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Balancing equity with strict compliance with commercial lease renewals: A closer look

In 8750297 Canada Inc v Ambassador Realty Inc., 2025 ONSC 5479, (“Ambassador”) the court offered important guidance on the scope of relief from forfeiture in commercial lease renewal option requirements. While relief against forfeiture has always existed for commercial tenants in Ontario, its application as it relates to commercial lease renewal was narrow and to only apply if the tenant could prove that they were diligent. This narrow application may no longer be as set in stone. In Ambassador, the court looked at whether the tenant was diligent based on the tenant’s sophistication and belief. In addition, the court looked at the general equities between the parties including the knowledge and the actions of the Landlord to determine the application of relief against forfeiture.

Background

On August 4, 2006, a 6-year commercial lease as signed by Mr. Musleh Tahir for the operation of a pizza restaurant. Mr. Tahir would receive regular notice of his option to renew the lease and eventually assigned the lease to a new tenant, 8750297 Canada Inc.

On November 30, 2012, the Tenant purchased the franchise rights of the pizza restaurant and entered into a sublease.  The lease was renewed on December 19, 2016. On December 15, 2021, the lease was assigned to the Tenant and extended to August 31, 2025.The extension included a unilateral right of the Tenant to renew the lease for an additional five years, provided that the tenant gives eight months notice in writing.

Over the course of the tenancy, the Tenant invested approximately $100,000 in renovations. The Landlord’s property manager regularly visited the premises, during which the Tenant would express a desire to remain long-term at the location, which was a direct consequence of the costs of renovations, The cost of the renovations was paid from the principal’s savings. During one visit, the property manager was alleged to have told the Tenant that it was “too early” to exercise the renewal option.

After the renewal notice deadline had passed by two months, the Landlord notified the Tenant that the lease renewal right had expired as a result of their failure to exercise the option. The Tenant responded the following day on February 5, 2025, affirming his intention to renew. In response, the Landlord misrepresented to the Tenant that a new tenant had already signed a new lease for the location. Having believed that the Tenant had failed to comply with option, the Landlord made no further attempts to communicate and simply ignored the Tenant’s pleading for a renewal of the lease and entered into a new lease with a third party on March 7, 2025.

Facing the impending eviction, the Tenant vacated the premises to mitigate damages and attempted to relocate. However, the cost of relocation was approximately $135,000.00. The Tenant brought an application seeking relief against forfeiture and renewal of the lease for 5 years.

Of significant note, the Tenant’s principal stated in cross-examination that he thought the lease would automatically renew.

Application

The Landlord relied on McRae Cold Storage Inc v Nova Cold Logistics ULC, 2019 ONCA 452 (“McRae”). In McRae, the court states that when a Tenant seeks relief of forfeiture for a renewal, the court must find that the Tenant made diligent efforts to comply with said lease and that the Tenant was in default through no fault of their own. After finding that the Tenant has been diligent, the court determines the general test of relief of forfeiture being: 1) the gravity of the breach; 2) the conduct of the applicant 3) the disparity between the value of the property forfeited and the damage caused by the breach.  The reason for this higher standard is that the failure to renew a lease is not a breach of the lease.

The Tenant in this case argued that they came to the court with clean hands and that law of equity should take precedence over strict compliance with the executed lease agreement and that they should be granted relief from forfeiture.

In accepting the Tenant’s position, the court issued a declaration that the lease would remain valid until August 31, 2030, effectively renewing the lease. The court found that the Tenant’s due diligence had been shown when examining the favourable equitable circumstances surrounding the missed renewal.

These include:

  • the Tenant acted in good faith and expressed his intention to renew to the property manager both prior to the renewal period and immediately after notice of termination;
  • the Tenant suffered from a new illness that impaired his ability to track and comply with deadlines;
  • the Tenant spent a considerable amount of money completing serious renovations to make the business a long-term profitable expenditure;
  • the Tenant’s experience with Mr. Tahir provided him with a reasonable expectation that he would receive a notice of the option to renew prior to the renewal deadline.
  • the Tenant was misled by the property manager that a new tenant was already signed for the unit when in fact that third party tenant would not be signed for another month;
  • the Tenant was not a sophisticated businessperson as a first-time commercial tenant;
  • the Tenant had a history of being a responsible tenant with no recorded rent defaults or damage; and
  • the Tenant had taken steps to mitigate his losses and rented up space, to his detriment, at another location.

In addition to the equity factors, the judge observed that the conduct of the Landlord was not in the spirit of performing contractual terms in good faith in accordance with the Supreme Court of Canada (“SCC”) Decision of Bhasin v Hrynew. The SCC outlined that parties must not lie or otherwise mislead each other about one’s contractual performance when sharing mutual dealings. Having deliberately misled the Tenant about the new tenant signing and having ignored the immediate follow up emails of the Tenant, the court was clearly not in favour of the Landlord’s behaviour.

Spell of Caution to Landlords

There is a serious question whether Ambassador was correctly decided based on test set out in McRae. The court’s emphasis on the Tenant being an unsophisticated party ignores the reality that this was a multi-year commercial relationship involving a franchise operation. The Tenant had, up to this point, successfully navigated lease assignments, operational management, and substantial renovations. Furthermore, the lease, which the Tenant negotiated, required a written notice of an extension and the Tenant admitted on cross examination that he thought the lease would be automatically renewed. The Tenant only provided written notice to the Landlord after the Landlord had informed the Tenant that the time for renewal had passed.

The precedent that this court set under their ‘sophistication’ analysis has the potential to open the flood gates on tenants claiming ignorance of terms they expressly negotiated.

Furthermore, landlords can no longer operate under the assumption that a missed renewal will provide them free range to contract with other parties. The Landlord’s statement about a newly signed tenant, even if premature, was made in the context of managing a property where the existing tenant had demonstrably failed to exercise the renewal. The representation made had no impact on whether the Tenant acted diligently in exercising the renewal. This case creates uncertainty for landlords, whereby property owners after a missed renewal deadline may be required to hold properties in limbo while they evaluate the circumstances of the tenant and any post-deadline expressions of interest.

Interestingly enough, it also seems the court held no empathy to the Landlord’s new tenancy agreement with the third-party tenant who, for all intents and purposes, was an innocent party in this affair. Despite a valid lease, the court dismissed the third-party intervening interest as “speculative prejudice” and that it should be weighed less then the Tenant’s equitable circumstances. The courts did not give any weight to the possibility that they would be opening the Landlord to liability and showed a general apathy to their business deal.

Conclusion

Overall, Ambassador clearly signals that commercial landlords should be cautious in assuming that missed renewal deadlines will automatically result in a loss of a tenant’s contractual rights. The decision signals a shift toward a more flexible, equity-driven analysis, where courts may look beyond strict contractual compliance and instead assess the broader factual matrix, including the conduct of both parties and the presence of good faith dealings and the sophistication of the parties. While due diligence of the tenant remains an important consideration, it is evident from this case that the court will look to the facts and determine what is fair in the circumstance.

For landlords, the decision could introduce considerable uncertainty into what was previously a relatively predictable area of commercial leasing. By placing significant emphasis on the tenant’s sophistication, the decision risks blurring the distinction between equitable fairness and the enforcement of bargained contractual terms. Whether Ambassador will ultimately be treated as a fact-specific exception or as a broader expansion of equitable intervention in commercial leasing remains to be seen. What is clear, however, is that the decision serves as a warning to landlords that they should understand their commercial tenant’s sophistication and, more importantly, they should deal with their tenants fairly and honestly. If they do not, there could be serious consequences.