A landlord's failure to enforce lease rights in response to a tenant's default can result in the default rights becoming unenforceable.
In the recent Alberta case of Sledz v. Edmonton Home Fair Ltd., a tenant entered into a lease to operate a restaurant. The tenant didn't open for business by the commencement date set out in the lease. It was late several times in paying rent. When it did start operating, it operated in a haphazard and part-time fashion. The restaurant was often closed for extended periods of time. All this behaviour by the tenant was clearly in breach of the lease.
The landlord initially served a default notice on the tenant, but in the following months did not enforce its default rights after the further defaults. Instead, it accepted late payments of rent from the tenant, and permitted the defaults to continue. From the landlord's perspective, it was more interested in getting the restaurant up and running in a proper way than using its default and lease termination rights to end a new lease, so it tolerated many of the tenant's breaches and in fact entered into negotiations in several instances to preserve the lease despite continuous breaches.
Eventually, the landlord's patience ran out. Without advance notice to the tenant, the landlord terminated the lease, re-took possession, and cashed in a letter of credit the tenant had provided as security for lease performance.
The tenant sued the landlord, claiming that the landlord had no right to terminate the lease in the circumstances. The tenant argued that the landlord, through its conduct, had led the tenant to believe that the lease provisions wouldn't be strictly enforced. The tenant won.
Landlord's conduct prevented lease enforcement
The trial judge agreed that the tenant's actions had been in breach of the lease, but that the landlord's course of conduct amounted to "promissory estoppel". The trial judge ruled that the landlord accepted the ongoing defaults of the tenant. The words and conduct of the landlord created the impression that it would not hold the tenant strictly to the terms of the lease. The court approved this statement of law:
"where one party has, by his words or conduct, made to the other a promise or assurance which was intended to affect the legal relations between them and to be acted on accordingly, then, once the other party has taken him at his word and acted on it, the one who gave the promise or assurance cannot afterwards be allowed to revert to the previous legal relations as if no such promise or assurance had been made by him."
There must be evidence showing that the landlord intended that the legal relations created by the contract would be altered as a result of the negotiations, and the words or conduct of the landlord must give rise to an unambiguous promise.
The court in the Sledz case ruled that the landlord's conduct was unambiguous, and quoted the famous English case of Vigers v. Pike (1842): "A man, who with full knowledge of his case, does not complain, but deals with his opponent as if he had no case against him, builds up from day to day a wall of protection for such opponent, which will probably defeat any future attack upon him."
In Sledz, the court concluded that the landlord was prohibited from terminating the lease because the landlord "engaged in lease-affirming conduct and, in particular, the acceptance of the post-dated cheques during the course of the continuous breaches of the lease. This action, coupled with the previous negotiations in which the [landlord] engaged, in order to maintain the lease, without insisting upon the [tenant's] strict compliance with the terms of the lease permits the [tenant] to raise the doctrine of promissory estoppel to assist him. These were not mere indulgences offered by the [landlord] but a continual pattern of conduct intended to and which affected the legal relationship of the parties."
No-Waiver Clause is not a solution
The court also ruled that the tenant could rely on the doctrine of waiver in its claim against the landlord. Put simply, that doctrine states that where one party to a contract chooses to not rely on some known right or defect in the performance of the other party, then the first party can't later rely on that right or defect in any claim against the defaulting party. The court stated that "where there is a breach of a lease provision and a landlord subsequently with full knowledge of the breach, accepts rent from the tenant, such acceptance is sufficient to constitute a waiver at law."
The landlord then argued that, even if it had not strictly enforced its lease rights in face of the tenant's defaults, it could rely upon the clause in the lease that stated that no waiver of rights has any effect unless made in writing. The court reviewed law in the area and concluded that "the fact that there is a written waiver clause in the Lease agreement is not fatal to a tenant's position."
As a result, the landlord was required to repay the line of credit, and interest, and a variety of other damages to the tenant. The landlord's claim against the tenant was dismissed in its entirety.
What can a landlord do? Cases such as this seem to make it more difficult for landlords who want to work cooperatively with tenants and who wish to avoid full-blown vigourous lease enforcement for every breach. However, the facts and the law are not as bleak as they appear in the Sledz case. The law on both promissory estoppel and waiver will permit the strict enforcement of a lease to be reinstated in certain circumstances, upon appropriate reasonable notice to the tenant. The landlord in Sledz failed to give that reinstatement notice; instead, it purported to enforce the lease when by its conduct it had lost its right to do so.
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