One of the most common and most litigated questions in commercial leasing is simple to state but complicated to answer: who is responsible for a particular repair, the landlord or the tenant? The answer depends on the lease, the nature of the damage, the specific system or component at issue, and sometimes on principles of equity that courts apply to temper harsh results. A burst pipe, a failing HVAC compressor, a cracked foundation, or a leaking roof can lead to disputes involving tens of thousands to hundreds of thousands of dollars.
This question is particularly acute for commercial tenants in Ontario, who often sign lengthy landlord-drafted “net lease” or “triple net” agreements that purport to allocate nearly every cost of operating the premises to the tenant. But the apparent sweep of these provisions is tempered by carefully-drafted exceptions, by the principles of interpretation that courts apply, and by the distinction between repair, replacement, maintenance, and capital improvements. Tenants who fail to negotiate these provisions at the outset often discover, years later, that they have assumed responsibility for a roof replacement, a new HVAC system, or code-compliance upgrades that have little to do with their business and whose benefit will flow to the next tenant.
This article explains how repair obligations are allocated in Ontario commercial leases, what sorts of repairs are typically the tenant’s responsibility versus the landlord’s, how net leases change the analysis, and what happens when the lease is silent or ambiguous. It is written for landlords and tenants who want to understand the risk allocation in their lease, and for anyone facing a dispute over a repair or replacement cost. Our commercial leases practice and commercial litigation practice advise on all aspects of commercial lease disputes in Ontario.
The Starting Point: The Lease Governs
Commercial leases in Ontario are contracts, and the allocation of repair obligations between landlord and tenant is determined primarily by the language of the lease itself. Unlike residential tenancies, which are heavily regulated by the Residential Tenancies Act and impose mandatory obligations on landlords, commercial leases are governed by the Commercial Tenancies Act but operate largely on principles of freedom of contract. The parties can allocate repair obligations in almost any way they choose.
This means that the first question in any commercial lease repair dispute is not “who usually pays for this?” but “what does the lease say?” Most commercial lease disputes are resolved by careful reading of the specific repair, maintenance, and operating cost provisions in the lease, informed by the rules of contract interpretation that Canadian courts apply.
The Implied Covenant to Repair
Even where the lease is silent, the common law and provincial statutes impose certain default obligations. In some Canadian jurisdictions, unless a contrary intention appears in the lease, every lease contains an implied covenant by the tenant to keep the leased premises in good and tenantable repair throughout the term and to yield them up in that condition at the end of the lease, subject to two important exceptions: damage caused by fire, storm, tempest, or other casualty, and reasonable wear and tear. Ontario does not impose this by statute in the same way as the northern territories, but a comparable obligation is typically included expressly in commercial leases.
What constitutes “good and tenantable repair” has been the subject of considerable judicial consideration. Courts have held that a covenant to repair requires the tenant to put the building into a state of repair similar to that which existed when the tenancy began. The tenant is not obliged to repair defects that already existed when it took possession of the premises, and it is not obliged to improve the premises beyond their original state. The measure of damages for breach of a tenant’s repair covenant depends on the state of repair to which the landlord is entitled under the parties’ bargain, not on any abstract standard of condition.
The Doctrine of Waste
A related common law principle is the doctrine of waste. A tenant has a duty not to commit “waste,” meaning conduct that damages the landlord’s reversionary interest in the property. Voluntary waste involves affirmative acts of damage (for example, tearing down a wall without permission), while permissive waste involves a failure to prevent deterioration (for example, allowing a leak to cause extensive water damage when timely action would have prevented it). A tenant that commits waste is liable to the landlord in damages, independent of any express repair covenant in the lease.
The Landlord’s Implied Warranty of Fitness
In Ontario, the common law recognizes an implied warranty by the landlord that the leased premises are fit for the purpose for which they were leased, where that purpose is known to both parties at the time of contracting. This warranty can be modified or excluded by express lease provisions, and it is narrower than the analogous warranty in Quebec (where the Civil Code imposes a statutory warranty that the leased property can be used for its intended purpose). But it provides an important common law backstop where the lease is silent about the condition of the premises at commencement. Some other provinces, including Alberta, New Brunswick, and Prince Edward Island, do not recognize this implied warranty at common law, placing the entire onus on the tenant to verify the condition of the premises.
Freedom of Contract and Its Limits
The default common law rules and the typical drafting patterns in commercial leases have developed in recognizable categories that make it possible to predict, in most cases, how courts will allocate responsibility for a given repair. But because commercial leases operate on principles of freedom of contract, a well-drafted provision can almost always displace the default rule. The rest of this article explains both the typical allocations and the drafting patterns that courts have accepted or modified.
Types of Commercial Leases: Net, Gross, and Everything in Between
Commercial leases in Canada are typically classified into a few broad categories based on how operating costs are allocated.
Net Leases (and “Triple Net” Leases)
A “net lease” is a lease in which the tenant pays base rent plus its share of the property’s operating costs, realty taxes, and often insurance. A “net net” or “net net net” (triple net) lease extends this allocation even further, with the tenant responsible for virtually all costs of operating the premises. Courts in Canada have held that there is no meaningful substantive difference between a “net” lease, a “net net” lease, and a “net net net” lease, as confirmed in C.C. Tatham & Associates Ltd. v. 2057870 Ontario Inc., and between an “absolutely net” lease and a “net net” lease, as confirmed in Mandarin Restaurant Franchise Corp. v. Figtree Construction Ltd.. The labels are marketing terms more than legal terms.
The core purpose of a net lease provision is to impose on the tenant all costs related to the premises and the broader project, unless the lease specifically says otherwise. The typical formulation provides that the landlord receives its rent “net” of all costs, with the tenant bearing those costs either directly (for items exclusively serving its premises) or through its proportionate share of common area operating costs.
Importantly, courts have tried to provide some equity in interpreting net lease provisions. A net lease clause does not automatically make the tenant responsible for every possible cost. Courts have refused to hold tenants responsible for the landlord’s capital taxes or for administration or management fees that are not specifically provided for in the lease. The net lease provision functions as a gap-filler, not as an absolute cost-shifting device.
Gross Leases
At the opposite end of the spectrum, a “gross lease” is one in which the tenant pays a single all-inclusive rent that is meant to cover base rent, operating costs, taxes, and utilities. Gross leases are less common in Canadian commercial practice today but are still seen in some office and industrial contexts. Under a gross lease, the landlord bears the risk of increases in operating costs during the term, which means the rent is typically higher than it would be under a net lease and typically includes an implicit margin for the landlord to absorb unexpected cost increases. For tenants that value budget certainty and do not want to assume the risk of fluctuating operating costs, a gross lease can be attractive, though the higher base rent reflects that risk transfer.
Modified Gross and Semi-Gross Leases
In practice, many commercial leases fall somewhere between pure net and pure gross. A “modified gross” lease may include base rent and some operating costs in a single payment while passing through other costs (such as realty taxes or utilities) separately. These hybrid structures are common in office leasing, where it is typical for the base rent to include the landlord’s usual operating costs but for “operating cost escalations” (increases above a base year) to be passed through to the tenant. The result is that the landlord bears the risk of the baseline operating costs but transfers the risk of cost increases to the tenant.
Another common hybrid is the “semi-gross” lease, in which base rent includes certain specified items (typically realty taxes and structural insurance) but not utilities, janitorial services, or common area maintenance. The permutations are endless, and the critical point for both landlords and tenants is to understand exactly what is included in base rent and what is charged as additional rent or operating costs.
Base Rent vs. Additional Rent
In Canadian commercial leasing practice, the monthly payment a tenant makes is typically divided into “base rent” (sometimes called “minimum rent”) and “additional rent.” Base rent is the fixed amount calculated on the rentable area of the premises. Additional rent is a broader concept that typically includes the tenant’s share of operating costs, realty taxes, insurance premiums, utilities, and sometimes percentage rent in retail contexts. The lease typically defines “rent” to include both base rent and additional rent, which has important consequences for the landlord’s remedies. If the tenant fails to pay additional rent, the landlord can typically exercise the same remedies as for non-payment of base rent, including distress and termination of the lease.
The Tenant’s Typical Repair Obligations
Standard commercial lease forms, particularly landlord-drafted forms, typically impose extensive repair obligations on the tenant. These include responsibility for the interior of the premises, for non-structural elements, and (in many leases) for building systems that exclusively serve the premises.
Interior Repairs and Maintenance
The tenant is almost always responsible for the interior of the leased premises. This includes floor coverings, interior walls, interior partitions, interior doors, light fixtures, plumbing fixtures located within the premises, and all of the tenant’s own leasehold improvements and trade fixtures. The tenant must keep these in good repair and must repair any damage caused by its own use or by the conduct of its employees, customers, or invitees.
The standard of repair required is typically expressed as “good and tenantable repair” or “good condition,” often with the qualification “reasonable wear and tear excepted.” The “reasonable wear and tear” exception is an important limit on the tenant’s obligation. It excuses the tenant from repairing deterioration that arises naturally from the ordinary use of the premises over time, as distinct from damage caused by misuse, neglect, or exceptional events. A carpet that has worn down from ordinary foot traffic over a ten-year lease is reasonable wear and tear. A carpet that has been stained or burned through carelessness is not. The line between the two is frequently contested in end-of-term disputes, and landlords often document the condition of the premises at the commencement of the lease to establish a baseline for comparison at surrender.
A tenant’s repair obligation also requires the tenant to perform regular maintenance, not just reactive repairs. Failure to change HVAC filters, failure to lubricate moving parts, failure to flush plumbing systems, or failure to perform periodic inspections can lead to accelerated deterioration that the tenant will then be held responsible for. Many leases expressly require the tenant to enter into preventive maintenance contracts for HVAC and other building systems, and to provide the landlord with copies of service records on request.
HVAC Systems Exclusively Serving the Premises
HVAC (heating, ventilation, and air conditioning) systems that exclusively serve the tenant’s premises are typically the tenant’s responsibility to maintain and replace under landlord-drafted leases. This is one of the most expensive and most disputed categories of repair obligations. A failing rooftop HVAC unit can cost tens of thousands of dollars to replace, and if the lease makes the tenant responsible for “replacement” of HVAC systems, the tenant may be on the hook for the full cost even if the unit fails near the end of the lease term.
The problem is obvious. A tenant in the last year or months of its lease who is required to replace the HVAC compressor or the entire unit receives none of the benefit of that replacement. The benefit flows to the landlord and to the next tenant. This has led sophisticated tenants to negotiate amendments to standard HVAC clauses requiring the landlord to perform replacements (as opposed to repairs) and to amortize the cost over the useful life of the replaced component, with the tenant paying only its share based on the portion of the useful life falling within its lease term.
A well-drafted tenant-favourable HVAC clause will typically distinguish between three types of work. Routine maintenance (filter changes, inspections, lubrication) is the tenant’s responsibility at the tenant’s cost, usually performed under a preventive maintenance contract with a qualified HVAC service provider. Minor repairs (fixing a thermostat, replacing a belt, repairing a leak) up to a specified dollar threshold per occurrence are the tenant’s cost. Major repairs and replacements (compressor replacement, replacement of the entire unit, replacement of major components with significant useful life) are performed by the landlord with the capital cost amortized over the useful life of the replacement, with the tenant paying only its pro rata share based on the portion of that useful life falling within the remainder of the lease term.
The drafting of HVAC clauses is often unclear, and ambiguous language has led courts to find landlords responsible for HVAC repair and replacement where the lease did not clearly impose the obligation on the tenant, as in 002142708 v. 376972 Ontario Ltd., where unclear language and conduct by the landlord resulted in the court finding the landlord responsible for HVAC repair and replacement.
Plate Glass and Storefront
In retail leases, the tenant is typically responsible for repairing or replacing plate glass, storefront glass, and entry doors. Damage to these elements from customer conduct, break-ins, or accidents is therefore the tenant’s cost. The rationale is that these elements are within the tenant’s control and are most often damaged by activities associated with the tenant’s use. Retail tenants should ensure that their property insurance specifically covers plate glass replacement, since this is typically expensive and can be excluded from standard commercial property policies.
Plumbing and Electrical Within the Premises
Plumbing and electrical systems exclusively serving the premises are typically the tenant’s responsibility. This includes interior wiring downstream of the electrical panel serving the premises, interior plumbing downstream of the main building supply, interior drainage lines up to the point of connection with the building’s main drainage system, and interior lighting fixtures. Where plumbing or electrical systems cross the boundary between the premises and the building’s common systems, the lease should specify where the tenant’s responsibility ends and the landlord’s begins. A common demarcation point is the “point of entry” into the premises (for supply systems) or the “point of exit” from the premises (for drainage and exhaust).
Tenant-Generated Code Compliance
Where changes in applicable laws (including building codes, fire codes, or accessibility requirements) are triggered by the tenant’s particular use of the premises or by the tenant’s alterations, the tenant is typically responsible for the cost of compliance. This is sometimes called “tenant-generated” compliance, and it is distinct from general code compliance obligations, which are usually the landlord’s responsibility.
For example, if a tenant takes over premises previously used as general retail and converts them to a restaurant, the tenant is typically responsible for the cost of any code-compliance upgrades triggered by the change in use, including kitchen ventilation, grease traps, enhanced plumbing, and increased electrical capacity. These costs are properly the tenant’s because they are specific to its business. Similarly, if a tenant installs specialized equipment that triggers additional fire suppression requirements, the cost of those requirements is typically the tenant’s.
The Landlord’s Typical Repair Obligations
Even under the most aggressive landlord-drafted net lease, certain categories of repairs remain the landlord’s responsibility. These are typically structural elements, common areas, and systems that serve multiple tenants.
Structural Elements
The “structure” of the building is almost always the landlord’s responsibility. This includes the foundation, load-bearing walls, structural columns and beams, the roof structure (as distinct from the roof membrane, discussed below), and the exterior walls. A crack in the foundation, a failing load-bearing wall, or structural damage from subsidence or settlement is the landlord’s cost to repair.
The line between “structural” and “non-structural” repairs can itself become the subject of litigation. Courts have held that repairs are “structural” when they affect the integrity of the building’s load-bearing elements or its fundamental habitability, rather than merely replacing or repairing surface finishes or systems. A crack in drywall is not structural. A crack in a load-bearing concrete column is structural. A worn carpet is not structural. A sinking foundation is structural.
Even where a lease purports to impose responsibility for “all repairs” on the tenant, courts have sometimes held that the tenant is not responsible for structural repairs unless the lease specifically so provides. Courts have been reluctant to interpret general repair language as imposing on the tenant the cost of preserving the landlord’s long-term capital asset. Clear and specific drafting is required if a landlord wants to shift structural repair costs to the tenant (and such provisions are rare outside of single-tenant leases of an entire building).
Roof Repairs and Replacement
The roof is a particularly contentious category. The building’s roof structure (the trusses, joists, and decking) is almost always the landlord’s responsibility. But the roof membrane (the waterproof covering) is often allocated to the tenant in net leases, particularly in single-tenant buildings. In multi-tenant buildings, the roof is typically a common element and the cost is allocated to tenants through common area operating costs. Disputes over whether a roof leak requires a repair (typically the tenant’s or common cost) or a full replacement (typically the landlord’s capital cost) are common.
A well-drafted lease distinguishes between roof repairs (the tenant’s cost or included in common area operating costs) and roof replacement (typically the landlord’s capital cost, or amortized over useful life and partially allocated to the tenant). Without a clear distinction, disputes arise over whether extensive re-roofing work that goes beyond patching individual leaks constitutes a “repair” or a “replacement.” Courts typically look at the scale of the work, the proportion of the roof affected, and whether the work materially extends the useful life of the roof, to determine which side of the line it falls on.
Exterior Walls, Windows, and Façade
The building’s exterior walls, windows (above the storefront level in retail contexts), and overall façade are typically the landlord’s responsibility. These elements are part of the building’s structure and its curb appeal, and they benefit all tenants and the landlord’s long-term asset. Painting and maintenance of the exterior are usually the landlord’s cost, often recovered through common area operating costs in multi-tenant buildings.
Common Areas
In multi-tenant buildings (office towers, shopping centres, strip plazas), the common areas (lobbies, corridors, parking lots, elevators, common washrooms, and exterior landscaping) are the landlord’s responsibility to maintain. However, the cost of maintaining common areas is typically passed through to tenants as part of common area operating costs, with each tenant paying its proportionate share based on its rentable area.
The definition of “common area operating costs” is heavily negotiated and is one of the most litigated provisions in commercial leases. Tenants should scrutinize this definition carefully and negotiate specific exclusions for items that are properly the landlord’s capital costs: the cost of acquiring or improving the land, the cost of constructing new buildings or additions, the cost of structural repairs to the base building, the landlord’s financing costs, legal fees related to other tenants’ leases, and leasing commissions. Without specific exclusions, a broadly-drafted common area operating cost provision can capture costs that the parties never contemplated would be shared.
Building Systems Serving Multiple Tenants
Mechanical systems that serve multiple tenants (central HVAC, central electrical and plumbing systems, fire safety systems, and elevators) are typically the landlord’s responsibility to maintain and replace. As with common areas, the operating cost is usually passed through to tenants, but the capital cost of replacement is often the landlord’s to bear or is amortized over its useful life and passed through only in part.
A recurring issue is the treatment of centralized systems that have failed before the end of their expected useful life. If the landlord has failed to maintain a system properly and it fails prematurely, the tenants may argue that the resulting replacement cost should not be passed through to them. If the system has simply reached the end of its expected life, the replacement cost is typically treated as a capital cost (the landlord’s) while the tenants pay only for the ongoing operating expenses of the new system.
Latent Defects and Pre-Existing Conditions
Latent defects (defects that existed at the time the tenant took possession but could not reasonably have been discovered) and pre-existing conditions (such as contamination under environmental laws) are generally the landlord’s responsibility. Tenants sometimes negotiate explicit representations and warranties from the landlord about the condition of the premises at the commencement of the lease, including compliance with environmental laws, absence of hazardous substances, and basic building code compliance.
Quiet Enjoyment
Every commercial lease in Ontario contains an implied covenant of quiet enjoyment, which obliges the landlord not to substantially interfere with the tenant’s use and enjoyment of the premises. While quiet enjoyment is typically discussed in the context of the landlord’s interference with the tenant’s operations (such as unannounced entries, construction noise affecting the premises, or disruptive work on the building), it can also be relevant to repair disputes. A landlord’s failure to perform necessary repairs, if it results in conditions that substantially interfere with the tenant’s use of the premises, may breach the covenant of quiet enjoyment in addition to the repair covenant. Tenants with claims for failed repair obligations often plead breach of the covenant of quiet enjoyment as an alternative cause of action.
The Repair vs. Replacement Distinction
One of the most important distinctions in commercial lease repair disputes is the difference between a “repair” and a “replacement,” or between an operating expense and a capital expense. The line between these categories can be outcome-determinative.
A “repair” is generally understood as work that restores a component to working order without materially upgrading it or extending its useful life. Patching a leak, replacing a worn washer, or fixing a faulty electrical switch are repairs. A “replacement” is the substitution of an entire component or system with a new one, typically because the original has reached the end of its useful life. Replacing a 20-year-old HVAC unit with a new one is a replacement.
Operating expenses are typically allocated to tenants (either directly or through common area operating costs) because they are ongoing costs of using the premises. Capital expenses are typically the landlord’s responsibility because they benefit the long-term value of the asset and will continue to benefit the landlord and future tenants long after the current tenant’s lease expires.
However, the line is not always clean. Many lease forms are drafted to blur the distinction, either by imposing “repair and replacement” obligations on the tenant without distinguishing between them, or by defining “operating costs” broadly enough to include certain capital items (often amortized over their useful life).
Amortization of Capital Costs
A common middle-ground solution is to amortize capital costs over their useful life and charge the tenant only its share. If an HVAC unit with a 20-year useful life is replaced in year 5 of a 10-year lease, the tenant pays 5/20ths of the cost of the new unit (or similar proportionate share). This approach fairly allocates the cost according to the benefit received.
Compliance with Laws and Changes in Law
A related and often overlooked category of repair obligations involves compliance with changing laws. Building codes, fire codes, accessibility requirements, and environmental regulations all change over time. When a new or amended law requires changes to the premises, who pays?
Tenant-Generated vs. Landlord-Generated vs. General Requirements
Well-drafted commercial leases distinguish between three categories of legal compliance costs.
“Tenant-generated” compliance requirements arise from the tenant’s particular use of the premises or from its specific alterations. For example, if a tenant operates a restaurant and new regulations require more stringent ventilation for commercial kitchens, the tenant is responsible for the cost. These are properly the tenant’s cost because they are directly tied to its business.
“Landlord-generated” compliance requirements arise from the landlord’s own acts or from the conduct of its agents. If the landlord performs base-building renovations and those renovations trigger code compliance obligations, the cost is the landlord’s.
“General requirements” are compliance costs that are not tied to either party’s specific acts but instead arise from changes in law that affect the property generally. A new accessibility requirement that mandates wheelchair access to all commercial buildings, or a fire code amendment requiring additional sprinklers in all commercial premises, is a general requirement. Sophisticated tenants argue (and most commentators agree) that these costs should be the landlord’s, because they relate to the general marketability and code compliance of the building and will benefit the landlord long after the current tenant has left.
Many landlord-drafted leases attempt to shift general compliance costs to the tenant. Tenants should scrutinize these provisions carefully and negotiate amendments to limit their exposure to costs that are disproportionate to their use of the premises.
Environmental Compliance
Environmental compliance is a particular concern in commercial leasing. Well-drafted leases include representations and warranties from the landlord about the environmental condition of the premises at the commencement of the lease and an indemnity for any pre-existing environmental contamination. The tenant is then responsible only for contamination or non-compliance that it causes. Without these provisions, a tenant may inherit costly environmental liabilities that predate its tenancy.
What Happens When the Lease Is Silent or Ambiguous
Not every repair obligation is clearly allocated in the lease. Sometimes the lease is silent on who is responsible for a particular type of repair, or the language is ambiguous enough that both parties have credible arguments. What happens then?
Principles of Contract Interpretation
Canadian courts apply the general principles of contract interpretation established by the Supreme Court of Canada in Sattva Capital Corp. v. Creston Moly Corp. to commercial lease disputes. The court considers the language of the lease in light of the factual matrix (the surrounding circumstances known to both parties at the time of contracting) and strives to give effect to the parties’ objective intentions. Courts also apply the principle of “business common sense,” refusing to adopt an interpretation that produces a commercially absurd result.
The Contra Proferentem Rule
Where a lease provision is genuinely ambiguous and one party drafted the lease, courts may apply the contra proferentem rule and interpret the ambiguous provision against the drafter. Because most commercial leases are drafted by the landlord on a standard form, this rule often operates in favour of tenants. However, the rule is a tiebreaker of last resort; courts will apply it only if the ambiguity cannot be resolved through the ordinary principles of interpretation.
Common Law Gap-Fillers
In the absence of clear lease language, the common law imposes some default rules, though these are modest and rarely displace the parties’ contractual allocations. The landlord typically has a duty to maintain common areas under its control and to keep the building in a condition fit for the tenant’s known use. The tenant has a duty to use the premises in a “tenant-like manner,” which was classically described by Lord Denning as meaning that the tenant must take proper care of the premises, including simple maintenance such as cleaning, preventing the freezing of pipes, and ensuring that basic systems are operated properly. The tenant must also avoid committing waste, as discussed above.
These common law duties are modest, and in modern commercial leasing the parties’ allocations in the lease almost always supersede them. Where the lease is silent or ambiguous on a particular issue, however, the common law can provide guidance. Courts applying the common law will typically ask who has control over the item or system in question (favouring that party as the one responsible for its maintenance), who benefits from the item or system (favouring shared responsibility where the benefit is shared), and whether the expense is properly characterized as an ongoing operating cost or a capital improvement (favouring tenant responsibility for the former and landlord responsibility for the latter).
The Role of Course of Dealing
Where the lease is ambiguous, courts may also consider the parties’ course of dealing. If the landlord has historically performed and paid for a particular category of repair, and the tenant has accepted this arrangement without objection, the course of dealing may be relevant to interpreting the ambiguous provision. Conversely, if the tenant has historically been charged for a particular cost and has paid it without objection, that history may support the landlord’s interpretation. Course of dealing evidence is particularly influential where the lease language could plausibly support either reading.
Remedies When Repair Obligations Are Breached
When one party fails to perform its repair obligations, the other party has a range of potential remedies depending on the nature of the breach and the language of the lease.
The Tenant’s Remedies Against a Defaulting Landlord
When the landlord fails to perform its repair obligations, the tenant’s remedies typically include damages for any loss suffered, injunctive relief compelling the landlord to perform, and in some cases (where the lease permits) the right to perform the repair itself and deduct the cost from rent (a “self-help” remedy). Where the landlord’s failure to repair is so serious that it deprives the tenant of the substantial use of the premises, the tenant may also have a claim for constructive eviction, which can justify termination of the lease.
Self-help provisions are common in tenant-favourable leases but are heavily negotiated. A typical tenant-favourable clause provides that if the landlord fails to perform a repair after written notice, the tenant may perform the repair and invoice the landlord, with the right to deduct the invoiced amount from rent if the landlord does not pay within a specified period. Where the repair affects an “essential service” such as HVAC, water, electricity, or elevator service, the tenant may also be entitled to a rent abatement if the service is interrupted beyond a short grace period (often 48 hours).
Landlords resist self-help and set-off provisions because they disrupt the landlord’s cash flow and create an incentive for tenants to manufacture disputes. A common compromise is to require the tenant to escrow the disputed amount with a third party (such as a solicitor) pending resolution of the dispute, so that the landlord’s rent stream is not interrupted unless the tenant ultimately prevails.
Constructive Eviction
Where the landlord’s failure to perform its repair obligations is so serious that it substantially deprives the tenant of the use and enjoyment of the premises, the tenant may have a claim for constructive eviction. Constructive eviction is not a physical eviction; it occurs when the landlord’s conduct (including failure to repair) is so severe that the tenant is forced to vacate the premises or is deprived of the substantial benefit of the lease. The legal consequence of constructive eviction is that the tenant may terminate the lease, stop paying rent, and claim damages for the landlord’s breach.
The threshold for constructive eviction is high. The tenant must show that the landlord’s conduct was sufficiently serious to amount to a substantial deprivation of use, not merely an inconvenience or a reduction in the quality of the premises. Failing HVAC that makes the premises unusable during summer months, persistent flooding from a leaking roof, or loss of electrical service for extended periods have all been argued as grounds for constructive eviction in appropriate circumstances.
The Landlord’s Remedies Against a Defaulting Tenant
When the tenant fails to perform its repair obligations, the landlord’s remedies typically include damages for the cost of performing the repair, the right to perform the repair itself and charge the cost back to the tenant as additional rent, and (in serious cases) termination of the lease for breach of covenant. The Commercial Tenancies Act governs the procedure for terminating a lease for breach, including the notice requirements under section 19.
Before terminating a lease for a tenant’s failure to perform a repair obligation, the landlord must typically serve a notice specifying the breach and giving the tenant a reasonable opportunity to remedy it. Courts scrutinize termination notices carefully, because termination of a commercial lease is a drastic remedy that can result in the loss of the tenant’s business. If the notice is defective (for example, if it fails to specify the breach with sufficient particularity or fails to allow a reasonable time to remedy), the purported termination may be invalid and the landlord may face counterclaims for wrongful termination.
Damages for Business Interruption
Where a failure to repair causes the tenant to suffer a business interruption (for example, the tenant cannot use its premises because of a failed HVAC system, a leaking roof, or a flooded floor), the tenant may have a claim for damages based on lost profits and additional expenses incurred. The tenant must prove both the fact of the loss and its quantum, typically through financial records showing historical performance and expert evidence on what the tenant would have earned but for the interruption.
Most commercial leases include limitation of liability and insurance provisions that affect these claims. A typical provision limits the landlord’s liability to direct damages, excluding consequential damages such as lost profits. Another common provision requires the tenant to maintain business interruption insurance and purports to preclude the tenant from claiming business interruption losses against the landlord, on the theory that the tenant’s own insurance covers the risk. The enforceability of these provisions depends on their specific wording and on the interaction with the insurance provisions discussed below.
Insurance and the Allocation of Repair Risk
Insurance provisions in commercial leases interact with repair obligations in complex ways. Most leases require both the landlord and the tenant to maintain property insurance, with specific allocations of who insures what.
A typical allocation is that the landlord insures the building (the structure, the base-building improvements, and the landlord’s systems) while the tenant insures its own contents, trade fixtures, and leasehold improvements. The tenant typically also maintains business interruption insurance, which covers lost profits and ongoing expenses if the tenant is unable to operate from the premises due to a covered event. The landlord, in turn, typically maintains rental income insurance, which covers lost rent if the premises become unusable due to a covered event.
The Supreme Court of Canada has emphasized that the insurance provisions in a commercial lease often allocate risk in ways that are independent of the repair obligations themselves. A tenant that is required to maintain all-risks insurance for the full replacement value of its leasehold improvements may be unable to recover from the landlord for damage to those improvements, even if the damage was caused by the landlord’s negligence, because the insurance provision has allocated the risk of that loss to the tenant’s insurer.
Covenants to Insure and Subrogation
This principle has been applied in cases where tenants sought to recover from landlords for fire or water damage. In Orion Interiors Inc. v. State Farm Fire and Casualty Co., for example, the tenant was barred from claiming damages against the landlord, regardless of the cause of the loss, due to the tenant’s covenant in the lease to maintain all-risks insurance in an amount sufficient to pay the full replacement cost of its property. Where the lease requires the tenant to maintain insurance covering the damage, courts have held that the tenant (or its insurer) bears the loss, regardless of how the damage occurred. See also Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc., where the interaction between covenants to insure and liability for loss was central to the analysis, and Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., in which the Supreme Court of Canada addressed the interpretation of standard-form insurance policies in the context of construction and property losses.
A related and important principle is that where the lease requires one party to insure against a particular risk and the other party contributes to the cost of that insurance (directly or through operating costs), the risk of that loss is allocated to the insurer, not to the contributing party. In 1044589 Ontario Inc. (Nantucket Business Centre) v. AB Autorama Ltd., for example, the Ontario Court of Appeal held that the tenant’s obligation to contribute to the cost of the landlord’s insurance against fire loss meant that the risk of fire loss was allocated to the landlord’s insurer, and the absence of an express covenant requiring the landlord to actually purchase the insurance had no practical effect. The tenant, having contributed to the insurance, was entitled to the benefit of the coverage.
However, the result can be different where the lease expressly preserves the tenant’s liability for its own negligence notwithstanding the insurance allocation. A plain reading of the lease may require the tenant to remain liable for damage caused by its own negligent acts even where the landlord has agreed to insure the building and the tenant has contributed to the cost of that insurance. The outcome in any particular case depends on the specific lease language and whether the parties clearly allocated the risk of the tenant’s negligence to the tenant or to the insurer.
The practical lesson is that tenants must ensure they actually carry the insurance their lease requires, must understand that the insurance requirement operates as a risk allocation independent of fault, and must review the specific language of the insurance and release provisions with their insurance advisors before signing the lease to confirm that the required coverage is available and that the lease does not create gaps between what the tenant must insure and what its policy actually covers.
Practical Guidance for Tenants and Landlords
For Tenants Entering a New Lease
Tenants negotiating a new commercial lease should scrutinize the repair, maintenance, and operating cost provisions carefully. Key issues to negotiate include: the clear identification of what is the tenant’s responsibility versus the landlord’s, the distinction between repair and replacement, amortization of capital costs over their useful life (particularly for HVAC systems), caps on annual increases in operating costs, audit rights over the landlord’s operating cost calculations, and exclusions from tenant-paid operating costs for items that are properly the landlord’s capital expenses.
For HVAC specifically, the ideal tenant-favourable clause distinguishes between maintenance (the tenant’s cost), repairs (the tenant’s cost up to a specified threshold), and replacements (performed by the landlord with the cost amortized over the useful life of the replaced equipment). For compliance with laws, the ideal tenant-favourable clause limits tenant-paid compliance to “tenant-generated” requirements and places general compliance and landlord-generated compliance on the landlord.
For Landlords
Landlords should ensure that their lease forms clearly allocate repair obligations and operating costs to avoid disputes about items that are neither specifically the tenant’s nor the landlord’s responsibility. A “catch-all” net lease provision is helpful but should be supplemented by specific allocations of known cost categories. Landlords should also be careful about self-help clauses that permit tenants to perform repairs and deduct from rent, because these provisions can be abused and can make rent collection significantly more difficult.
For Parties in a Dispute
Parties facing a repair dispute should start with a careful reading of the lease, focusing on the specific provisions that allocate the disputed cost. If the language is clear, the dispute will typically be resolved by the terms of the lease. If the language is ambiguous, the parties should consider the factual matrix, the course of dealing (if any), and the broader principles of contract interpretation. Early legal advice can often prevent a minor dispute from escalating into full-scale litigation.
Commercial lease disputes are among the most common forms of commercial litigation in Ontario, and disputes over repair obligations, HVAC replacement costs, operating cost audits, and code compliance expenses are especially frequent. Whether you are a tenant facing an unexpected repair demand from your landlord, a landlord seeking to enforce repair obligations against a tenant, or a party negotiating a new lease and wanting to protect your interests at the outset, careful drafting and early legal advice can save significant time and money. Our commercial leasing practice advises on all aspects of commercial lease negotiation and disputes in Ontario. Contact Grigoras Law to discuss your situation.
Conclusion
The question of who is responsible for a particular repair in a commercial lease is deceptively complex. The answer depends on the specific language of the lease, the nature and location of the component at issue, whether the work is properly characterized as a repair or a replacement, and sometimes on principles of equity that courts apply to temper the literal application of harsh provisions. Net leases purport to allocate virtually all costs to the tenant, but courts have developed a body of case law that limits the reach of these provisions in specific contexts.
For tenants, the critical moment is the negotiation of the lease. Once the lease is signed, the tenant is bound by its terms, and the cost of an unexpected HVAC replacement or code compliance upgrade can be significant. For landlords, clear and comprehensive drafting is the best protection against disputes. And for parties who find themselves in a dispute, a careful analysis of the lease, informed by the principles of commercial lease interpretation, is the starting point for resolution.
