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Exercise Caution: Lease Renewal Clauses and Standard Form Leases in Gurudutt

A recent Ontario Superior Court case will be of interest to commercial landlords and tenants alike.

In 1251614 Ontario Ltd v. Gurudutt, the tenant signed a 10 year lease that granted the tenant the right to renew the lease for 2 further terms of 5 years each, with rental rates to be negotiated at the time of renewal and settled by arbitration, if necessary. In addition, the lease stated:

“Any such renewal to be on the same terms and conditions as are contained in this Lease except…the form of the renewal Lease shall be, at the landlord’s option, a lease extension agreement or a new lease in the landlord’s then standard form.” (emphasis added)

The tenant gave notice of its intention to renew, prompting the landlord to provide its then standard form lease. That particular standard form had been signed by 8 of the 10 tenants occupying the landlord’s property. In all material respects, the standard form was identical to the tenant’s existing lease, except for the inclusion of a demolition clause. The tenant refused to sign the standard form, arguing that it had the right to renew on the same terms and conditions contained in its existing lease. The Court disagreed, holding that the landlord was entitled to require the tenant to sign its current standard form lease if the tenant wanted to renew (regardless of whether the standard form included material changes from the existing lease).

In arriving at its conclusion, the Court was influenced by several factors, including:

  • Sophistication of the Parties – both landlord and tenant were sophisticated business entities that had retained legal counsel to review the existing lease with the form of renewal clause; and
  • Established Use of “Standard Form” lease – the landlord’s then standard form lease had been consistently presented to tenants of the property (and accepted by them) in the years leading up to the tenant’s renewal.

Gurudutt presents some important considerations for both landlords and tenants. Landlords should generally attempt to insist upon renewal clauses like that found in Gurudutt in order to accommodate future redevelopment opportunities and ensure that their lease agreements can evolve with the times. It is also important that landlords attempt to consistently use the same form of lease with all tenants of a commercial property, so that the Landlord can demonstrate a history of “uptake” in the event of a dispute on this issue.

Tenants should be careful to ensure that any renewal clause requiring the adoption of a future standard form lease provides, at a minimum, that the tenant be allowed the opportunity to make reasonable revisions and comments to such standard form. If a tenant is already subject to a Gurudutt-type renewal clause, then it would be prudent to request the landlord’s standard form lease prior to exercising the renewal option, to determine in advance what material changes will be binding upon the tenant during the renewal.

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