Signed, Sealed, Regretted_ How to Avoid the Costliest Commercial Lease Traps in Ontario

Commercial real estate transactions in Ontario operate under a foundational common law principle: freedom of contract. Unlike residential leases governed by the rigid consumer protection of the Residential Tenancies Act, commercial leases are predominantly governed by the Commercial Tenancies Act and general contract law. Ontario courts generally assume that commercial landlords and tenants are sophisticated parties capable of negotiating their own terms, meaning that an oversight or poorly drafted clause can lead to catastrophic financial or operational consequences.

One frequent pitfall involves unilateral rent increases and arbitrary spatial recalculations. Landlords may occasionally attempt to recalculate rent mid-lease based on updated measurements or escalating operational expenses. Without an explicit contractual right embedded in the agreement, doing so is illegal. In Tran v. Bloorston Farms Ltd., when a new landlord purchased a building, re-measured a restaurant space, and locked the tenant out for refusing to pay increased rent based on higher square footage, the Ontario Court of Appeal confirmed that the lease did not give the landlord a right to unilaterally recalculate rent. The court awarded significant damages for unlawful termination, emphasizing that landlords cannot invent post-execution adjustment rights. Consequently, tenants must ensure square footage, base rent, and Common Area Maintenance adjustment formulas are explicitly fixed or capped within the contract.

Another major hazard lies in flawed notices of breach and statutory compliance. When disputes arise over non-monetary breaches, such as failure to maintain adequate insurance or unauthorized alterations, landlords often move quickly toward termination or changing locks. However, failing to follow statutory notice requirements under Section 19(2) of the Commercial Tenancies Act can invalidate a termination. Section 19(2) mandates that before enforcing a right of re-entry for a non-rent breach, a landlord must serve a notice specifying the particular breach, requiring the tenant to remedy it if possible, and requesting monetary compensation if the landlord is seeking money. In Martin v. Mailhot, a landlord terminated a lease after the tenant failed to provide required insurance certificates, but the notice did not demand monetary compensation. The Court of Appeal clarified that a demand for money is only required if the landlord actually suffered a financial loss and is seeking money; if the remedy sought is simply performance, demanding money is unnecessary. Landlords must issue precise statutory notices before exercising re-entry, while tenants must recognize that a failure to cure non-monetary breaches within the statutory timeframe can lead to valid forfeiture.

Tenants often miscalculate by assuming that "relief from forfeiture" under Section 20 of the Commercial Tenancies Act offers an easy way out after a default. Relief from forfeiture is an equitable remedy where the court restores the lease as if the termination never happened, but it does not allow the court to rewrite lease terms, abate rent, or reduce contractual interest rates. While it rewards prompt action and clean hands, it offers no protection to tenants with a history of willful defaults. In Hudson's Bay Company ULC v. Oxford Properties, during the COVID-19 pandemic, Hudson's Bay withheld rent and later asked the court to order rent abatements and modified payment schedules as part of its equitable relief. The Ontario Court of Appeal rejected this expanded interpretation, ruling that relief from forfeiture cannot be used to rewrite the financial terms of a commercial lease and requiring the tenant to pay all arrears in full, plus interest at the contractual rate, to regain access.

A further pitfall occurs when a landlord fails to deliver vacant possession on the agreed commencement date. While tenants usually assume their only option is to sue for monetary damages, Ontario courts have established that compelling the landlord to hand over the space through specific performance is viable if the property is unique. In Bellwoods Brewery Inc. v. 1896841 Ontario Limited, after signing a long-term lease for a marquee facility, the landlord refused to vacate its own inventory and debris from the premises. Bellwoods sued for both specific performance and delay damages, resulting in the court awarding specific performance alongside over $6 million in damages for delay because the space possessed unique branding characteristics that could not be duplicated elsewhere. Delivery clauses and delay remedies must be explicitly outlined in the lease, and if a location is vital to a business's operational strategy, tenants should document its unique features during negotiations to preserve equitable remedies like specific performance.

To prevent these costly disputes before signing an Ontario commercial lease, both parties should address four core legal protections in writing: clearly defining Common Area Maintenance expenses to exclude capital structural repairs while establishing audit rights; ensuring landlord consent to lease assignments or subleasing cannot be unreasonably withheld or delayed; explicitly delineating work responsibilities and occupancy rights during build-out periods; and crafting permitted use clauses that accommodate future business expansion while securing exclusivity rights against direct competitors in the same development.