A recent Ontario Court of Appeal decision reviewed a “continuous use” clause in a commercial lease. A continuous use clause in a lease is a requirement that obligates the tenant to continuously operate its business throughout the term of the lease and is commonly found in a commercial lease for retail space within shopping centers.
The landlord owned a shopping mall. The tenant rented space in the mall and operated a retail store in the mall for many years.
In February 2004, the tenant advised the landlord that it intended to cease operations in May 2004, even though the lease did not terminate until April 2005.
The landlord sued the tenant claiming it was obliged under the “continuous use” clauses in the lease to operate the store business until the lease ended in April 2005.
Nonetheless, the tenant closed the store in May 2004. However, the tenant had paid rent, maintenance, and repair obligations under the lease until the lease termination date.
The landlord pursued its claim alleging that the tenant’s premature departure from the mall had caused significant damages beyond the amounts owed for rent, repair, and maintenance under the lease.
The trial judge found that, under the terms of the lease, the tenant was entitled to close its store when it did. The landlord appealed.
At issue was a dispute over the interpretation of the lease focused mainly on the interaction of the “uses” clause in s. 8.01, and the “hours of operation” clause in s. 8.01.1. The trial judge found both clauses to qualify as “continuous use” provisions, which stated the following:
“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 being 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.
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 court found that the continuous use obligation spelled out in s. 8.01 is repeated in very similar language in s. 8.05, which was headed “Continuous Use”. The court stated that, unless modified by some other provision in the lease, the language of ss. 8.01 and 8.05 could leave no doubt that the tenant was obliged to carry on business on the leased premises throughout the term of the lease.
The court noted that section 8.01.1 required the tenant to be open for business during “minimum hours of business” on any day when 80 per cent of the rentable area of the commercial part of the mall was open and the “Department Store” was open. However, the “Department Store” referenced in this provision had ceased operations in 1999 when it went bankrupt. The Department Store had been the main store in the mall and no tenant had replaced it as of 2004.Therefore, when the tenant told the landlord that it was ceasing operations, neither condition in s. 8.01.1 existed; eighty per cent of the rentable area was not open, and the Department Store was not open.
The trial judge had found that the tenant’s duty to continuously operate its store was qualified by s. 8.01.1 such that it was only required to be open for business when the two conditions in that section were met. As a result, if the tenant was not required under the terms of the lease to be open for business, it could not have an obligation to continuously carry out its business on the rented premises.
The Court of Appeal disagreed.
It found that s. 8.01.1, which addressed hours of operation and gave the tenant discretion as to the hours it chose to remain open could not reasonably be read as overriding the tenant’s express continuous use obligation which appeared in an unqualified form in two places in the lease (ss. 8.01 and 8.05).
The court stated:
“On a plain reading, s. 8.01 imposes an obligation on [the tenant] to carry on business in the leased space for the term of the lease. On an equally plain reading, s. 8.01.1 is directed at setting [the tenant]’s hours of operation of its business and not at the requirement that [the tenant] carry on business. There is a fundamental commercial difference between a term directed at the hours of the day during which a store must open and a requirement that the store carry on business on a continuous basis. A term which speaks to hours of operation assumes that the store is carrying on business.”
As a result, the court found that the tenant was obliged to carry on business through to the end of the lease under the continuous operation provisions in ss. 8.01 and 8.05.
The court allowed the appeal and granted judgment in favour of the landlord declaring that the tenant breached its obligation of continuous operation when it closed its store in May 2004. The matter was remitted to the trial court for a determination of the damages.
Entering in to a commercial lease represents a huge financial commitment and comes with significant legal risk. Because of this, it is critical for both landlords and tenants to obtain the advice of an experienced commercial leasing lawyer when negotiating a commercial lease and certainly before finalizing any agreement.
At DBH Law in Calgary, our experienced commercial real estate lawyers help our clients manage the risks of commercial leasing by providing trusted guidance in all aspects of their leasing affairs.
Contact the experienced commercial real estate team at DBH Law in Calgary to see how we can help you through your commercial leasing matters. We work with our clients every step of the way, negotiating for you and protecting your interests in the event of a dispute. Please reach out to us online or by phone at 403.252.9937 to talk today.