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Overholding Tenants: Misconceptions Put to Rest

The Ontario Court of Appeal has clarified the rights and obligations of overholding commercial tenants, namely whether they have a unilateral right to continue occupying leased premises after the initial lease term expires.

The tenant in question operated a chronic pain management clinic under a 5-year lease of commercial premises which was slated to end on December 31, 2011.  As that date neared, the tenant advised the landlord it was relocating the clinic and was not planning to renew the lease. However, since the new premises were not quite ready the landlord granted the tenant several short extensions, but refused to allow it to remain beyond January 1, 2012.   The landlord had found a new commercial tenant that was moving in on that date.

Nonetheless, the tenant did not move out on December 31, 2011 as required; the landlord changed the locks the next day.  Claiming that the tenant’s failure to surrender the premises left it with no option, the landlord retook possession and removed the tenant’s goods to make room for the incoming new occupant. The tenant objected, asserting that it was an overholding tenant as defined in the lease, that it was now subject to a month-to-month tenancy, and that the landlord’s conduct was itself in breach of the lease’s provisions. The tenant applied to the court for an emergency ruling.
The legal outcome hinged on two competing lease provisions: the “overholding clause” (which provided that if the tenant continued to occupy the premises at the expiry of the initial term, then there will be a deemed month-to-month tenancy terminable upon one month’s notice), and the “surrender clause” (which required the tenant to “peaceably surrender and give up to the Landlord vacant possession” when the lease term ended).   The court’s challenge was to determine which of these conflicting terms should prevail.  The lower court had found in the tenant’s favour.  

The landlord was successful in a subsequent appeal.

The Court of Appeal ruled that on proper interpretation of this lease, the overholding clause gave rise to a month-to-month tenancy in favour of the tenant only if the landlord consented – such consent was usually evidenced by the landlord accepting rent from the tenant after the initial lease term ended. It was also implicit that in such circumstances, the landlord would waive the tenant’s usual obligation to vacate.
This interpretation of the terms of the lease made good commercial sense: otherwise, the landlord would be subject to uncertainty as to whether the tenant would be delivering up vacant possession at the lease’s end, and could not safely re-let the premises to another tenant.

As such – and unless there was evidence here that the landlord had given such consent and waiver – the tenant’s obligation to comply with the surrender clause remained. Further, the Court observed that while such surrender clauses are often found in leases, they are technically superfluous since the tenant has an implicit obligation to deliver vacant possession when the lease ends.

Here, the evidence was abundant:  not only did the landlord not consent to the tenant’s overholding after December 2011, it made it clear that it needed the premises, and in fact signed a new lease with another party. Further, at no time did it accept rent from the tenant after that date.

Nonetheless, the tenant had unilaterally decided to stay beyond the initial term in breach of its duty to deliver vacant possession, effectively becoming a trespasser. The landlord had therefore been justified in changing the locks and removing the tenant’s goods.  See AIM Health Group Inc. v. 40 Finchgate Limited Partnership, 2012 (ONCA).