Commercial Leases.

A commercial lease is both a conveyance of an estate in land and a contractual document. It is an agreement under which a landlord grants a tenant the right to occupy and use a defined property for commercial purposes during a specified term, in exchange for rent and the performance of various covenants. Unlike residential tenancies, which are governed by the Residential Tenancies Act, 2006, commercial leases in Ontario are primarily governed by the Commercial Tenancies Act, R.S.O. 1990, c. L.7 (the "CTA"), together with the general principles of contract law and equity.

What Is a Commercial Lease?

The parties to a commercial lease have significantly greater freedom to structure their relationship than residential landlords and tenants, but that freedom comes with greater complexity and greater risk on both sides. The parties to a lease are generally the landlord and the tenant, often referred to in the CTA as the "lessor" and "lessee." The CTA contains broad definitions of each. A "landlord" includes any person who is a lessor, owner, or the person giving or permitting the occupation of the premises, together with their heirs, assigns, and legal representatives. A "tenant" includes a lessee, occupant, sub-tenant, or under-tenant, together with their assigns and legal representatives. These definitions are intentionally wide: a 50% shareholder of a corporate landlord who personally performed the duties of a landlord has been held to fall within the definition, as has a management company and a purchaser under a conditional agreement of purchase and sale.

Lease vs. Licence

A lease must be distinguished from a licence. A lease is a conveyance of an estate in land, it grants the tenant exclusive possession of the premises for the term. A licence, by contrast, is a mere permission to use a property; it does not convey a leasehold interest in the land, and the licensor can revoke it at will (absent express contractual protections). With a licence, the occupant becomes a licensee; with a lease, the occupant becomes a tenant with full possessory rights enforceable against the landlord and, in many respects, against the world.

The test applied by the courts to determine whether a particular arrangement is a lease or a licence is whether the agreement, on a proper construction based on the actual intention of the parties, grants exclusive possession of the premises. Exclusive possession does not require the absolute exclusion of the landlord, the landlord may retain rights of access, but it does require that the occupant have the right to use the property as against all others. Licence arrangements, often referred to as "concession agreements," are common in large department stores where licensees operate kiosks or pop-up retail outlets for food, hair services, or other ancillary activities. Because a licensee does not have a possessory interest, the landlord's rights on default are significantly different from those applicable to a tenant.

Lease vs. Agreement to Lease

A landlord and tenant may create a leasehold interest either by executing a formal lease or by entering into an agreement to lease. Both are contractually binding once executed. Despite not having agreed to all the terms, a document in the form of an agreement to lease may itself be held to constitute a lease, and specific performance may be granted where the tenant has entered into possession.

It is common practice in shopping centre leasing to attach the lease in draft form as a schedule to the agreement to lease, giving the tenant an opportunity to review the terms before committing. However, where terms in an agreement to lease differ from those in the formal lease ultimately executed, the latter will generally govern. An "agreement to agree", a provision that the parties will settle outstanding terms in the future, is no agreement at all and cannot be enforced. Landlords and tenants should ensure that all material terms are agreed upon and recorded before executing any binding document.

Governing Legislation

Commercial leasing in Ontario is governed by a web of statutes and common law principles. The most important include:

• The Commercial Tenancies Act, R.S.O. 1990, c. L.7, the primary statute governing the landlord and tenant relationship, including distress, forfeiture, relief from forfeiture, and assignment;RSO 1990, c L.7. The principal Ontario statute governing commercial landlord-tenant relations. The CTA carries forward, in modernised form, the body of common law and equitable rules that historically governed leasehold relationships, layering statutory provisions on top of the contractual freedom that otherwise prevails. Operative provisions in the firm's practice include s 18 (effect of disclaimer of title); s 19 (notice requirements before forfeiture for breach of covenant other than non-payment of rent); s 20 (relief from forfeiture, including the s 20(4) stay-on-payment-into-court mechanism for non-payment of rent); s 23 (the requirement that a landlord not unreasonably withhold consent to assignment or sublease where the lease so provides); ss 30 to 53 (the distress regime, the conditions precedent, the procedural rules, the priorities, and the limits); s 41 (six-month post-termination distress where the tenant remains in possession); and s 48 (the 30-day fraudulent-removal remedy). Counsel must read the CTA together with the lease, since most CTA provisions can be modified or overridden by clear contractual language.
• The Statute of Frauds, R.S.O. 1990, c. S.19, requiring certain leases to be in writing;
• The Conveyancing and Law of Property Act, R.S.O. 1990, c. C.34, which implies certain covenants and governs the running of covenants with the land;
• The Short Forms of Leases Act, R.S.O. 1990, c. S.11, which provides prescribed short form covenants with full legal effect;
• The Land Titles Act, R.S.O. 1990, c. L.5, and the Land Registration Reform Act, R.S.O. 1990, c. L.4, governing registration and priorities;
• The Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 ("BIA") and the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 ("CCAA"), federal statutes governing the rights of landlords and tenants in insolvency; and
• The Personal Property Security Act, R.S.O. 1990, c. P.10 ("PPSA"), governing priorities between the landlord and the tenant's secured creditors.

Essential Terms of a Lease

For an agreement to lease or a lease to be binding, it must contain the following essential terms: the parties (landlord, tenant, and any guarantor or indemnifier); a description of the premises identified with sufficient certainty; the term (commencement date, expiry date, and any options to renew); the rent (base rent and, if applicable, additional rent, operating costs, and percentage rent); the use clause (the permitted use and any restrictions); and any material terms either party designates as essential.

Beyond these essential terms, a standard commercial lease will also address security deposits, fixturing periods, the landlord's and tenant's work, insurance, maintenance, assignments and subleases, parking, and renewal options. Failure to adequately define key terms, such as operating costs, has been held to render an agreement to lease unenforceable for want of essential content.

Writing Requirements and the Statute of Frauds

The Statute of FraudsRSO 1990, c S.19. The Ontario consolidation of the original 1677 English Statute of Frauds. In commercial leasing the operative provisions are ss 1 and 2, which require that any lease for a term exceeding three years be made by deed (a writing under seal); and s 4, which requires that any agreement that is not to be performed within one year be evidenced by a signed writing. Where a lease falls within the statute but no compliant writing exists, courts will sometimes recognise the lease through the equitable doctrine of part performance, typically where the tenant has entered possession and paid rent. The statute is a defence that must be specifically pleaded; failure to plead it waives reliance. Most modern commercial leases easily clear the statute's formal requirements, but the doctrine still bears on disputed agreements to lease, oral side agreements, and informal extensions of term. requires that leases exceeding three years be made by deed. Section 3 of the Act provides an exception for leases of three years or less at a rent not less than two-thirds of the improved value of the property, which may be created orally or informally. For all commercial leases exceeding three years, a written document is not only advisable, it is legally required. An oral lease for a term exceeding three years is void, not merely voidable.

A document which is not made under seal may still take effect as an agreement to lease. The Statute of Frauds must be specifically pleaded as a defence, and its application may be excluded by acts of part performance, for example, where the tenant has entered into possession and paid rent. Courts have also applied estoppel to prevent a party from denying the existence of a lease where the other party has relied on it to their detriment. Assignments and surrenders of leases are similarly subject to formal requirements, including the requirement that the document be made by deed where the residue of the term exceeds three years.

Capacity to Contract

Corporations incorporated under the Business Corporations Act, R.S.O. 1990, c. B.16 have the capacity and the rights, powers, and privileges of a natural person and may therefore purchase or lease real estate. The dissolution of a corporate tenant terminates the lease and constitutes the former shareholders in occupation as trespassers, although subsection 241(9) of the Business Corporations Act provides that a dissolved corporation may bring or defend an action within two years of dissolution. The amalgamation of a corporate tenant does not affect the lease, as the amalgamated corporation is treated as a continuation of its predecessor.

Directors and officers may face personal liability for lease obligations in certain circumstances, for example, where the capacity in which the lease was signed is ambiguous, or where the court "lifts the corporate veil" to address fraud or oppression. Directors who participate in a decision to have a corporation breach or abandon its lease may also be sued for inducing breach of contract, provided the landlord proves more than mere direction, deliberate and improper conduct must be shown.

Interpretation and Drafting

Courts apply ordinary principles of contract interpretation to leases. Ambiguities are resolved so as to give effect to the reasonable expectations of the parties, construed against the background of the factual matrix at the time of contracting. The court will not, however, permit parol evidence to vary a clear and unambiguous lease. If the lease is clear, it will be enforced as written, even if one party later argues the terms are unreasonable.

Courts will not ordinarily imply terms into a lease unless it is necessary to do so to give the lease business efficacy. A lease that inadvertently does not reflect an agreed item, for example, because a landlord silently changed a term from the offer to lease, may be rectified. Rectification is available where both parties had a common intention and the written document does not reflect that intention due to a mistake.

From a practical drafting perspective, leases should be clear, comprehensive, and drafted in language that is readable without excessive legalese. The following provisions frequently become the subject of disputes and deserve particularly careful attention in drafting and negotiation:

• Operating cost definitions, which items are included and excluded, and the mechanism for reconciliation;
• Force majeure clauses, particularly their scope following the COVID-19 pandemic and whether they trigger rent abatement, reduction, or deferral;
• Co-tenancy clauses, rights that trigger if an anchor tenant or a specified percentage of the centre closes;
• Assignment and subletting provisions, the grounds on which consent may be withheld;
• Renewal and adjustment mechanisms, whether renewal rent is capable of being fixed with certainty; and
• Notice requirements, default notice periods, cure periods, and deemed receipt provisions.

Description and Certainty of Premises

For any lease, the parties must describe the leased premises correctly and with sufficient certainty. The name or some other description of the building or shopping centre in which the premises are located, together with the unit number and the street address, is generally sufficient for most commercial purposes. However, where the tenant is leasing a portion of a larger building, the description must be precise enough that the extent of the tenant's exclusive possession can be determined without ambiguity. Disputes about the dimensions of leased premises, and the financial consequences of discrepancies in measurement, are a common source of litigation.

Courts have recognized that, in commercial leasing, an easement for access to the leased premises may be implied where access is necessary for the effective enjoyment of the property and could not have been intended to be withheld. A landlord cannot, by a subsequent act, deprive the tenant of access that was fundamental to the grant.

Common Areas

The common areas of a commercial development, driveways, walkways, parking and delivery areas, lobbies, elevators, corridors, interior mall spaces, and common washrooms, are retained and controlled by the landlord. The tenant does not ordinarily have exclusive possession of these areas but is entitled to their use, together with other tenants, their customers, and visitors. The tenant is generally a licensee with respect to common areas, although an easement may be implied in certain circumstances where access through a common area is essential to the use of the leased premises.

The landlord's right to control common areas is not unlimited. Where a landlord restricts access or permanently interferes with parking and access that was fundamental to the tenant's business, this may constitute a breach of the covenant for quiet enjoyment or a derogation from the landlord's grant. A landlord who, after executing the lease, erects a structure in a designated parking area shown on the plan attached to the lease has been held to be in derogation of its grant.

Landlord's Access

Most commercial leases grant the landlord the right of entry to inspect the premises, carry out repairs, show the premises to prospective tenants near the end of the term, or carry out the landlord's obligations. This right of access must be exercised in a manner consistent with the tenant's right to possession. The landlord cannot use access rights to harass the tenant or to conduct a de facto eviction. Access for inspection typically requires reasonable notice, except in emergencies.

Leasehold Improvements and Fixtures

Leasehold improvements are improvements made by the tenant to the demised premises. At common law, fixtures, items attached to the land, become part of the realty and therefore belong to the landlord upon termination of the lease. The key question is always whether an item has been affixed to the premises and, if so, whether it was intended to become a permanent part of the realty or whether it was attached for the more convenient use of the tenant's business.

Tenant's fixtures, items attached for trade purposes, are generally removable by the tenant before the end of the term. However, a tenant who fails to remove fixtures before the lease expires may lose them to the landlord. Most commercial leases contain express provisions governing the treatment of leasehold improvements at the end of the term, either requiring the tenant to remove them and restore the premises, or permitting the landlord to retain them without compensation.

Fixturing allowances are a common landlord inducement, a cash contribution toward the cost of the tenant's leasehold improvements. The treatment of fixturing allowances for income tax purposes is governed by the provisions of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.).

Environmental Matters

Commercial leases frequently address environmental obligations. A tenant who causes contamination of the demised premises may face significant liability under provincial environmental legislation, and a landlord who knew of pre-existing contamination and failed to disclose it may be liable for the cost of remediation. Sophisticated leases include detailed environmental indemnification provisions, representations and warranties about the state of the property, and obligations to comply with environmental laws throughout the term.

The intersection of environmental obligations and commercial leasing has become more significant following legislative changes extending liability to directors and officers of tenant corporations for remediation costs arising from the corporation's environmental footprint.

Base Rent and Types of Leases

Rent, properly understood, is the consideration paid by the tenant to the landlord for the exclusive possession of the demised premises. The modern conception of rent is a periodical payment, typically monthly, in advance. The reservation of rent in a lease creates an implied covenant to pay it, although most leases also contain an express covenant for certainty.

The labels used in commercial leasing, "gross," "net," "net-net," and "net-net-net", describe the relative allocation of financial obligations between the parties, but they have no formal legal definition. Their meaning must always be determined by reference to the specific terms of the lease:

• A gross lease has the tenant pay a fixed base rent and the landlord absorb realty taxes, utilities, heating and cooling, insurance, and maintenance.
• A net lease has the tenant pay base rent plus realty taxes, with the landlord absorbing other operating costs.
• A net-net lease adds insurance to the tenant's obligations.
• A net-net-net (triple net) lease passes substantially all operating costs, taxes, insurance, and maintenance, to the tenant, subject to any specific exclusions negotiated.

In the absence of agreement to the contrary, the tenant must pay rent for the entire term of the lease without abatement or suspension, unless the landlord's acts amount to an eviction. An eviction requires "something of a grave and permanent character done by the landlord with the intention of depriving the tenant of the enjoyment of the demised premises." A temporary inconvenience or partial interference with possession does not constitute eviction and does not justify suspension of rent.

Operating Costs and Additional Rent

To maximize the landlord's recovery of expenses, "operating costs" are often extensively defined in commercial leases. All moneys payable by the tenant in addition to basic rent are typically defined as "additional rent" and made expressly subject to the same remedies available to the landlord for non-payment of base rent, including distress and termination.

A typical definition of operating costs includes:

• Insurance costs for the building and common areas;
• Cleaning, snow removal, garbage collection, and landscaping;
• Lighting, electricity, and utilities serving the common areas;
• Policing, security, and traffic control;
• Salaries and benefits of management and maintenance personnel;
• Repairs, replacements, and maintenance of the building and its systems;
• Depreciation or amortization of maintenance equipment;
• HVAC costs allocated to common areas;
• Energy conservation systems;
• Business and realty taxes on common facilities; and
• An administration or management fee, typically calculated as a percentage of base rent, taxes, and operating costs.

Tenants should negotiate the exclusion of items that are properly the landlord's capital expenditure or investment. Standard exclusions from operating costs include ground rental under any ground lease, debt service costs, leasing commissions, costs recoverable under contractor warranties, and proceeds of insurance claims. Adjustments for vacant premises are also important: many leases provide that if the building is less than fully occupied, the landlord may "gross up" operating costs to what they would have been at full occupancy, preventing tenants from benefiting from the landlord's failure to lease.

If possible, tenants should request audited statements of operating costs, or at minimum statements certified by an officer of the landlord. Most sophisticated leases include tenant audit rights, the right to review the landlord's operating cost records, subject to time limits within which an audit must be demanded following receipt of the annual reconciliation statement.

Percentage Rent

Many commercial leases, particularly in the retail sector, provide for the tenant to pay "percentage rent", an amount equal to a set percentage of the tenant's gross receipts above a defined natural breakpoint, being the level of gross receipts at which percentage rent begins to exceed the base rent. The natural breakpoint is derived by dividing the annual base rent by the percentage rate.

"Gross receipts" is typically elaborately defined to prevent manipulation and to ensure the landlord receives the full benefit of the tenant's commercial success at that location. Tenants commonly seek to exclude from the definition of gross receipts: sales taxes, returns and allowances, online sales where goods are not shipped from the leased premises, and certain loss-leader categories. Courts have strictly construed percentage rent clauses, and ambiguities are generally resolved in favour of the narrower interpretation of what must be included.

Rent Adjustment and Renewal Clauses

Rent adjustment mechanisms, including Consumer Price Index escalations, fixed percentage increases, or market rent resets at renewal, are common in longer commercial leases. The renewal rent must be provided for or capable of being fixed with certainty, or the renewal provision will be unenforceable. Courts have held that "current market rate" is sufficiently certain, but a provision that the rent "may be reviewed and adjusted" has been held insufficiently certain to create an enforceable renewal right.

Inducements and Security Deposits

To attract desirable tenants, landlords offer a variety of inducements. Common forms include assuming the obligations of the tenant under an existing lease, constructing the tenant's leasehold improvements, cash payments to the tenant, rent-free periods at the start of the term, and fixturing allowances typically calculated as a percentage of annual rent per square foot to fund the tenant's initial fit-out.

Security deposits are typically taken by the landlord as security for the payment of rent and performance of lease obligations. There are two types: deposits applied to the last month's rent, and deposits held as general security throughout the term. The landlord's obligation to repay a security deposit at the end of the term is a personal covenant and does not run with the land, a purchaser of the property from the landlord is not automatically required to repay the deposit to the tenant at the end of the term unless the assignment of the deposit obligation is effected.

Certainty of Term

A lease must have a fixed commencement date and a fixed expiry date, or a mechanism for determining each with certainty. A lease whose commencement date is uncertain, for example, a lease commencing "when the premises are ready for occupation" without any backstop date, may be held void for uncertainty unless the parties have taken possession and the commencement date can be established by reference to conduct. The rule against uncertainty of term applies to both the start and end dates.

The Planning Act, R.S.O. 1990, c. P.13 contains provisions affecting leases that exceed 21 years in certain circumstances, namely, that a lease for a period in excess of 21 years may constitute a "conveyance" requiring consent under the subdivision control provisions of the Act. Parties to long-term leases should carefully assess Planning Act compliance.

A tenant who holds over after the expiry of a fixed-term lease becomes either a monthly tenant (where the landlord accepts rent on a monthly basis) or a tenant at will. Under the CTA, an overholding tenant on a commercial lease may be removed on at least 60 days' notice if the original term was one year or more, or on shorter notice commensurate with the rental period if the term was shorter. Most commercial leases contain express overholding clauses, typically providing that an overholding tenant becomes a monthly tenant at a substantial premium over the original rent, to discourage holdover occupancy.

Renewal Provisions

A renewal option, if properly exercised, extends the lease on terms agreed in advance or to be determined by a specified mechanism. Strict compliance with renewal notice requirements is generally required. Courts have distinguished between a failure to give notice (which forfeits the option) and a late notice given in good faith where the landlord has suffered no prejudice, but tenants should never rely on equitable intervention. The better practice is strict compliance with all time-sensitive provisions.

A renewal of a lease does not, without more, renew ancillary agreements, including personal guarantees. The covenant of a guarantor does not automatically run with the reversion and is not enforceable by a purchaser from the original landlord absent privity of contract, unless the lease expressly provides otherwise.

Rights of First Refusal and Purchase Options

A right of first refusal gives the tenant the right to match any bona fide third-party offer for the purchase or lease of specified premises before the landlord may accept that offer. It is triggered by receipt of a bona fide offer and requires the tenant to exercise the right within a specified period. The rule against perpetuities has historically presented challenges for rights of first refusal, but most modern Ontario drafting addresses this expressly.

A purchase option grants the tenant the right to purchase the property at a specified price or on a specified basis, exercisable by notice within the option period. An option to purchase a leasehold estate is an interest in land and is registrable against title. Failure to register may result in the option being cut off by a subsequent purchaser for value without notice.

Covenants Running with the Land

A covenant is an agreement imposing an obligation on the covenantor. In the context of commercial leasing, certain covenants "run with the land", meaning that they bind and benefit not only the original parties but also their successors in title. For a covenant to run with the land at law, the covenant must touch and concern the land demised, there must have been an intention that the covenant should run with the land, and there must be privity of estate between the parties.

A covenant is to be distinguished from a condition, which is a stipulation going to the root of the agreement. The breach of a condition entitles the innocent party to terminate the agreement and claim damages, whereas the breach of a covenant gives rise to a claim in damages but does not automatically entitle the innocent party to terminate, unless the lease contains an express right of re-entry for breach of covenant. Upon an assignment of the lease, all covenants that run with the land, including restrictive use covenants, bind the assignee. Personal covenants (those that do not touch and concern the land) remain binding only on the original covenantor and do not run with the assignment.

Repair and Maintenance

Commercial leases typically allocate repair and maintenance obligations between landlord and tenant. In net leases, the tenant is generally responsible for all repairs and maintenance of the interior of the demised premises, while the landlord maintains the structure, exterior, and common areas. In gross leases, the landlord typically bears broader repair obligations.

A covenant by the tenant to keep premises in "good repair" requires the tenant to put the premises in repair if they are not in repair when the covenant is given. The phrase "reasonable wear and tear excepted" limits the tenant's obligation by excluding deterioration attributable to the ordinary and reasonable use of the premises. However, this exception does not extend to structural disrepair caused by the tenant's neglect.

The Short Forms of Leases Act contains prescribed short form covenants that, when incorporated by reference, have the effect of detailed provisions set out in the legislation. The covenant to repair in the short form is often incorporated into commercial leases and interpreted by courts with reference to the Act.

Use Clauses and Restrictions

The use clause defines the purpose for which the tenant may occupy the demised premises. In retail contexts, use clauses serve two related functions: they protect the landlord's ability to maintain the intended mix of tenants in the development, and they protect individual tenants from competition by way of exclusivity covenants.

A clause permitting or requiring the tenant to use the premises only for a specific purpose operates as a restriction on use, but courts have generally declined to treat it as an implied covenant to operate the business. A covenant not to use the premises for a prohibited purpose operates as an ongoing obligation enforceable by injunction or damages. An exclusivity clause, for example, a covenant by the landlord not to permit another tenant in the same development to operate the same type of business, runs with the land as a restrictive covenant enforceable against successors who take with notice.

The Competition Act, R.S.C. 1985, c. C-34 may be relevant where use covenants or exclusivity arrangements unduly restrict competition in a relevant market. Parties should be alive to competition law implications in negotiating radius clauses or co-tenancy restrictions.

Operating Covenants and Going Dark

In shopping centre leases, the landlord often wants an express covenant by the tenant to continuously operate its business throughout the term. A covenant for continuous operation will not be implied, without an express provision, the tenant has no duty to keep its doors open, even if closure reduces the landlord's percentage rent.

When a major tenant breaches an operating covenant, the effects on a shopping centre can be significant: the landlord loses percentage rent, smaller tenants may have co-tenancy rights that allow them to terminate or reduce their rent, and prospective tenants may decline to sign. Courts have occasionally granted injunctions to enforce operating covenants, but Ontario courts have generally been reluctant to do so, finding that damages are an adequate remedy and that an order to operate is difficult to supervise. The leading case is Islington Village Inc. v. Citibank Canada, [1992] O.J. No. 1970,[1992] OJ No 1970 (Gen Div). Spence J declined to issue a mandatory injunction compelling Citibank to continue operating a branch from leased premises in a small commercial plaza. The reasoning was twofold. First, damages were an adequate remedy: the loss to the landlord was financial, capable of quantification, and not of the kind that demanded equitable enforcement. Second, an order requiring a sophisticated commercial actor to keep its doors open day in and day out is precisely the kind of order courts are reluctant to grant, because it converts the court into the supervisor of an ongoing commercial operation. The decision is the workhorse Ontario authority for the proposition that operating covenants will rarely be specifically enforced, and it shapes how landlord and tenant counsel structure remedies (including liquidated damages and co-tenancy clauses) when an operating-covenant breach is anticipated. in which the court declined to issue an injunction compelling a bank to continue operating from leased premises.

A major tenant may negotiate a "going dark" provision, an express right to close and cease operations while continuing to pay rent. Going dark rights typically require advance notice to the landlord and are sometimes coupled with the landlord's right to terminate the lease and recapture the premises if the tenant goes dark for an extended period. Co-tenancy clauses give tenants the right to terminate the lease or reduce their rent if a specified anchor tenant closes its doors or if occupancy in the development falls below a specified threshold. These provisions are particularly significant in today's retail environment, where the departure of an anchor tenant can dramatically affect foot traffic and the viability of the tenant mix.

Quiet Enjoyment

The covenant for quiet enjoyment, whether express, implied at common law, or imposed by statute, is one of the most fundamental protections afforded to a commercial tenant. It is a promise by the landlord that the tenant will have peaceful and uninterrupted possession of the demised premises for the duration of the term, free from the acts of the landlord or those claiming under it.

The covenant does not require actual physical interference. Acts short of physical eviction may constitute a breach of the covenant, including keeping customers away from the demised premises; excessive and intolerable noise caused by the landlord's construction; permanent interference with parking and access fundamental to the tenant's business; persistent intimidation and threats; failure to rebuild fire-damaged premises within the required time; and renovation activities causing total absence of quiet enjoyment for extensive periods.

Acts of a stranger over which the landlord has no control do not constitute a breach of the covenant. However, where the landlord is put on notice of breaches by an adjoining tenant that interfere with the complaining tenant's rights, the landlord must take steps to correct the situation, a failure to act may itself constitute a breach. The landlord may also not derogate from its grant by doing anything on adjacent land that renders the demised premises unfit or materially less fit for the purpose for which they were let.

Assignment vs. Sublease

At common law, a tenant has the right to assign a lease or to sublet without the landlord's consent, unless the lease contains an express restriction. Subsection 23(1) of the CTA modifies this common law rule and requires landlord consent to assign or sublet where the lease contains a covenant against doing so without consent.

An assignment and a sublease are fundamentally different transactions with different legal consequences. An assignment transfers the entire remaining interest in the lease, creating privity of estate between landlord and assignee, and all covenants running with the land bind the assignee. A sublease transfers only a lesser interest, part of the term or part of the premises, with no privity between head landlord and subtenant, and only the terms of the sublease bind the subtenant. In both cases, the original tenant remains liable unless specifically released by the landlord.

The Covenant Against Assignment

A covenant against assignment is strictly construed against the landlord. Where the lease prohibits assignment without consent, the prohibition extends only to assignments and does not prevent the tenant from granting a sublease, unless the covenant expressly prohibits both. The practical implication is that a tenant who cannot obtain consent to an assignment may be able to structure the transaction as a sublease.

Courts have recognized several forms of a covenant against assignment: a prohibition against assignment without consent, which is the most common; a prohibition against assignment to any person whatsoever; and a prohibition against any dealing with the lease. Each is construed strictly, and a landlord who seeks to rely on a forfeiture of the lease for breach of such a covenant must ensure that the prohibition was clearly breached.

Landlord's Consent

Where the lease requires the landlord's consent to an assignment, subsection 23(1) of the CTA provides that such consent is not to be unreasonably withheld. The landlord must have a reasonable basis for withholding consent, personal prejudice or a desire to profit from the tenant's need to assign is not a legitimate ground. Reasonable grounds for withholding consent include legitimate concerns about the financial responsibility and creditworthiness of the proposed assignee; whether the proposed use is consistent with the permitted use clause and the landlord's overall tenant mix; the business experience and competence of the proposed assignee to operate the business contemplated by the lease; and proposed alterations to the premises by the assignee.

Improper grounds for withholding consent include a demand for a premium or a higher rent from the assignee, personal dislike of the assignee unrelated to legitimate business concerns, and objecting solely on the basis that the landlord wishes to recapture the premises for its own use. Where the landlord wrongfully withholds consent, the tenant may seek a declaration of unreasonableness and damages for lost business opportunity. In extreme cases, the tenant may be entitled to proceed with the assignment over the landlord's objection.

Many commercial leases contain a "recapture" provision, a right for the landlord to terminate the lease in lieu of consenting to the assignment, recapturing the premises for direct re-letting at current market rates. These provisions must be carefully reviewed by tenants before any assignment is proposed, as the exercise of a recapture right can effectively destroy the economic value of the tenant's assignment.

Continuing Liability of Assignor

Unless the lease expressly releases the original tenant, the original tenant remains personally liable on the covenants of the lease throughout the entire term, notwithstanding assignment. Privity of contract, the contractual relationship created by the original lease, survives the assignment. This means that if the assignee defaults, the landlord may sue the original tenant directly for all amounts due under the lease.

Tenants negotiating an assignment should always seek a full release from the landlord as a condition of the assignment. Where a release is refused, the original tenant should seek an indemnity from the assignee, a promise to reimburse the original tenant for any amounts the original tenant is required to pay to the landlord by reason of the assignee's default. The assignee of a tenant's lease, by accepting the assignment, assumes direct liability to the landlord for all covenants in the lease that run with the land, including the covenant to pay rent. The assignee also takes subject to any defects in the assignor's title to the leasehold interest, including any existing defaults.

Nature of the Remedy

Distress is a self-help remedy whereby a landlord seizes and sells the goods and chattels of a tenant to satisfy arrears of rent owing. It is a powerful and immediate remedy, but one that is procedurally complex, heavily regulated, and fraught with potential liability if not executed correctly. The conditions precedent for a valid distress are: there must be a landlord and tenant relationship under a lease or agreement to lease; the tenant must be in possession of the premises; there must be rent arrears currently due; and the distress must be levied while the tenancy is alive, although section 41 of the CTA permits distress for up to six months after the termination of a lease where the tenant remains in possession.

Distress and forfeiture are mutually exclusive remedies. A landlord who has terminated a lease and retaken possession cannot subsequently levy distress for arrears accrued prior to termination. The election between distress and forfeiture is a critical strategic decision that landlords must make carefully, once made, it cannot be undone.

Scope and Chattels Subject to Distress

Distress is generally limited to the goods and chattels of the tenant physically present on the demised premises at the time of distraint. Not all items on the premises are subject to distress:

• Tenant's trade fixtures, whether subject to distress depends on the degree of annexation and whether they have become part of the realty;
• Goods owned by third parties, chattels belonging to persons other than the tenant are generally not subject to distress, although section 31(2) of the CTA gives the landlord priority over certain classes of persons whose claim to chattels arises through the tenant;
• Goods on consignment, do not belong to the tenant and are not subject to distress;
• Equipment under a registered PPSA security interest, priority as between the landlord and a secured creditor under the PPSA is governed by the priority rules in that statute; and
• Exempt chattels, section 30 of the CTA permits a tenant to claim the same exemptions as are available under the Execution Act.

Section 48 of the CTA gives the landlord the right, for up to 30 days, to follow and distrain upon chattels that have been fraudulently or clandestinely removed from the premises to avoid distress. A tenant who fraudulently removes goods and anyone who knowingly assists is liable under section 50 for double the value of the chattels removed.

Procedure

Distress may be effected only during daylight hours, between sunrise and sunset, and not on Sundays. The landlord should retain a properly licensed bailiff to carry out the distraint. The bailiff's warrant must identify the name of the tenant and any guarantor, the location of the premises, the amount of the arrears, and an indemnification of the landlord. The landlord or bailiff may not break the outer lock to gain entry but, once lawfully on the premises, may break inner locks.

Following seizure, the landlord must give the tenant notice and five days to "replevy" (recover) the distrained goods by paying the arrears and costs. The goods cannot be sold until five clear days after seizure. The best method of sale is typically a public auction. The landlord must account for any surplus after satisfying all rent due and costs of the distress and sale.

Wrongful Distress

A distress is illegal (as opposed to merely irregular) where the fundamental conditions for distress are not met, for example, where no rent is actually in arrears, where the lease has been terminated, or where exempt goods are seized. An illegal distress entitles the tenant to bring an action for full satisfaction of all damages sustained by the wrongful distraint. An irregular distress, one where the right to distrain exists but the procedure was defective, gives rise to a claim only for special damages resulting from the irregularity.

Landlords who instruct a bailiff improperly expose themselves to liability. Where the distress is carried out in good faith on the landlord's instructions, the bailiff is generally entitled to be indemnified by the landlord. Conversely, if the bailiff departs from the landlord's instructions and commits an illegal act of their own, the landlord is not liable.

Landlord's Remedies Overview

On non-payment of rent or breach of an express or implied covenant, the landlord has several available remedies. As confirmed by the Supreme Court of Canada in Highway Properties Ltd. v. Kelly, Douglas and Co., [1971] S.C.R. 562,[1971] SCR 562, 17 DLR (3d) 710. Laskin J for the Supreme Court rejected the older orthodoxy that a landlord's remedies on a tenant's repudiation were confined to the property-law alternatives of insistence on performance, termination with damages to the date of termination, or re-letting on the tenant's account. The Court added a fourth course of action grounded in modern contract law: termination accompanied by a claim for the present value of the loss of the entire benefit of the lease for the balance of the term, on the analogy of repudiation in any commercial contract. Highway Properties is the foundational authority for the contemporary commercial-lease damages framework in Canada. It also confirmed that the four courses are mutually exclusive and that the landlord must elect among them; conduct inconsistent with the chosen course (most commonly, accepting rent after purported termination) operates as a waiver. The decision shapes both the strategic decision-making at the moment of breach and the damages assessment that follows. these courses of action are mutually exclusive:

• Insist on performance, the landlord may keep the lease alive and sue for arrears of rent as they accrue;
• Terminate and sue for accrued arrears or damages to the date of termination;
• Re-let as the tenant's agent, the landlord enters and re-lets the premises on the tenant's behalf, holding the tenant liable for the shortfall between the new rent and the original rent; or
• Terminate and sue for loss of the entire benefit of the lease, the landlord provides notice of termination and claims damages on the basis of the present value of the loss of the lease for the balance of the term.

The landlord must make an election between these courses of action. Conduct inconsistent with the elected course, such as accepting rent after purporting to terminate, may constitute a waiver of the termination and revive the tenancy.

Forfeiture: Notice Requirements

To forfeit a lease under subsection 19(2) of the CTA for breach of covenant (other than non-payment of rent, which requires no notice), the landlord must first serve a notice of termination that specifies the breach complained of with sufficient particularity; if the breach is capable of remedy, requires the tenant to remedy it within a reasonable time; and requires the tenant to make reasonable monetary compensation to the landlord for the breach.

Failure to give a proper notice of termination results in an ineffective forfeiture. The notice must purport to terminate the lease unequivocally and immediately, a notice that terminates at a future date is not a valid notice of forfeiture but rather a notice to quit. Courts will not presume a right of re-entry by the landlord unless the lease clearly implies such a right.

A landlord who, after purporting to terminate the lease, does any act inconsistent with the forfeiture, including accepting rent, is taken to have waived the forfeiture, and the tenancy is treated as continuing. Most leases contain anti-waiver clauses stating that a single acceptance of rent or other act of indulgence does not constitute a waiver of the landlord's right to strictly enforce the lease. Courts have generally given these clauses effect, but they are not absolute, a course of conduct by the landlord over a significant period may still constitute waiver.

Relief from Forfeiture

Even where a landlord has properly terminated a lease, the tenant may apply for relief from forfeiture. Courts have broad equitable jurisdiction to grant relief, and section 20(1) of the CTA and section 98 of the Courts of Justice Act, R.S.O. 1990, c. C.43 each provide statutory bases for relief. Courts consider the following factors: the conduct of the applicant and the gravity of the breach; the nature and severity of the breach and whether it is of a continuing nature; whether the breach can be remedied; the length and nature of the parties' relationship; the disparity between the value of the property forfeited and the damage caused by the breach; whether the tenant comes to the court with "clean hands" and is prepared to compensate the landlord; and whether granting relief would injure the interests of an innocent third party in possession.

For non-payment of rent specifically, additional considerations include whether there has been an outright refusal by the tenant to pay, the length of time the rent has been in arrears, whether the landlord has suffered serious loss by reason of the delay, and whether the tenant brings the application with clean hands. The leading recent Ontario authority on the structure of relief from forfeiture is Hudson's Bay Co. ULC v. Oxford Properties Retail Holdings II Inc., 2022 ONCA 585.2022 ONCA 585. The Ontario Court of Appeal set out a comprehensive framework for relief from forfeiture, emphasising that the judicial exercise involves considerations of hardship, reasonableness, unfairness, and unconscionability, and whether the parties come with clean hands. The case arose from the COVID-era retail disruption, with HBC seeking relief from forfeiture in respect of department-store premises after a dispute with the landlord over rent payments. The Court reinforced the longstanding principle that relief is generally granted where the breach is capable of remedy and was remedied within a reasonable time, and where no great or irreparable harm has been caused to the landlord. The decision is now the working framework Ontario courts apply when assessing relief applications, and it is regularly cited alongside the s 20 CTA and s 98 Courts of Justice Act jurisdictions for the same remedy.

Section 20(4) of the CTA provides that where an action is brought to enforce a right of re-entry for non-payment of rent, the tenant may stay the action at any time before judgment by paying into court all rent in arrears plus costs. The effect of relief from forfeiture under section 20(5) is to reinstate the lease to its original position. Courts have also granted relief from forfeiture on independent applications by the tenant even after the landlord has regained possession, though delay in bringing such an application is itself a factor weighing against relief.

Landlord's Damages and Mitigation

Where a tenant repudiates the lease by abandoning the premises or refusing to perform, the landlord's damages are assessed on the basis of the present value of the loss of the benefit of the lease for the balance of the term, provided the landlord has elected to terminate and claim damages. The leading Supreme Court authority is Highway Properties, which recognized this as the fourth and most commercially realistic course of action available to a landlord on a tenant's repudiation.

The landlord is under a duty to mitigate its loss by taking reasonable steps to re-let the premises. This duty arises where the landlord elects to terminate and claim damages, it does not arise where the landlord keeps the lease alive and sues for rent as it falls due. Reasonable mitigation requires making genuine efforts to re-let at market rent, not merely listing the premises at an unrealistic price. The landlord need not accept a substituted tenant whose covenant is materially inferior to the defaulting tenant's.

Damages are assessed to put the landlord in the position it would have been in had the tenant performed, subject to the duty to mitigate. In addition to lost rent, the landlord may recover the costs of re-letting (leasing commissions, legal fees, tenant improvement allowances); abatement or rent-free periods during the re-letting period; lost percentage rent for the balance of the original term; and, in appropriate cases, punitive damages where the tenant's conduct was high-handed or deliberately oppressive.

Injunctions

Injunctive relief is available in commercial lease disputes to enforce covenants and restrain continuing breaches. A landlord may seek an injunction to enforce a use covenant, a restrictive covenant, or a covenant against unauthorized subletting. A tenant may seek an injunction to restrain unlawful re-entry or threatened forfeiture.

The standard three-part test for an interlocutory injunction requires the applicant to establish a serious issue to be tried; irreparable harm if the injunction is refused; and that the balance of convenience favours the grant of the order. In the commercial lease context, urgency is often a key factor, a landlord who changes the locks without proper notice may face an urgent injunction compelling re-entry by the tenant, and a tenant who faces a threatened wrongful re-entry has a strong basis for urgent relief pending determination of the dispute.

Tenant's Remedies

A tenant whose rights are breached by the landlord has several available remedies beyond the right to claim damages:

• Abatement of rent, where the landlord has committed a breach of covenant that substantially deprives the tenant of the benefit of the lease, the tenant may set off the resulting loss against rent obligations;
• Specific performance, the court may order the landlord to perform specific obligations, such as completing construction or delivering possession;
• Rectification, where the written lease does not accurately reflect the agreed terms, the court may rectify the document;
• Rescission, where the lease was induced by misrepresentation or fraud, the tenant may seek to rescind the agreement;
• Equitable set-off, a tenant with a cross-claim against the landlord arising out of or closely connected to the lease may set off that claim against rent arrears; and
• Damages for breach of covenant for quiet enjoyment, measured as the present worth, as of the date of the breach, of the tenant's loss of the benefit of the lease for the balance of the term.

Tenants should also be aware of the availability of alternative dispute resolution. Many commercial leases contain arbitration provisions for specific disputes (such as renewal rent determinations), and parties may agree at any time to submit a dispute to mediation or arbitration as an alternative to litigation.

Stay of Proceedings

When a commercial tenant becomes insolvent and files for bankruptcy or creditor protection, the interaction between insolvency law and commercial leasing creates a complex and often urgent situation for landlords. Under the BIA,Bankruptcy and Insolvency Act, RSC 1985, c B-3. The federal statute that governs both bankruptcy (the liquidation regime in which the debtor's property vests in a trustee for distribution to creditors) and the BIA-proposal restructuring regime for smaller insolvencies that fall below the CCAA threshold. For commercial leasing, the operative provisions are s 65.2 (the trustee's right to disclaim a lease in a BIA proposal, with the landlord's resulting damages claim provable as an unsecured claim subject to a statutory cap); s 69 (the automatic stay on the filing of a notice of intention or a proposal); s 81 (third-party property claims, including the landlord's claim to chattels distrained before filing); s 136(1)(f) (the priority for landlord rent in bankruptcy, three months arrears plus three months accelerated rent up to the value of the goods on the premises at the date of bankruptcy); and s 146 (the trustee's right to occupy or surrender the premises). Counsel acting for either landlord or tenant in the period before a BIA filing must understand that the timing window for effective enforcement closes the moment the stay engages. upon the making of a receiving order or a voluntary assignment, an automatic stay of proceedings takes effect, preventing the landlord from commencing or continuing any action for recovery of rent or taking any enforcement steps (including distress) against the debtor or its property, except as specifically authorized by the court or the statutory scheme.

Similarly, under the CCAA, an initial order granted by the court stays all proceedings against the debtor company. This stay may explicitly address the landlord's distress rights and rights of termination. A landlord who conducts a distress after the filing of an NOI under the BIA or after the granting of a CCAA initial order may be found in contempt of court.

Trustee's Right to Disclaim or Retain

A trustee in bankruptcy may retain, assign, or disclaim the lease. The trustee's decision has significant consequences for the landlord:

• If the trustee retains the lease, the trustee is obliged to pay rent accruing during the period of occupation as an expense of the estate, a priority claim ahead of ordinary unsecured creditors.
• If the trustee disclaims the lease, the disclaimer operates to release the bankrupt tenant from future obligations under the lease, and the lease is treated as having been surrendered. The landlord then has an unsecured claim in the bankruptcy for damages arising from the disclaimer.
• Under a BIA proposal, the debtor (or the trustee as administrator) may also elect to retain, assign, or repudiate the lease as part of the restructuring plan, subject to the rights of the landlord under the lease and the provisions of the BIA.

Where the original tenant has assigned the lease and the assignee subsequently becomes bankrupt, the original tenant's liability as covenantor under the original lease is not extinguished by the bankruptcy. The landlord may, depending on the circumstances, pursue the original tenant directly for the assignee's default.

CCAA Proceedings and Landlord Rights

In CCAA proceedings,Companies' Creditors Arrangement Act, RSC 1985, c C-36. The federal restructuring statute available to insolvent debtor companies with at least $5 million in claims, providing a flexible court-supervised reorganisation framework that often runs in parallel with operations rather than against a wound-up estate. For commercial-leasing practice, the operative provisions are s 11 (the broad initial-order jurisdiction empowering the supervising court to grant such orders as it considers appropriate, including the comprehensive stay); s 11.02 (the duration and scope of the stay); s 32 (the disclaimer or resiliation of contracts, including leases, on prior notice and subject to court oversight, with the landlord entitled to a damages claim provable in the proceedings); and s 36 (the sale of assets, including the assignment of leases, on notice to affected parties). Unlike the BIA proposal regime, the CCAA does not impose a statutory cap on the landlord's disclaimer-damages claim, but the measure of damages and the rank in the creditor hierarchy fall to be determined by the supervising court and the terms of any approved plan of compromise or arrangement. the debtor company generally retains control of its operations during the restructuring period, subject to the supervision of the court-appointed Monitor. The initial order typically includes provisions permitting the debtor to carry on business in the ordinary course, which may include continuing to occupy leased premises and making rent payments as they become due in the ordinary course (though not necessarily paying pre-filing arrears without court approval).

The CCAA gives courts broad discretion to make such orders as they consider appropriate in the circumstances, including approvals that may limit or modify the landlord's contractual rights. At the same time, the courts have generally recognized that a landlord's right to be paid current rent and to have its lease obligations honoured is fundamental and should not be lightly overridden.

Section 32 of the CCAA expressly addresses the disclaimer or resiliation of contracts in CCAA proceedings, permitting a debtor company, with court approval, to disclaim or resiliate any agreement to which it is a party. A landlord whose lease is disclaimed or resiliated in a CCAA proceeding is entitled to compensation for the loss resulting from the disclaimer, which is treated as a claim provable in the CCAA proceedings. However, the measure of such compensation and its rank in the creditor hierarchy are subject to court determination and the terms of any approved plan of compromise or arrangement.