Not-Quite-Absolute Obligations: 
Reasonable Limits on Lease Covenants to Repair & Restore

Both commercial landlords and their tenants should take heed: under Canadian common law, even the most water-tight lease covenants to keep in repair and restore the premises upon the expiration or other termination of a lease may not be stringently enforced by the courts.

Usually, a court will require a commercial tenant to fulfill its side of the bargain that it freely entered into under the lease agreement. Where there are extraordinary circumstances, or the tenant can otherwise present a compelling case that the degree of repair and restoration apparently required by the plain terms of the lease is beyond the reasonable expectations of the contracting parties, however, the result may differ. Caselaw supports an argument that a court ought to infer certain limits into a commercial tenant's covenants to repair and restore leased premises to give effect to such reasonable expectations. These authorities provide certain levers the outgoing tenant can seek to pull to reduce its liability.

"Less than Literal" Interpretation

The common law jurisprudence suggests that the degree of repair and restoration reasonably required of a commercial tenant should make "objective business sense," considering the nature and length of the lease, as well as correspond with the use of the premises considered by the contracting parties.¹ Even where the wording of a covenant to carry out complete restoration is unambiguous, judicial authorities from across Canada suggest that it is inappropriate to interpret the lease in a vacuum without regard for reasonable expectations flowing from the clear mutual intentions surrounding the lease. A "less than literal" interpretation attentive to "commercial reality and reasonableness" may permit a tenant to leave the premises in a state that remains substantially as functional to the landlord (or a new tenant), rather than restored to original condition. The challenge for the tenant is to put together a compelling case that leaving the premises in a less than perfectly "renewed" state would not render the site substantially less useful, with regard to the usual or ordinary purposes and uses of the particular kind of commercial property in question.

Backward-Looking and Contextual Standards of "Good" or "Substantial" Condition

To assess whether the typical standards of restoration are met, a court will look to the utility of the premises at the time the lease began as the relevant point of comparison; however large or absolute the wording of the covenant to restore may be, the focus is on the initial state of the premises. The court ought to consider factors such as age and degree of exposure to natural forces and intensive use. The common law does not contemplate that a commercial structure occupied for a prolonged period and subject to hard usage in the normal course of a tenant's business will be repaired to its original condition. Rather, courts have identified a guiding principle that a tenant is not entitled to leave leased premises in bad repair because they are old, but it may leave the site in "good" condition in relation to its particular nature, as long as the premises retain essential functionality. Commercial tenants are entitled to resist restoration obligations that exceed the contextually reasonable degree of repair required to ensure the continuing basic utility of the premises.

No Windfalls (Repair, not Renewal)

Caselaw indicates it is inappropriate for a commercial landlord to demand repairs that would constitute a "windfall." Courts have recognized that the very concept of repair work relates to fixing disrepair of the original and returning the premises to their prior condition, not replacement or re-establishing newness. In respect of a tenant's covenants to repair and restore, courts will draw a line between what can fairly be described as "repairs" and what amounts to replacement. A court is unlikely to enforce a demand for repair work that involves returning to the landlord something different from what it originally provided and is aimed not at restoring the premises to their essential functional state but at ensuring they remain serviceable long into the future. The Ontario Court of Appeal has affirmed that such commercially inappropriate "windfalls" may include both complete rehabilitation of the premises and repair work that produces something nearly as good as what the tenant received, such that what is returned to the landlord does not fairly reflect the usage and passage of time it accepted under the lease. Simply put, a tenant may have a strong case against liability for repair work that it can convincingly portray as not merely sustaining but serving to renew and extend the utility of the premises into the future, regardless of the exact wording of its covenant(s).

Exceptions drawn for "Reasonable Wear and Tear"

Commercial leases also commonly include an exception for "reasonable wear and tear" (e.g., damage caused by ordinary activities and natural causes) in the tenant's covenant to keep the premises in good or substantial repair. Interpreting this exception is a heavily fact-dependent exercise responsive to the ordinary hazards of a tenant's business activity, and a commercial tenant may leave long-occupied premises in a significantly deteriorated state provided that such deterioration occurred despite prudent care by the tenant.² For instance, the Ontario Court of Appeal has considered that buildings intended for heavy commercial usage are "certain to deteriorate" in the ordinary course of a tenancy in a "measure proportionate to the type of industry therein operated." When it is apparent from the circumstances that both parties to a commercial lease directed their minds to the possibility or likelihood of damage to the premises associated with the intended use, the responsibility for repairs to be borne by the tenant may be limited to deterioration that falls outside the intended purpose and prudent care.

Furthermore, even where a specific covenant to restore is not qualified by a "reasonable wear and tear" exception, the tenant's restoration obligation may be limited by the presence of this exception in relation to the tenant's covenant to repair. Following the example of the Ontario Court of Appeal, courts may interpret this exception as implicit acceptance by the landlord that "something less" than the original condition of the premises may be surrendered upon the end of the lease and may more easily be convinced to look beyond the plain wording of the tenant's covenant to restore.

No Absurd Outcomes

The Supreme Court has affirmed that a guiding principle for interpreting commercial agreements is to give the terms chosen their plain and ordinary meaning—unless the result would be counterintuitive, unrealistic or otherwise not contemplated in the relevant commercial environment in which the agreement was formed. The standard set out is high, and may require the hypothetical outcome to be not merely unreasonable but bordering on absurd. That said, this general rule provides a commercial tenant with an additional basis to resist onerous demands to repair or restore the premises at the end of the lease, as being so beyond what is reasonable in the circumstances that it cannot fairly be said to have been contemplated by the contracting parties.

Key Takeaways

Even when carefully drafted in the most absolute of terms, a tenant's covenants to repair and restore the premises at the end of a commercial lease are not necessarily water-tight. For opposing reasons, both landlords and their tenants should know that Canadian common law offers support for reasonable limits to be inferred into these covenants when a court deems doing so is appropriate.

This is not to suggest that careful drafting of the lease does not remain highly important. The more strongly and specifically covenants to repair and restore are drafted, the less room remains for a tenant to plead that mutual intentions or reasonable expectations between the contracting parties justify or require a court to enforce an outcome different from what the words plainly demand. Landlords should continue to think hard about whether they wish their premises to be returned in a particular condition at the end of a lease agreement before it is formed, and strive to stringently frame the tenant's covenant to restore in relation to this condition and regardless of difficulty or expense.

To discuss how Bennett Jones can help your organization negotiate or navigate lease covenants, and to receive a version of this blog with comprehensive case citations and illustrative contrasts, please contact one of the authors or another member of the firm's Commercial Real Estate Group.