Tenants be warned: Ontario Court of Appeal confirms limited availability of relief from forfeiture

The Ontario Court of Appeal has affirmed its narrow jurisdiction in McRae Cold Storage Inc. v. Nova Cold Logistics ULC¹ to grant relief from forfeiture in cases where a tenant failed to comply with a condition precedent to the renewal of the lease (Torys represented Nova Cold). In such circumstances, the tenant has the high burden of showing it made diligent efforts to comply with the terms of the lease which are unavailing through no default of its own.

What you need to know

• Whether you are a tenant or a landlord, you must know and understand your rights and obligations in the context of a lease renewal clause.
• As a tenant, you must strictly comply with the terms of the option. If you do not, the court will have limited equitable jurisdiction to relieve you of the consequences of your default.
  • Even if the tenant disputes the landlord’s interpretation of the lease and disputes it is in default, the burden is on the tenant to ensure it complies with the renewal clause and to preserve the renewal option, such as by paying the disputed amounts under protest.
• As a landlord, it is important to know if the lease requires you to give notice of default in advance of the deadline to exercise the renewal option. The fact that the landlord in this case was transparent with the tenant about its default and did nothing to mislead the tenant was a factor in favour of refusing to grant relief from forfeiture.

Factual background

The appellant, McRae Cold Storage Inc., was a tenant of a commercial lease where it leased space in a cold storage facility owned by the respondent, Nova Cold Storage Logistics ULC, the landlord. The lease was for a five-year term and expired on March 31, 2018.

The lease contained a provision that provided McRae with an option to renew or extend the term for an additional five years if certain conditions were met, including that the tenant was not in default under any terms of the lease on the date it exercised the option to renew.

Beginning in summer 2016, a dispute arose between the parties as to the proper interpretation of the clause which allowed Nova Cold to pass along increased energy costs to McRae. Nova Cold claimed it was entitled to additional payment under the clause and McRae claimed it was not. McRae continued to pay its monthly rent but did not pay any of the increased energy costs claimed by Nova Cold.

In March 2017, Nova Cold provided McRae a formal notice of default. In April 2017, Nova Cold warned McRae that if it failed to pay it would not be permitted to exercise its option to renew the lease. Between April and the deadline to exercise the renewal option (October 2, 2017), McRae took no steps.

On September 29, 2017, McRae provided written notice that it was exercising the renewal option. Nova Cold rejected that purported renewal, reinforcing that since McRae was in default it could not renew the lease. McRae took no further steps for several months.

In March 2018, just weeks before the lease expired, McRae brought an application seeking an interpretation of the energy clause. It sought a declaration it was not in default of its obligations under the lease and that it had properly exercised its option to renew and alternatively, a declaration that it was entitled to relief from forfeiture.

Decision below: McRae’s application is dismissed

The Application Judge made three key findings. First, she found the landlord’s interpretation of the contractual provision in dispute was correct and the tenant owed the amounts claimed.

Second, as the tenant did not pay the amounts invoiced, it was in default under the lease and therefore unable to exercise the renewal option. The burden was on the tenant to show it complied with the terms of the renewal option and McRae could not do so. The Application Judge held that while McRae may have disagreed with the landlord’s interpretation, it was not open to McRae to fail to pay. She rejected the argument that it was entitled to know the exact amount owing. She held that if McRae intended to preserve its right to renew the lease, it should have paid the amounts claimed by Nova Cold under protest.

Third, McRae is not entitled to relief from forfeiture because it could not demonstrate the requisite degree of diligence to comply with the lease’s terms. McRae had more than ample time to remedy the default and in failing to do so, jeopardized its option to renew. She also noted there was no conduct on Nova Cold’s part that equity would find reason to criticize. It made its position clear throughout and did nothing to mislead McRae into believing the option could still be exercised.

Court of Appeal: Confirmed narrow jurisdiction to grant equitable relief

McRae did not appeal the Application Judge’s first two findings. It did not appeal her interpretation of the lease provision or her conclusion that it was in default under the lease. It only appealed only on the basis the Application Judge erred in declining to grant relief from forfeiture.

The Court of Appeal dismissed the appeal, confirming the narrow jurisdiction to grant equitable relief where there has been a failure to comply with a condition precedent to a lease renewal. The tenant must show it made diligent efforts to comply with the terms of the lease which are unavailing through no default of its own. There was ample evidentiary basis to conclude McRae did not act with diligence to cure its default.

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¹ 2019 ONCA 452.

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