The Supreme Court of British Columbia recently clarified lease renewal rights in the context of a commercial lease in The Zone Bowling Centre (2002) Ltd. v. 14100 Entertainment Blvd. Investments Ltd., 2015 BCSC 524.
What do the courts tell us about lease renewal rights?
The decision stresses the importance of parties to a lease reading and understanding their rights and obligations in the context of a lease renewal clause. If the lease requires it, it is prudent for the tenant to exercise the option to renew in time and in writing. If the tenant fails to do as the lease requires and instead enters into lease renewal negotiations with the landlord, the tenant does so at his own peril and with no guarantee that the landlord will allow the tenant to remain at the leased premises. As this case demonstrates, courts are loathe to interfere with contractual certainty as bargained between two commercial parties and subsequent negotiations may not be enough to revive the right of renewal if it is not validly exercised by the tenant.
Summary of Facts
The Zone Bowling Centre (“the Zone”) operated a popular bowling alley and brew pub in the Riverport Sports & Entertainment Park in Richmond, British Columbia. The Zone, as tenant, had entered into a lease with 14100 Entertainment Blvd. (the “Original Owner”), as landlord, for the premises (“Premises”). The initial term of the lease was 10 years ending on April 30, 2014, with three lease renewal options, each for an additional five years. Prior to expiry of the initial term, the Original Owner sold the Premises and assigned the lease to 0984972 BC Ltd. (the “New Owner”).
Under the lease, the landlord covenanted with the Zone to grant a renewal of the lease, if the Zone:
1) gave notice to the landlord that the Zone “wishes to obtain a renewal of this Lease” not earlier than twelve months and not later than nine months before the expiry of the initial term;
2) was not in breach of any covenant or condition of the lease at the time of the renewal notice to the landlord; and
3) had duly and regularly observed and performed the covenants and conditions contained in the lease.
The lease further required that any notice provided under the lease be in writing.
As the initial term was to expire on April 30, 2014, the cut-off date for the Zone to exercise the first renewal option was July 31, 2013. However, the Zone did not exercise its renewal option until August 2013 and even then, it failed to do so in writing. Further, throughout the term of the lease, the Zone was late in paying rent and, in fact, rent was overdue on July 31, 2013.
Despite this, after missing the cut-off date, the Zone entered into lease renewal negotiations with the Original Owner and later, the New Owner, as landlord. These discussions broke down in July, 2014. At this time, the New Owner informed the Zone that it did not consider that the option to renew had been validly exercised and instead considered the Zone to be an overholding tenant on a month to month tenancy.
On October 27, 2014, the New Owner gave the Zone written notice terminating the lease effective November 30, 2014. In spite of this, the Zone continued to occupy the Premises based on the its view that it had properly exercised the renewal option. The Zone then brought a petition, seeking a declaration that it had properly exercised the option to renew.
The issue before the Court was whether or not the Zone had exercised the first renewal option under the lease. To determine whether the option had been validly exercised, the Court analyzed whether the three conditions precedent set out in the lease had been met by the Zone.
Based on the evidence before the Court, Mr. Justice Bowden found that the Zone had not exercised the renewal option by July 31, 2013. Furthermore, Mr. Justice Bowden held that during the period from June 1, 2013 to September 25, 2013 the Zone was in arrears in paying rent and, therefore, was in breach of its duties under the lease during the time that the Zone had allegedly exercised its renewal option. Finally, on account of the Zone being consistently in default of its obligation to pay rent, it could not be said that the Zone had “duly and regularly performed its obligations” throughout the 10 year term of the lease.
Even so, the Zone argued that the respondents had waived strict compliance with the lease and the conditions precedent to the exercise of the option by accepting rent when payments were overdue, and that the respondents were precluded from alleging a breach of the lease as a basis for denying the renewal, given the continuing lease renewal negotiations among the parties.
The Court found the respondents’ late acceptance of rent payments did not amount to a waiver of their right to require the Zone to strictly comply with the preconditions to exercise the option to renew – at most, it could amount to a waiver of the landlord’s right to terminate the lease on the basis of the Zone’s breach of its obligation to pay rent. Further, as the Court found that there was no evidence that the respondents had promised the Zone it could exercise the renewal option without providing notice in writing, nor by providing notice after the cut-off date specified in the lease, the landlord was not precluded from insisting on enforcing its strict legal rights in connection with the renewal option
Finally, although the Court noted the potentially significant adverse impact on the Zone’s business, the Court found that the alternative remedy of “relief from forfeiture” – which often allows tenants who have been in breach one opportunity to reinstate it – was not available to the Zone in this case. By failing to exercise the option properly the Zone had not forfeited an existing tenancy, but instead had simply lost the right of renewal, so relief from forfeiture could not apply.
Thus, despite its efforts, the Zone was not able to salvage its option to renew. (It was later reported that the parties had reached an agreement after this decision was handed down and the Zone was able to continue operating at the Premises. We do not know the terms of that agreement.)
This case is a reminder to all contracting parties that if they intend to engage in negotiations during the currency of a contract, they should never do so without securing a legally enforceable agreement by the other side that it will not require strict compliance with the contract terms while the negotiations are underway.