Requirements for a Binding Agreement to Lease 


April 2006 - (Lang Michener LLP Real Estate Brief April 2006)

Lang Michener LLP Real Estate Brief April 2006

The following statement from Williams & Rhodes, Canadian Law of Landlord and Tenant (6th ed) has been adopted by the Ontario Courts:

"To be valid an agreement for lease must show (1) the parties, (2) a description of the premises to be demised, (3) the commencement, and (4) the duration of the term, (5) the rent, if any, and (6) all the material terms of the contract not being matters incident to the relation of landlord and tenant including any covenants, exceptions and reservations."

The first five requirements (parties, premises, commencement date, duration of term and rent) are invariable requirements. They are also, for the most part, fairly straight forward.

The sixth requirement is much more subjective. If there are matters material to one party that are mentioned to the other, they must be unconditionally accepted (or otherwise resolved) in order for there to be a concluded agreement. If such material terms have not been accepted or otherwise resolved, the matter will be seen as continuing to be in negotiations and not a concluded contract.

The recent case of Blubarrie Hill Inc. v. 1645110 Ontario Ltd. (2005) 36 R.P.R. (4th) 101 Ont. S.C., provides an example of what can be seen as material points where no agreement had been reached.

The Blubarrie Hill case involved a restaurant premises. The property where the premises was located was sold and the new owner of the property met with the restaurant owner prior to closing to discuss a new lease. The points agreed to included the commencement date, the duration of the term and the rent. Some paperwork was exchanged but the parties did not sign an agreement. The restaurant owner eventually brought an action for a determination whether or not the parties had agreed to a lease.

The restaurant owner's claim that there was an agreement failed, as not all the material terms of the contract had been agreed to. The court held that the material terms upon which there was no agreement included whether or not there was an obligation to pay by postdated cheques, whether or not a personal guarantee was to be provided, what liability insurance coverage was required and the lack of a clear definition of available parking.

Other examples of the sixth requirement for a binding agreement can be seen from previous cases. The Ontario Court of Appeal held in Ossory Canada Inc. v. Wendy's Restaurants of Canada (1997), 36 O.R. (3d) 483, that the provision of a garbage enclosure and pylon signage rights were material to Wendy's (as a fast food service operator) and that such importance had been communicated to the Landlord. Accordingly, there was no concluded contract in that case as agreement was not reached in those items.

In Barque Investments Ltd. v. DKT Computer Learning Centre Inc. (2001) AB QB 768, the court held that the rental rate in the overholding clause, the prohibition on change of use on sublease, the relocation right in favour of the Landlord, the Landlord's right to terminate in lieu of granting consent to an assignment or sublease and a right of early termination in favour of the Landlord were all substantial matters for which no agreement had been reached. Accordingly, again there was no concluded contract.

These cases show the importance of fully documenting any preliminary agreement regarding the lease of premises. The failure to deal with all material terms could result in the court finding that there is in fact no agreement reached.

This article appeared in Real Estate Brief April 2006.