Canada: Commercial Leasing And Ontario’s Limitations Regime

Copyright 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Real Estate Leasing, April, 2008

When changes were made to the limitations laws in Ontario in 2002, the legal community debated extensively about when and how the new limitations would apply to commencing an action in respect of existing and future disputes. Parts II and III of the former Limitations Act were repealed and replaced with the Limitations Act, 2002.

Part I was renamed the Real Property Limitations Act (RPLA) and continued in its existing form. The new Limitations Act was designed to simplify the application of limitation periods by providing, subject to some exceptions, a basic limitation period of two years based on a principle of discoverability and an ultimate limitation period of 15 years.

Lawyers dealing with leasing real property were unsure of how potential litigious issues arising from leases and limitations would play out in the courts. A lease has a dual legal nature: it is a contract but at the same time it deals with rights to real property. So do disputes regarding leases fall under the contractual limitation periods in the new Limitations Act?

The answer is surprisingly straightforward. The limitation periods set out in the new Limitations Act do not apply to proceedings to which the RPLA applies. Thus, the limitation on several types of actions related to real property are governed strictly by the RPLA, which sets out limitation periods ranging from six to 60 years. The actions governed by the RPLA relating to commercial leases are primarily actions to recover arrears of rent or interest. Therefore if a dispute relates to arrears of rent, a party has six years from the sum becoming due, or six years following written acknowledgment by the party owing the sum, to bring an action.

Generally speaking, actions arising out of commercial leases that are not covered by the RPLA will be governed by the limitation periods in the new Limitations Act. Accordingly, any breach of covenant or breach of a clause in a commercial lease that does not pertain to payments that can be classified as arrears of rent will be subject to the basic two-year limitation period under the new Limitations Act. Some likely examples are situations of improper tenant assignments or sublettings, a landlord improperly withholding consent to assign or sublet, failure to obtain insurance though contractually obliged to do so, and failure to operate despite a continuous operating covenant.

Note that the provisions of the RPLA do not address issues of overpayment of rent. Presumably then, a tenant making a claim for recovery of overpayment of rent is subject to the two-year rule under the Limitations Act. Tenants would be prudent to bring any action, where necessary, to recover overpayment of rent within two years from the time where a reasonable person in the circumstances first ought to have known of the claim in accordance with the discoverability principle.

Whether parties can contract in a commercial lease to change limitation periods also depends on which act applies. Under the initial draft of the new Limitations Act, parties could not contract out of the limitations. The subsequent uproar by the business community led to the enactment of several exceptions to this general principle; now, in business agreements such as commercial leases, the parties can vary, suspend or extend the limitations (the ultimate limitation period may only be varied if the claim has been discovered). However, under the RPLA, there is no explicit prohibition or allowance on varying its statutory limitations, and any right to bring an action is extinguished upon the expiry of the period set out in the RPLA. Thus, it would seem the parties cannot suspend or extend these limitations, but could likely vary them by contract to reduce the applicable limitations period.

Landlords and tenants should remain diligent in the surveillance of the operation of a commercial lease so that enforcement of rights or disputes over breaches can be handled efficiently and to ensure the opportunity to utilize the courts is not lost. When it comes to recovering arrears of a rent payment, a party has six years from the date the payment became due to involve the courts for resolution. Where the issue is overpayment, a party may be restricted to bringing an action within two years. Parties are also limited to two years to seek the assistance of the courts with respect to breach of other terms under a lease. Where the applicable limitation is the two-year period provided in the new Limitations Act, parties may vary, suspend or extend the period in the lease agreement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.