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Occupation of a Premises Does not Require Physical Possession

In commercial leases many special tenant rights are personal to the named tenant and require that the tenant be in occupation. That is, when negotiating terms such as renewal rights, termination rights and expansion rights, landlords will want to limit their application to the original tenant and require that such original tenant be in occupation in order to take advantage of such rights.

In Nortel Networks Ltd. v. Kanata Research Park Corp. (2004) 73 O.R. (3d) 594 the Ontario Superior Court held that physical possession is not required in order for a tenant to be in occupation.

In this case, Nortel has a lease of a large amount of space from Kanata Research. It had a right to cancel up to 50% of such space. It was a precondition to the cancellation right that Nortel or a subsidiary be in occupancy of the premises. Nortel consolidated space at other locations and when Nortel exercised its cancellation right there were no employees in the premises. Following receipt of the notice of the cancellation right, Kanata Research advised Nortel that the right was not validly exercised as Nortel was not in occupation.

The Court reviewed various definitions of occupancy and found that there were two components.  Occupancy includes both physical occupation and legal occupation. Legal occupation is the right to occupation and the ability to control occupation. The requirement of occupancy here meant that Nortel had to be either in physical occupation or have legal occupation. Since no other party (such as a subtenant) was in physical occupation, Nortel continued to have legal occupation and therefor did validly exercise its cancellation right.

This does make some sense for a cancellation right. If the tenant is in full occupation it may not have the need to exercise a cancellation right. In fact, the Court stated that there was no evidence that it would make any difference to Kanata Research whether or not Nortel was in physical occupation.  I wonder if the result would have been different if the tenant was exercising an expansion right or a renewal right, where a landlord might argue that it does make a difference if the tenant is in physical occupancy? It might not be good for the building to have a vacant premises expanded or renewed if, for example, there were retail tenants that required office workers for their business.

In any event, if a landlord wants to limit a tenant to exercising a right only when it is in physical possession it should say so specifically and not rely on simply requiring occupancy.

Bill Rowlands

June 4, 2005 in Leasing | Permalink

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