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Exercising Lease Renewal Options

The case of Royal City Shopping Centre Ltd. v. Canadian Direct Insurance Incorporated 2005 BCSC 1597 was a dispute between a landlord and a tenant as to whether or not the tenant had validly exercised the option to renew in its lease.

The tenant’s lease expired October 31, 2005. The tenant had a right to renew for a further five years. There were certain conditions in the renewal clause. The only condition at issue was whether or not the tenant delivered a written request as required not less than nine months before the end of the term. If that required request was delivered, there would be a binding renewal term with a rent to be agreed upon (or determined by arbitration if the parties did not agree).

In a letter dated December 22, 2004 (which is more than nine months before the end of the term) the tenant wrote to the landlord as follows:

“In terms of Rider No. 1, Article 3.1 of the Lease Agreement dated October 19, 1995 we hereby tender notice of our intention to exercise the option to renew subject to satisfactory negotiation of the lease terms.

Please note that the tenant will be represented by Avison Young Commercial Real Estate (BC) Inc. in all matters pertaining to the renewal.”

The landlord submitted that the letter was, on its face, a renewal and that once the tenant exercised its option by such letter, the lease was renewed. All that was left to be done was to negotiate the rent for the renewal period.

On the other hand, the tenant, which had since gone on to make a deal elsewhere, submitted that the letter was ambiguous and does not constitute a renewal.

The court reviewed the case law as to when a letter was effective to exercise an option to renew. In particular, the court found that to be valid the exercise of an option (like an acceptance of an agreement) must be “clear and unambiguous”, contain “explicit certainty and direct, unequivocal communication”, be “explicit, express and unequivocal notice” and be “unconditional and unqualified”.

In this case, the court found that the tenant’s letter did not satisfy these conditions. Firstly, the letter was an “intention” to exercise the option, rather than the exercise of the option itself. Secondly, such intention was conditional on “satisfactory negotiation of the lease terms”. The language was held to be equivocal and ambiguous and not consistent with the required language in the lease. The lease did not require negotiation of terms other than the minimum rent (which was to be determined by arbitration if the parties did not agree).

For support of its conclusion, the court looked first at the surrounding circumstances at the time the contract was made. The fact that the tenant was looking for alternative premises, and had hired an agent to assist it, supported the court’s conclusion.

Because the letter was ambiguous, the court also considered the parties’ subsequent conduct. From the facts, the court drew the inference that the landlord did not rely on the tenant’s letter as a renewal of the lease, and instead entered into negotiations with the tenant for a new lease on new terms.

This case shows the importance of a clear and unambiguous exercise of a renewal option by the tenant. In the circumstances here, it was the landlord who took the position that the renewal notice was valid. Depending on the circumstances, it could just as well be the other way around where the tenant is seeking to protect the exercise of its renewal. In those cases, the tenant will want a clear and unambiguous letter to rely upon.

Bill Rowlands

May 2, 2006 in Leasing | Permalink

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