October 2010

Renewal options

By Alexandre Lebeau Lawyer

Non-housing leases often contain renewal clauses along the lines of:

"So long as the Tenant has not defaulted on the terms of the Lease, upon the expiry of the Lease, the Landlord may invoke a Lease renewal option for an additional period of five (5) years under the same terms and conditions, with the exception of the rental amount, which must be negotiated. The Tenant will advise the Lessor of his intention to exercise the renewal option at least six (6) months and no more than twelve (12) months prior to the expiry of the Lease [...]."

Despite the terms renewal option, in this type of clause, the option is, in fact, fictitious. Rather, it is a clause granting the tenant priority over others to conclude a new lease agreement with the lessor (Mutuelle des fonctionnaires du Québec v. Les Immeubles G.C. Gagnon inc., 1997 CanLII 10674 (CQ C.A.). In other words, the lessor's only obligation is to first offer the business premises to the tenant. The parties must then negotiate the rent payable for the duration of the renewal.

Should the parties not be able to reach an agreement on this key element of the lease, the courts will generally rule that the lease may be terminated and that the premises may be offered to another party. Though the lessor's refusal to negotiate in good faith may, under certain circumstances, open the door to remedy in damages for the tenant, the courts will refuse to set and enforce the key elements of a rental agreement (i.e., the rental amount) (9175-9266 Québec inc. v. André Allard & Associés inc., 2008 QCCS 510 (CanLII); Renaud et Suissa v. Société du Parc des Iles et Ville de Montréal, REJB 1998-09822 (C.S. ) and Betsas v. Barrette, 2005 CanLII 23363 (QC C.Q.).

It is clear that the tenant's business may be seriously affected, and even compromised, if he/she is forced to leave the rental premises after failed rent negotiations with the lessor for the duration of the renewal.

In addition, when signing the lease, tenants seeking to avoid negotiations when the option is exercised should ensure that the agreement includes all of the key renewal conditions, including the rental amount. The renewal clause may stipulate that the rent payable during the renewal period will be based on a mathematical adjustment formula specified in the lease (see the aforementioned Mutuelle des fonctionnaires du Québec) (e.g. a rent increase based on the consumer price index (CPI) change in a given region and for a given period).

In sum, the renewal option must determine the key renewal conditions or lead to their determination based on a formula or mechanism stipulated in the lease.