Court of Appeal Reviews Tenants’ Duty to Repair Fixtures and Improvements

The law relating to a commercial tenant’s duty to repair both trade fixtures and improvements to the property was addressed by the Ontario Court of Appeal in a recent decision.

The facts involved a tenant who leased premises in Mississauga that were used as a gas station. The property featured underground fuel storage tanks and fuel lines. One of these fuel lines leaked; as a method of repair the tenant simply capped the line and discontinued using it. When the tenant terminated the lease and vacated the premises in the usual course, it left behind the underground fuel lines, including the fuel line it had capped.

The landlord then applied to the court for a declaration that the tenant was the owner of the underground storage and fuel lines, and asked for an order directing them to be removed. The application judge dismissed the request. However, rather than launch an appeal, the landlord adopted a new strategy, and instead asked the court for an order requiring the tenant to repair the underground tanks and fuel lines. On that basis, the landlord was successful.

The tenant then appealed that decision to the Court of Appeal. It claimed that the terms of the lease simply did not impose any such repair obligation on the tenant in connection with the underground fuel line.

The case hinged on the proper interpretation of the lease, and more importantly on the characterization of the underground fuel tanks and lines as either "trade fixtures" or "improvements". In turn, this determination gave rise to a potential duty to repair by the tenant.

In undertaking the necessary analysis, the Court of Appeal began by clarifying that – in keeping with the traditional legal interpretation – improvements refer to things constructed on and attached to real property and which become part of it. Trade fixtures, on the other hand, are placed on and connected to the real property, but in a manner that allows for the connection to be severed.

As with most contracts of this type, the lease in question provided that any improvements or equipment installed on the property would remain the tenant’s property. The tenant was also allowed to remove any of its installed trade fixtures at the end of the lease term; anything not removed became the landlord’s property. There was no right by the tenant to remove improvements.

With this in mind, the interpretation of the terms imposing repair obligations was key. The Court observed that traditionally, the law relating to repairs draws a distinction between improvements and trade fixtures, as follows:

… [B]ecause they cannot be removed, improvements made by a tenant will inevitably become the property of the landlord, giving the landlord an interest in ensuring their repair. On the other hand, a tenant’s fixtures may be removed by the tenant, in which case the landlord has no stake in their repair.

In this specific lease, the terms were clear as to the tenant’s differing repair obligations as between "trade fixtures" and "improvements": the duty to repair clearly applied to improvements only.

Against this background, the Court of Appeal found two grounds on which to allow the tenant’s appeal. First, it observed that: 1) the application judge had characterized the underground storage tanks and fuel lines as being "trade fixtures" belonging to the tenant; and 2) the lease stated that any trade fixtures left behind by the tenant became the landlord’s property. Since the tenant did not remove the fuel tanks and lines when the lease ended, they became the landlord’s property in law. Bolstering this conclusion was the fact that the application judge had dismissed the landlord’s request for an order declaring the tenant to be the owner, which finding was not appealed.

The application judge had also found that the tenant’s capping of the fuel lines did not fulfill its repair obligations. However, since the Court of Appeal found that the judge had mischaracterized the lines and tanks in the first place, and since the lease terms only required the tenant to repair "improvements", there could be no obligation on the tenant to repair them at all.

As a result, the Court of Appeal allowed the tenant’s appeal, and substituted an order dismissing the landlord’s application outright. See Caledonia Service Station Inc. v. Cango Inc., 2011 (ONCA).