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The Ontario Court of Appeal (ONCA) recently reviewed  a “continuous use” clause in a commercial lease in a  dispute in which a landlord was suing a retail tenant after the tenant ceased retail operations prior to the lease coming to an end.

What Happened?

The defendant was a well-known retailer and a long-standing commercial tenant of the landlord. The lease between the parties was to terminate in April of 2005. The tenant, however, advised the landlord that it would discontinue operating at the location as of May 2004. It did so and thereafter paid only its base rent, maintenance, and repair obligations under the lease until its term expired.

The landlord sued the tenant taking the position that the tenant was obligated by the leases “continuous use ” clause to continue its retail operation until the end of the lease. The landlord sought damages that it alleged it had suffered as a result of the breach beyond the rent payments made.

Continuous Use Provision in the Lease

The continuous use clause that the landlord sought to rely on was as follows:

Section 8.01 Use of Premises

The Tenant covenants and agrees that throughout the Term, either it or its successors or permitted assigns will continuously, actively and diligently carry on the business in the whole of the Leased Premises (but subject to this Section 8.01) of the provision of such services and the sale of merchandise as is sold in any department store, it is understood that while the Tenant is not required by this Section 8.01 to sell all lines as are sold in any department store, it will operate a multi-line store.

The trial judge found a further clause in the lease which qualified this continuous use provision. It was the “hours of operation” clause which read as follows:

Section 8.01.1 Hours During Which Tenant to Remain Open

The Tenant shall remain open for the conduct of business with the public during at lease [sic] those minimum hours of business, on those days when

(1) eighty percent (80%) (by area and number) of the Rentable Area of the Commercial Complex (excluding all premises leased to the Tenant or to any Person described in Sections 11.01(b)(1), 11.01(b)(2) and 11.01(b)(3) below), and

(2) the Department Store, as it exists on the 21st day of February 1986,

are open in substantially the whole of such respective areas for the conduct of business with the public.

The Department store referred to was another retailer that had gone bankrupt and was no longer present in 2004. At the time the tenant advised the landlord it was closing neither condition in s. 8.01.1 was met: eighty percent of the rental area was not open and the Department store was gone and had not been replaced.

The trial judge  found that Section 8.01.1 (hours of operation) qualified the obligation in Section 8.01 (continuous use) reasoning that the tenant was only required to be open for business when the two conditions in Section 8.01.1 were met. If the tenant was not required to be open for business it followed that the continuous use provision was unenforceable.

The trial judge dismissed the claim finding that the tenant was permitted by the terms of the lease to close the store when it did. The landlord appealed.

The ONCA Decision

The ONCA read the continuous use clause in the lease as meaning that the tenant was expressly, and clearly, obligated to continuously, actively and diligently carry on business in the leased premises. Unless this obligation was specifically modified by some other term of the lease there could be no doubt that it was not allowed to close when it did.

The discretionary hours of operation clause allowed the tenant discretion as to when it would be open for business, but it could not reasonably have been read as overriding the clear and express obligation to remain in operation. There was a fundamental commercial difference between the two terms. A clause that speaks to the hours of operation assumes that the business is operating.

The tenant’s argument that the words “subject to s. 8.01” in s. 8.01 support its position as the words should have been “subject to 8.01.1” as there clearly had been a drafting error. Accepting this, s. 8.01.1 speaks only of the particulars of the obligation to continue operation until the end of the lease. There is no contradiction between the two clauses.

The ONCA concluded that interpretation given to s. 8.01 by the trial judge was clearly wrong. The error was material in that it determined the result. The error was therefore palpable and overriding and required appellate intervention.

At Milosevic Fiske LLP, our team of Toronto corporate commercial lawyers regularly represent clients in complex commercial real estate matters, including contractual disputes over leases, purchase and sale disputes, and mortgage fraud cases. Over the years, our team of exceptional litigators has seen it all and has successfully fought for our clients’ rights. Our impressive track record speaks for itself.  Call us at 416-916-1387 or contact us online for a consultation