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Commercial Tenant’s Lease Extended by Third Party

A recent court case involved the question of whether an option to extend a commercial lease could be exercised by someone other than the actual tenant.

The tenant, Firkin Pubs (“Firkin”), leased the famous “Flatiron Building” in downtown Toronto from the owner/landlord.  The term was for 10 years starting in 2001, with a renewal option to extend the lease for two 5-year terms.  Firkin then arranged for a franchisee to operate a restaurant and bar on the premises under the name “The Flatiron & Firkin” (“Franchisee”).

Just as the term of the lease was about to expire, a representative of The Firkin Group of Pubs (the  name under which Firkin operated) wrote to the landlord purporting to exercise the option to extend the lease for another 5 years.  Firkin then received a letter and invoice from the landlord, asking for a stipulated amount of “additional rent” under the lease.  Firkin disputed the landlord’s calculations but paid under protest, expecting that parties would come to terms. Firkin allowed its Franchisee to continue operating on the premises.

However, the landlord eventually took the position that Firkin had not validly exercised the option to extend at all, because: 1) the notice to extend did not come from the actual tenant, which was Firkin; 2) Firkin was in arrears of rent when the renewal notice was delivered; and 3) Firkin had parted with possession of the Flatiron building (in order to allow the Franchisee to operate the bar/restaurant on-site) without the landlord’s consent and contrary to the lease terms.

The matter went to court for resolution.  Firstly, the court found that the notice to extend the lease was valid, even though technically it was not exercised by Firkin itself but rather by The Firkin Group of Pubs. After commenting that the landlord’s insistence on strict compliance with the lease was a rather late-breaking development, the court went on to find that the lease was silent on the method by which the option to extend was to be exercised. It required only that “actual notice” be given; here, “The Firkin Group of Pubs” was effectively Firkin’s agent and could exercise the option on Firkin’s behalf.

Secondly, the court held that the landlord’s complaint that Firkin was in arrears of rent was also groundless. The lease terms specifically required an “Event of Default” to occur before the lease was considered in breach; that term was defined to be any breach or default that was not remedied by Firkin after receiving written notice of it from the landlord.  In this case, the landlord failed to give Firkin that written notice, and gave only a late demand for additional rent after the term had expired, which Firkin paid immediately subject to its objections as to the exact mount.

Finally, the court found that at the time the option to extend was purportedly exercised, the landlord knew it was the Franchisee rather than Firkin which was in possession of the Flatiron building, and had effectively given its consent. For one thing, the landlord had received a copy of the franchise agreement between Firkin and the Franchisee, and had also written directly to the Franchisee to offer that if Firkin ever defaulted on the lease, then the Franchisee could take over, subject to certain financial conditions.  Moreover, according to the court, Firkin did not legally give up legal possession merely because it allowed the Franchisee to operate the restaurant and bar on the premises.  This is because the franchise agreement did not grant the Franchisee the right to exclusive possession; instead, Firkin maintained legal possession of the premises at all times, and had full access to it throughout. Also, Firkin continued to deal directly with the landlord on operational issues and to negotiate the extension of the lease.

In the end, the court found that Firkin had validly exercised the option to extend, so that the lease was renewed for a further five years.  See:  Firkin Pubs Metro Inc. v. Flatiron Equities Limited, 2011 (ONSC).