Canadian Commercial Real Estate Law Blog

« Increased Rates of Interest on a Mortgage Default (Reliant Capital v. Silverdale Development) | Blog Home | Supreme Court of Canada Decides Right of Way Issue »

An Agreement to Agree is No Agreement at All

The decision of The Ontario Superior Court of Justice in The Great Atlantic & Pacific Company of Canada v. Topostar (Aurora) Inc. is an example where the court found that the words in a lease document were not sufficient to determine the rent for expansion space of a tenant. The parties had agreed that the “rent for the addition or extension shall be negotiated by Landlord and Tenant acting reasonably”. The court found this was nothing more than an agreement to agree which is no agreement at all. This issue could be equally applicable to a renewal provision.

In this case the Lease was entered into in 1984. A section of the Lease gave A&P (the Tenant) expansion rights at the commencement of the 11th lease year and every ten years thereafter. The expansion area was identified and contemplated either A&P building the expansion premises at the time it exercised its option or the Landlord doing so in advance in a manner that would facilitate the subsequent expansion by A&P. The Landlord had constructed the expansion space in 1985 in accordance with A&P’s specifications. It was subsequently recognized that the Landlord had not, as it should have, ensured that the lease to the third party ended at time periods that would facilitate the exercise of A&P’s expansion right. On or about August 27, 2004 A&P exercised its expansion right.

While there were a number of issues between A&P and the Landlord with respect to the exercise of the expansion right, only the issue of the rent was determined by the court. The court noted the relevant provision that “rent for the addition or extension shall be negotiated by the Landlord and Tenant acting reasonably.” The court stated that its job was to interpret the intent of the parties on the basis of the language used in the Lease and not to make a new agreement for the parties.

The court then held as follows:

“The words are general words. They provide no agreed formula, let alone any objective standard such as “market rent” or other certainty. They do not provide for arbitration if rent cannot be agreed. They are merely an agreement to negotiate which is no agreement at all.”

As a result of there being no formula for reaching an agreement and no other methods, such as arbitration, for determining the agreement in the event the negotiation fails, it was held that the provision was not enforceable. A&P had no right to expand.

Although this situation dealt with an expansion right, the discussion would be equally applicable to renewal rights, which are often subject to negotiation. This case reinforces the requirement to have a formula for determining the market rent or some other method of getting certainty, such as an arbitration provision.

Bill Rowlands

June 27, 2006 in Leasing | Permalink

« Increased Rates of Interest on a Mortgage Default (Reliant Capital v. Silverdale Development) | Blog Home | Supreme Court of Canada Decides Right of Way Issue »

Comments

So the rent was left to the court to determine? What basis did they use to determine the rent?

Posted by: Dave from Snap Up Real Estate | Oct 25, 2006 2:56:44 AM

The comments to this entry are closed.