Ontario Court of Appeal Addresses Waiver of Rights in Commercial Lease Dispute

Mark Feigenbaum

The Ontario Court of Appeal recently discussed what is required to determine revocation of a waiver in a corporate commercial agreement.

What Happened?

The Appellant, McDonald’s Restaurants of Canada Ltd. (“McDonald’s”), and the Respondent, North Elgin Centre Inc. (“North Elgin Centre”), entered into a twenty-year ground lease that would end on March 10, 2017. The lease included an option to renew the lease for two consecutive terms, each of ten years. The parties did not dispute that McDonald’s provided notice of its intention to renew the lease prior to March 10, 2017; however, the trial judge determined the renewal provision required McDonald’s to do more than simply provide its intention to renew.

The trial judge also found that because the parties did not agree on a rental rate, nine (9) months prior to the end of the term, McDonald’s had to either refer the issue to arbitration or revoke its intention to renew the lease, which was explicitly stipulated in the original lease. McDonald’s did neither. The trial judge concluded that since North Elgin Centre did not demand that McDonald’s strictly comply with the renewal provision in the lease, the doctrine of waiver did not apply, and the lease had come to an end. The Court of Appeal disagreed.

The Position of the Parties

McDonald’s argued that by submitting their intention to renew, there was commercial certainty regarding its secure tenure for the renewal period. It also maintained that it was not compelled to revoke its intention or elect arbitration.

McDonald’s also argued that the doctrine of waiver applies, as North Elgin Centre had no right to insist on strict compliance with the renewal provision. McDonald’s pointed out that it had started renewal discussions with North Elgin Centre in February 2016 and that North Elgin Centre did not follow the standard process of delivering an initial proposal following McDonald’s indication of their intention to renew. Only in an e-mail dated March 31, 2016, past the nine (9) month mark established in the renewal provision, did North Elgin Centre’s representative indicate that it, “assumed that McDonald’s intends to let this lease expire.” McDonald’s argued that it would have been inconsistent with good faith negotiations to elect to an expensive arbitration before North Elgin Centre provided its first proposal.

North Elgin Centre argued that the entire conduct of the parties must be analyzed to determine whether the doctrine of waiver applies. North Elgin Centre also indicated that McDonald’s is a sophisticated party and was aware of the renewal provision, in particular McDonald’s onus to either withdraw its intention or elect arbitration up to six months prior to March 10, 2017.

The Law

In Petridis v Shabinsky, the principle of waiver is discussed at length with respect to the renewal of a lease agreement. In that decision, the court explained that in cases involving the sale of land, the innocent party might waive its right to repudiate and, as a result, would not be allowed to enforce strictly its waived rights. There is no reason this principle could not be applied to an issue of a lease renewal. In that case, the defendant had continued to recognize the right of the tenant to renew the lease and chose not to insist on the expiry of that option because it wanted to persuade the tenant to stay at an increased rent. The court determined that it would be inequitable to allow the defendant to terminate the negotiations without some reasonable notice to the tenant because it did not strictly enforce the expiry provision, which it could have done and simply granted a time extension. Ultimately, the court concluded that the extension of time given by the defendant for the negotiations was not a variation of the written contract but a waiver of a right under that contract.

Section 50(3) of the Planning Act (“the Act”) outlines when a person can convey land to another person, including entering an agreement that has the effect of granting the use of land, for no more than a period of twenty-one years. This section, however, indicates that this may be renewed, should it fall under eight specific exemptions.

One exemption to this twenty-one year period of time is where consent is given by the appropriate municipality. Had McDonald’s been successful on its application, it would have sought an order directing North Elgin Centre to obtain consent under Section 50(3)(f) of the Act.

The Original Trial Decision

The trial judge determined that North Elgin Centre waived its right to insist on strict compliance with the terms of the renewal provision.

However, after analyzing a series of e-mail exchanges between North Elgin Centre’s representative and McDonald’s representative, the trial judge concluded that North Elgin Centre revoked its waiver. The trial judge indicated that in an e-mail dated August 31, 2016, North Elgin Centre demonstrated its intention to return to its original position under the lease. The trial judge held that a party who has waived its right can revert to its original position on giving reasonable notice by making this explicit to the other party and the other party had reasonable period of time to respond.

The original trial judge concluded that McDonald’s had sufficient time to elect to proceed to arbitration but it did not and, as a result, McDonald’s did not comply with the terms of the renewal provisions of the lease and the lease ended on March 10, 2017.

The Court of Appeal Decision

The Court of Appeal determined that it was a palpable and overriding error of mixed law and fact for the trial judge to determine that North Elgin Centre’s waiver had been revoked.

The Court of Appeal explained that in order for a revocation of a waiver to take place, the party must provide reasonable notice to the receiving party. What is considered, ‘reasonable,’ involves notice that is clear that the party who is granting the waiver will insist upon the strict enforcement of its legal rights. The notice must also give the receiving party an opportunity to cure any defect resulting from its reliance on the waiver.

The Court of Appeal examined the same e-mail exchanges between the parties, which in the Court’s opinion, did not explicitly indicate that North Elgin Centre wished to revoke their waiver, but rather that North Elgin Centre did not provide McDonald’s sufficient time to fix the breach in the lease. Instead, North Elgin Centre unilaterally determined that the lease would end on March 10, 2017.

The Court of Appeal held that North Elgin did not clearly indicate whether it was insisting upon the strict enforcement of its legal rights under the lease. There is no clear revocation of the waiver. However, the e-mail exchange also does not provide McDonald’s a reasonable amount of time to fix the breach of the lease. North Elgin Centre unilaterally decided the lease would end on March 10, 2017. As a result, because waiver had not been properly revoked, the issue of fair market rates will be determined through arbitration.

With respect to McDonald’s claim for an order that North Elgin Centre should undertake the necessary process under Section 50(3)(f) of the Planning Act to obtain consent of the municipality, the Court of Appeal noted that the 21^st year of that lease was soon approaching, and that McDonald’s would have to quickly bring an application for the consent, and North Elgin Centre will reasonably cooperate to obtain that consent.

If you are involved in a commercial contract dispute or any related litigation, contact Mark Feigenbaum for exceptional representation and guidance. Mark’s many years of interdisciplinary knowledge in law, accounting, and finance make him uniquely positioned to protect you, your business, and your assets. Call Mark online or call him at (416) 777-8433 or toll-free at (877) 275-4792 to book a consultation.