1212763 ONTARIO LTD. V. BONJOUR CAFÉ examines whether an assignor's indemnity agreement can be enforced by a landlord following an assignment of an amendment to the lease. In this case, the Landlord sought to recover unpaid rent from prior operators of a coffee shop. The Landlord originally entered into a lease with the Tenant, Bonjour Café, for a term of fi ve years from February 1996 to February 2001. The coffee shop was run by a revolving door of operators as the Lease was assigned six times between 1996 and 2004. The Lease was fi rst assigned to 1312215 Ontario Inc. (the "First Assignee") in 1998. The Landlord consented to the assigned and agreed to extend the Term to February 2006 (the "First Extension Term"). Upon each assignment, the Landlord required the assignor to sign an agreement indemnifying the Tenant's obligations under the Lease throughout the Term, notwithstanding any subsequent assignments. The principal of one assignor, Café Ebenezer, signed a supplementary indemnity agreement that was to apply throughout the Term and "any extensions thereof".

In 2004, the final assignee extended the Lease to February 2009 (the "Second Extension Term") and the rent payable was increased starting in the Second Extension Term. The Landlord did not notify the former assignees about the rent increase. When the last assignee stopped paying rent in 2005, the Landlord terminated the Lease, leased the space to a third party at a signifi cantly lower rate, and brought an action to recover lost rent from two of the operators — the First Assignee and Café Ebenezer.

The Court held that the former assignees were not released from their obligations under the indemnity agreements when the Lease was assigned without their knowledge. The assignments did not constitute a material change to the Lease, as they did not alter the rights and obligations of the parties under the Lease. As well, the 2004 amendment had no effect on the indemnity obligations of the assignees during the First Extension Term since the rent increase did not come into effect until the Second Extension Term. Accordingly, the Court found both assignors liable for rent up to February 2006.

However, neither assignee was found liable for any rent during the Second Extension Term. The First Assignee's liability was limited to "the Term" which, at the time, included only the First Extension Term. So what about Café Ebenezer, whose supplementary indemnity clearly applied to the Term and "any extensions thereof"? The Court indicated its liability would have continued throughout the Second Extension Term had the Lease simply been extended. However, Café Ebenezer's consent was required for the increased rent and since it was not obtained, the Court held that the supplementary indemnity was terminated when the rent increase took effect.

Why wasn't Café Ebenezer liable for anything during the Second Extension Term, even the base rent payable for the last year of the First Extension Period? The Court ruled that termination of the indemnity "is the effect of the application of common law rules. The amendments are not to be read as if the Landlord extended the Lease on the same terms and conditions."

Bonjour Café demonstrates the importance for landlords to incorporate express language in their leases, consents and indemnity agreements, that (i) stipulates liability will continue during the initial Term of the Lease and "any renewals or extensions thereof" and (ii) contemplates rental increases during the renewal/extension terms. We question whether a clause in the indemnity, which provided that the assignee would remain liable for the fair market rent during any extension period, would have been suffi cient to avoid termination of the indemnity and enable the Landlord to recover some rent from Café Ebenezer during the Second Extension Term.

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