Commercial Lease Interpretation – Overholding Tenants

January 8th, 2013 by

The Court of Appeal for Ontario recently released its decision in AIM Health Group Inc. v. 40 Finchgate Limited Partnership [1] dealing with the interpretation of an overholding clause in a commercial lease. The decision is instructive in that Ontario’s highest Court analyzed provisions of a commercial lease in the context of commercial reasonableness, rather than strictly on the language of the lease itself.

In AIM, a commercial tenant operating a medical clinic decided not to renew its lease and the landlord began searching for a new tenant. The tenant then requested a lease extension from the landlord while it tried to find new premises that would meet particular standards required by the government. Despite the tenant’s requests for an extension, the landlord located a new tenant and notified the tenant that the landlord required vacant possession of the premises by the end of the lease term, as it had located a new tenant. At the expiry of the lease term, the landlord changed the locks and took back possession of the premises

The commercial lease contained an overholding clause that did not specifically require the landlord’s consent for the tenant to remain in the premises on a month-to-month basis following expiry of the lease. In a 2-1 decision, the Court of Appeal found that overholding clauses have an implied term that a tenant may only remain in the premises beyond the expiry of the lease if the landlord consents, either explicitly by agreement or by acceptance of rent. A unilateral overholding clause is in conflict with the implied surrender clause for commercial leases where tenants are obliged to return vacant possession to the landlord at the end of the lease term. Despite the particular language on landlord consent and acceptance of rent not being present in the lease between the parties, the Court of Appeal was prepared to interpret the overholding clause in a commercially reasonable manner to provide certainty and clarity to the parties.

While the Court of Appeal has set out the principles for interpreting this particular issue in a commercial lease, it is in the best interest of both landlords and tenants to ensure the obligations in a commercial lease are clearly set out. Lease agreements should contain specific language dealing with the lease term, payment of rent, overholding and surrender of premises, among other things, so that all parties understand their obligations in particular situations. When dealing with an overholding tenant, landlords must comply with the notice provisions of the lease to ensure they are within their rights to take back possession of the premises at the end of the lease term. Tenants who require lease extensions must ensure they provide notice of such a request to the landlord, and tender rent in advance for the overholding period to seek the landlord’s consent. Where negotiations between the parties regarding possible lease extension or renewal is ongoing at the end of a lease, landlords and tenants should be clear on their obligations with respect to payment of rent, extension of the term during negotiations and options in the event negotiations do not result in a lease renewal.

If you have any questions regarding commercial leases and the rights of commercial landlords and tenants, please contact a lawyer in the Commercial Real-Estate or Commercial Litigation Group at Devry Smith Frank LLP. We advise commercial landlords, commercial tenants, developers and financiers regarding all forms of commercial leasing matters and disputes.
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[1] 2012 ONCA 795


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