Have a Little Faith in Me: Good Faith in Leasing Lately

Have a Little Faith in Me: Good Faith in Leasing Lately

This bulletin explores the duty of good faith in commercial leasing, which grows out of the Supreme Court of Canada’s recent decisions in C.M. Callow Inc. v Zollinger[1] (“Callow”) and Wastech Services Ltd. v Greater Vancouver Sewerage and Drainage District[2] (“Wastech”) and earlier Bhasin v Hrynew[3] (“Bhasin”). Included in this bulletin is a helpful summary of recent leasing cases and their takeaways regarding the duty of good faith for landlords and tenants.

Introduction

The duty of good faith was recognized by the Court in Bhasin as a common law doctrine requiring “honest, candid, forthright, or reasonable contractual performance” between two contractual counterparties.[4] That doctrine has been refined by the Court in Bhasin to clarify that “parties generally must perform their contractual duties honestly and reasonably” and must not lie or knowingly mislead the other party.[5] The Court also confirmed that this duty exists in every contract, without needing to be explicitly mentioned, and cannot be contracted out of.[6]

Callow expanded the duty of good faith to include a duty to exercise discretionary contractual powers in good faith.[7] In that case, the Court found that a group of condominium corporations breached their duty of good faith by delaying to inform a maintenance service provider that the condominium corporations would be terminating their contract with the service provider, despite having formed the intention to do so approximately nine months earlier. During this period, the condominium corporations received free supplemental work from the maintenance service provider by deceiving them into believing the contract would be renewed.[8]

In Wastech, the Supreme Court further outlined the parameters of the duty of good faith in finding that an unreasonable exercise of discretionary contractual powers will breach the duty of good faith where the exercise of such discretion is arbitrary or capricious or is unconnected to the purpose for which the discretion was granted.[9] A finding that the duty has been breached will not be determined by what a Court thinks is “fair,” but on “what is reasonable according to the parties’ own bargain.”[10] In Wastech, the Court held that when the parties to the contract in question agreed on the inclusion of a discretionary power allowing one party to reallocate waste from one facility to another, the party having such discretionary power was entitled to exercise it regardless of whether it financially disadvantaged the other party, because that power was connected to the purpose of the discretion, being in this case the maximizing of efficiency, the preservation of site capacity and cost-effectiveness.[11]

Case Law Update

Following Bhasin, Callow, and Wastech, various lower common-law courts across Canada have been applying the duty of good faith to different landlord-tenant situations in commercial leases. The following table summarizes key takeaways in those cases regarding the duty of good faith, the brief facts of the case and the Court’s ultimate ruling.

Conclusion

These cases illustrate that landlords and tenants in commercial leases are best served by honestly communicating with the other party and properly following the provisions of the Lease. One should resist the urge to act or react out of spite. Even in situations where more profitable leasing opportunities may arise, one should avoid misleading the other party.

For a more detailed review of questions and concerns pertaining to the duty of good faith in commercial leasing, please reach out to one of the members of McMillan’s Commercial Leasing team.

[1] 2020 SCC 45 [Callow].
[2] 2021 SCC 7 [Wastech].
[3] 2014 SCC 71 [Bhasin].
[4] Ibid at para 66.
[5] Ibid at para 73.
[6] Ibid at para 74.
[7] Callow at para 33.
[8] Ibid at para 5.
[9] Wastech at para 4.
[10] Callow at para 71.
[11] Callow at para 100.

by Mervyn Allen, Ximena Pinilla, Jacob Stucken, Josh Sheppard (Summer Student)

A Cautionary Note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2023