Canada: The Overholding Provision In A Commercial Lease

Almost every commercial lease has an overholding provision. Although the exact words vary, the typical provision provides that if the tenant continues to occupy the premises following the end of the term, there is deemed to be a month-to-month tenancy terminable by either party on one month's notice and with rent at some percentage (from 100% to 200%) of the rent paid in the last month of the term.

The fact that a lease may have a provision titled "overholding" has from time to time resulted in tenants having a misconception that there is some right to stay in the premises after the end of the term. The Court of Appeal in Ontario seems to have put this issue to rest in the case of AIM Health Group Inc v 40 Finchgate Limited Partnership by clearly stating there is no such right based on a typical overholding clause.

The facts in this case were very straight forward. AIM Health Group Inc. (the "Tenant") was a tenant of 40 Finchgate Limited Partnership (the "Landlord") pursuant to a commercial lease for space in a medical office building. The term was to expire on December 31, 2011. There was an option to renew in favour of the Tenant that was not exercised. In fact, the Tenant advised the Landlord that the clinic operated by the Tenant was going to relocate.

The Tenant however experienced delays with respect to its relocation and sought a short term extension from the Landlord. The Landlord indicated that no extension was available because it had secured a new tenant for January 1, 2012.

The term of the Lease therefore expired on December 31, 2011. The Tenant continued to occupy the premises. On January 1, 2012, the Landlord changed the locks. The Tenant brought an emergency application seeking, among other things, a declaration that it was entitled to re-enter and occupy the leased premises as an overholding tenant pursuant to the overholding provision in its lease.

The lease had a typical overholding provision deeming there to be a month-to-month tenancy if the Tenant continues in occupancy after the term and without further written agreement. Commercial leases have such a provision as, absent such a provision, in cases of overholding the tenant would be deemed by the common law to be a year to year tenant (resulting in a minimum of a further one year period and requiring six months' notice to terminate).

The issue was whether the overholding clause gave the Tenant a unilateral right to overhold that restrained the Landlord from enforcing the end of the lease term on the agreed expiry date.

At first instance, the Judge found in favour of the Tenant and held that the Landlord had acted wrongfully when it locked the Tenant out. The matter was apparently resolved before the appeal was heard, but the Court of Appeal decided the issue was significant enough to hear and decide the matter.

The Tenant took the position that under the overholding provision it had the unilateral option not to vacate the premises at the end of its term but to remain in possession as a month-to-month tenant. As a month-to-month tenant, either party could then terminate on 30 days notice. So under the Tenant's reasoning, it had the right to stay on for a minimum of one further month. This position was taken notwithstanding that the Landlord did not accept any rent from the Tenant for January, 2012, or otherwise give any consent. In fact, the Landlord has been quite clear it needed the premises back on January 1, 2012.

The majority decision of the Court of Appeal did not agree with the Tenant. The Court held that under a typical overholding provision, the Landlord must agree that the Tenant may stay in possession in order for the Tenant to have a right to carry on in the premises after the end of the term. Often that consent is evidenced by a landlord's acceptance of rent.

The Court of Appeal further noted that an acceptance of the Tenant's position would result in a commercially unreasonable situation. Landlords would have to keep the month following the end of each term open for the tenant to stay on and could not proceed to re-rent a premises until one month following the end of the term. That would leave each landlord with a potential burden of unrented premises for at least one month resulting from a tenant's unilateral right to stay on. The Court of Appeal stated that such result would not be an accord with principles of commercial efficacy or good business sense.

While there was a dissenting opinion in the Court of Appeal, the case does seem to clearly rule on this matter. Under a typical overholding clause the tenant can be required by the landlord to vacate the premises at the end of the term. The overholding clause and the terms applicable to the overholding will only come into effect if the landlord is in agreement. Tenants must arrange their affairs accordingly.

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