the store’s position that the amendment extended the maximum length of the lease by ten years.

The landlord appealed, arguing, among other things, that the application judge had erred in determining the lease was ambiguous by failing to consider the lease as a whole.

Court of Appeal Finds in Favour of Landlord

At the outset of its decision, the court stated plainly: “A contract must be interpreted as a whole.” 

The court then reviewed the terms of the lease and the amendment, following which it explained:

“The application judge committed an error of law by failing to consider the wording of the provisions in the context of the agreement as a whole. If he had not committed this error, he would have come to the conclusion that there was no ambiguity….

When the 1999 amendment is read within the context of the original lease, there is no ambiguity…

In short, the application judge fell into error in failing to consider the actual wording within the context of the lease as a whole, which led him to find that the provision was ambiguous. This was an extricable legal error…”

As part of its reasoning, the court explained that if the application judge’s interpretation was given effect, it would have led to an overall term of 60 years rather than 50, which had been specifically precluded by the original lease. However, the parties had not amended the 50-year limit provision. The court opined that if the parties had intended to vary the maximum lease term they would have done so, but did not.

As such, the court allowed the landlord’s appeal and declared that the expiry date of the lease was 2029, and not 2039 as the store had argued.

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Real estate transactions represent some of the largest financial transactions in the life of any individual or company. Whether you are a first-time homebuyer or a large corporation acquiring a new space to grow your business, it is important to retain a law firm with the experience and skill necessary to ensure your interests are protected and the transaction closes without issue.

At Bader Law, we have an extensively experienced business law team and regularly represent our corporate clients in various real estate matters. We work with business clients ranging from small family-run operations to large enterprises, helping our clients manage their real property interests with an eye toward growth. Our business and real estate teams work closely together to provide thorough and strategic representation on all commercial real estate transactions, including commercial leasing issues affecting landlords and tenants.

The Mississauga real estate lawyers at Bader Law represent individual and corporate buyers and sellers in both residential and commercial real estate transactions in Mississauga and throughout Greater Toronto Area. We will advise you on your options, help secure your interests, and protect your financial investments. Contact us online or at (289) 652-9092to learn how we can help.