Breaking A Commercial Lease In Ontario

Breaking a commercial lease in Ontario is not a decision to be taken lightly. Unlike residential tenancies, which are heavily regulated by the Residential Tenancies Act, commercial leases are contracts governed by the Commercial Tenancies Act (Ontario) and general contract law. This means that both landlords and tenants are expected to honour the lease terms for the full duration of the agreed term. Ending a commercial lease early can carry serious legal and financial consequences for both parties. Whether you are a tenant hoping to exit a lease or a landlord dealing with a tenant's early departure, it's crucial to understand your rights, remedies, and obligations under Ontario law.

This article covers what a commercial lease agreement entails, common reasons leases get broken, the implications when either a tenant or a landlord breaches the agreement, and the legal consequences of early termination. We'll also outline practical steps to break a commercial lease and explain how a commercial lease lawyer can assist.

Key Takeaways

1. Commercial leases are binding contracts: In Ontario, a commercial lease agreement is legally binding for the term agreed. Breaking it early can trigger significant penalties, including liability for remaining rent, forfeiture of security deposits, and even potential legal action by the other party. Unlike residential leases, there is no automatic right to terminate early with short notice; the terms of the contract and the Commercial Tenancies Act govern the situation.
2. Tenants remain liable (but landlords must mitigate): If a tenant walks away from a lease, they will typically remain responsible for the rent for the rest of the term or until the premises are re-leased. However, landlords have a duty to mitigate their losses by trying to re-rent the space as soon as reasonably possible. In other words, a landlord usually cannot just leave the space empty for the duration and then claim all that lost rent from the former tenant – they must make reasonable efforts to find a new tenant to reduce the damages.
3. Landlords have remedies for tenant breach: When a tenant breaches a commercial lease (for example, by leaving early or not paying rent), the landlord has several remedies. These include terminating the lease and evicting the tenant, suing for unpaid rent and damages, or even seizing the tenant's goods for rent owed through a process called distraint. If the landlord terminates the lease and claims damages for lost future rent, they must give proper notice of that claim and can only recover for the period the premises remain vacant (due to the duty to mitigate). Landlords cannot double dip by terminating and also claiming rent as if the lease were still ongoing for the entire term.
4. Tenants have remedies for landlord breach: If a landlord is the one who breaches the lease (for instance, by failing to uphold their obligations or wrongfully evicting the tenant), the tenant may seek legal remedies as well. Tenants can sue for damages, seek an injunction or specific performance to enforce their rights, or even treat the lease as terminated if the landlord's breach is fundamental. For example, if a landlord's actions substantially deprive the tenant of the benefit of the lease (a fundamental breach), the tenant can terminate the lease and may claim relocation costs or other losses. Tenants are also entitled to "quiet enjoyment" of the premises – if a landlord seriously interferes with this, the tenant can claim damages for breach of quiet enjoyment.
5. Legal advice and negotiation are key: There are often ways to avoid the worst outcomes of a broken lease. A tenant who needs to break a lease should first review the contract for any early termination clause or assignment rights, then consider negotiating with the landlord for a mutual exit. Options like assignment or subletting to a new tenant (with the landlord's consent) can provide a way out with minimal penalty.

Commercial Lease Agreement in Ontario

A commercial lease agreement in Ontario is a contract between a landlord (property owner) and a tenant (usually a business entity or individual operating a business) for the rental of commercial property. This could be an office, retail store, industrial space, or other non-residential premises. Unlike residential tenancies which are governed by the Residential Tenancies Act and overseen by the Landlord and Tenant Board, commercial tenancies are primarily governed by the Commercial Tenancies Act, R.S.O. 1990, c. L.7 and the terms of the lease itself. The Commercial Tenancies Act (CTA) sets out certain rights and remedies for commercial landlords and tenants, but it does not provide the same level of regulation or automatic protections found in residential law.

Key characteristics of Ontario commercial leases:

1. Freedom of Contract: Commercial parties generally have freedom to negotiate terms such as rent amount, length of lease, renewal options, and default remedies. Many commercial leases span multiple years (common terms are 3, 5, or 10 years), giving businesses stability for their operations. The lease document will detail each party's obligations for example, who is responsible for maintenance, repairs, insurance, property taxes, etc., in addition to the basic obligation that the tenant pays rent and the landlord provides the space.
2. Fixed Term and Possible Renewal: Most commercial leases are for a fixed term (e.g. a 5-year lease). There is no automatic right for a tenant to terminate early simply by giving notice (unlike a month-to-month residential tenancy where 60 days' notice can end it). The lease is expected to run until its expiry date. Some leases have renewal clauses or options to extend, which the tenant can exercise, but again these are by agreement of the parties.
3. Notice Periods for Default: The lease will typically contain clauses on what constitutes default (breach of the lease) and any grace or notice periods. For example, a lease might say that if the tenant fails to pay rent, the landlord must give 5 or 10 days' notice to cure the default before taking further action. If the lease does not specify the notice period for non-payment default, then by law the landlord must wait 15 days of missed rent before they can terminate. The Ontario Commercial Tenancies Act explicitly allows a landlord to re-enter and take back the premises if rent is unpaid for over 15 days, provided the lease doesn't set a different notice period. In other words, the Act gives a default rule: 15 days' rent arrears can trigger termination if the contract is silent on it.
4. Fewer Statutory Protections: Commercial tenants in Ontario do not have some of the statutory protections that residential tenants enjoy. For instance, there is no government board that must approve an eviction; a landlord can lawfully change the locks on a commercial tenant for non-payment of rent without a court order, as long as the proper notice period has passed and the lease is lawfully terminated.
5. Personal Guarantees and Deposits: It's common in commercial leases for landlords to require a personal guarantee (if the tenant is a corporation, an individual owner may guarantee the lease obligations) and a hefty security deposit (often equivalent to last month's rent, or more). These provide the landlord additional security.

In summary, a commercial lease in Ontario is a legally binding agreement that is enforceable in court. Both parties should enter it with the expectation that it cannot be easily broken. If unforeseen circumstances arise, breaking the lease typically requires either legal cause or negotiation with the other party to reach an agreement.

Common Reasons Tenants Break Commercial Leases

Life and business are unpredictable, and there are many reasons a tenant might need or want to break a commercial lease early. Some of the most common reasons include:

1. Financial Hardship or Business Failure: Perhaps the most common reason is that the tenant's business is not doing well financially. If revenue has dropped or the business is running at a loss, the tenant may find it impossible to continue paying the rent.

For example, a small retail shop that experiences a severe downturn might conclude that it's better to close down than accumulate debt under a multi-year lease. Similarly, if a business declares bankruptcy, it will likely disclaim the lease as part of the process.

2. Relocation or Business Expansion/Downsizing: The tenant's needs may have changed since signing the lease. They might have found a better location (more foot traffic or closer to clients) or need a larger (or smaller) space. These strategic business changes often lead tenants to attempt to negotiate an early termination or assignment of the lease to a new tenant.

3. Problems with the Premises or Landlord Breach: In some cases, tenants feel forced out because of issues with the property or the landlord. For instance, if the premises become unusable- say the building has serious structural problems, persistent leaks, mold, or utility failures, the tenant might claim the landlord failed to maintain the property as required by the lease. Or if the landlord is breaching the agreement, the tenant may have legal justification to leave. These situations blur the line between "breaking the lease" and terminating it for cause due to the landlord's breach.

4. External Events (Force Majeure or Frustration): Sometimes external events make it impractical or impossible to continue the lease. A prime example was the COVID-19 pandemic, which for some businesses made their leased premises effectively unusable. In rare cases, such events could invoke a force majeure clause in the lease (if one exists) or the doctrine of frustration of contract which if proven means the contract is terminated due to an unforeseen event outside the control of the parties.

5. Personal Circumstances: For very small businesses or individual guarantors, personal reasons (health issues, family emergencies) might compel a lease break. While personal hardship isn't a legal excuse to terminate a commercial lease without repercussions, it is a reason tenants in real life sometimes walk away and then try to negotiate a solution after the fact.

When a Landlord Breaks a Commercial Lease

A landlord breaking a commercial lease usually means the landlord has failed to live up to their contractual obligations or has improperly terminated or evicted the tenant. This can give the tenant certain legal remedies and rights.

Examples of landlord breaches:

1. Failure to Deliver Possession or Proper Premises: One fundamental obligation of the landlord is to give the tenant possession of the leased space as agreed. If a landlord doesn't deliver the premises on the start date (for example, construction delays in a new building), this can be a major breach.

For instance, in the case Spirent Communications of Ottawa Ltd. v. Quake Technologies (Canada) Inc. (2008), the Ontario Superior Court found that a six-week delay in delivering the premises (on a three-year lease) was a fundamental breach by the landlord. The tenant was entitled to treat the lease as terminated and was even awarded $122,000 in damages for relocation costs and losses because the landlord failed to meet its obligation to provide the space on time. This case illustrates that if the landlord's breach strikes at the root of the contract, the tenant can walk away and recover damages.

2. Breach of Quiet Enjoyment: Tenants in Ontario have an implied right to "quiet enjoyment" of the leased premises essentially the right to use the property peacefully without interference by the landlord. This doesn't just refer to noise; it covers any substantial interference.

If a landlord, for example, constantly disrupts the tenant's business, the tenant can claim the landlord breached their quiet enjoyment. A serious interference can even be treated as constructive eviction meaning the landlord's actions forced the tenant out, which is a form of breach. In such cases, a tenant could potentially stop paying rent and leave, arguing the landlord effectively evicted them by making the place uninhabitable. The tenant could then seek damages for losses caused by this breach.

3. Illegal Eviction or Lockout: If a landlord locks out a tenant or terminates the lease without following the proper procedure, that's a breach of the lease (and likely a trespass or conversion of the tenant's property, etc.). For example, if a landlord changed the locks while the tenant was only 7 days behind on rent, despite the lease or Act requiring a longer grace period, the landlord has wrongfully terminated. The tenant in that scenario could go to court to seek an injunction to be reinstated or sue for damages for wrongful eviction. Ontario courts can grant relief from forfeiture in such cases which is an equitable remedy to forgive the tenant's breach and restore the tenancy if the court feels it's just to do so.

4. Failure to Perform Landlord's Duties: Many leases specify things the landlord must do e.g. maintain the common areas, roof and structural repairs, provide heating/air conditioning during business hours, etc. If the landlord seriously fails to do what the lease requires, the tenant may have a claim for damages.

Tenant's Remedies When a Landlord Breaches:

Tenants essentially have two pathways: preserve the lease or terminate the lease, depending on what outcome they desire.

1. If the tenant wants to continue the lease (preserve it): The tenant can sue for specific performance or an injunction to force the . landlord to comply, or for abatement of rent (a reduction in rent to compensate for the landlord's breach), or for damages.

For example, if the landlord isn't fixing a leaky roof, the tenant might get a court order requiring the repairs to be done, and possibly a rent abatement for the period the leaks interfered with business. As mentioned, relief from forfeiture is another remedy if the landlord has terminated the lease wrongfully the court could reinstate the lease, effectively nullifying the landlord's termination, and possibly impose terms (like the tenant paying the arrears) to make things right.

2. If the tenant wants to terminate the lease: The tenant can treat the landlord's breach as a repudiation of the contract. This requires the breach to be fundamental– a high threshold, meaning the breach defeats the essential purpose of the lease. Damages could include things like the extra rent the tenant has to pay at a new location (if higher than the old rent) or costs of moving (as seen in the Spirent v. Quake case). Additionally, tenants may consider the self-help remedy of set-off withholding part of the rent in proportion to the landlord's breach, if the landlord owes them something.

Legal Consequences of Breaking a Lease Early

When a lease is broken early, the party in breach faces several potential legal consequences. These differ somewhat for tenants and landlords, but since tenant breaks are more common, we'll start with those.

Consequences for a Tenant Breaking the Lease:

1. Liability for Remaining Rent: In general, if a tenant abandons a lease with time left on it, the tenant is on the hook for the rent for the balance of the term unless and until the landlord finds a new tenant. The rationale is that the tenant made a binding promise to pay rent for, say, a five-year term; leaving after three years doesn't erase that obligation. The landlord can sue the tenant for breach of contract and claim as damages the rent for the remaining two years of the term.

This duty to mitigate in commercial leases was established by the Supreme Court of Canada in Highway Properties Ltd. v. Kelly, Douglas & Co. [1971] SCR 562 which recognized that a landlord who terminates a lease and claims damages for future rent must act reasonably to re-let the premises and minimize the loss.

2. Loss of Security Deposit or Prepaid Rent: Breaking the lease often means forfeiting any security deposit or last month's rent that was prepaid. Landlords commonly apply the deposit to cover unpaid rent or damage when a tenant breaks a lease.

3. Additional Financial Penalties (Contractual or Statutory): Some commercial leases include an early termination fee or liquidated damages clause. For instance, a lease might stipulate that if the tenant breaks early, they owe an extra two months' rent as a penalty. Courts will enforce such clauses so long as they are a genuine pre-estimate of the landlord's loss and not a hugely disproportionate penalty. Aside from the lease terms, Ontario law does not impose a specific penalty for breaking a commercial lease.

4. Legal Action and Judgments: If a tenant breaches, the landlord can bring a lawsuit to recover damages. This can result in a court judgment against the tenant (and guarantor, if any). Once the landlord obtains a judgment, they can enforce it like any other judgment e.g. by garnishing the tenant's (or guarantor's) bank accounts or other assets.

5. Credit Impact and Business Reputation: another consequence is the impact on the tenant's credit and reputation. If a court judgment is entered for unpaid rent, it can affect the credit rating of the business or individual.

6. Distress (Seizure of Tenant's Property): If a tenant simply stops paying rent but leaves their belongings or inventory on the premises, the landlord has the ancient remedy of distress (also called distraint). This allows the landlord to seize and sell the tenant's goods to recover rent arrears, without a court order, provided it's done lawfully.

Consequences for a Landlord Breaking the Lease:

When a landlord improperly breaks or ends a lease, the consequences mirror the above in reverse, though in practice such situations are less common (since landlords usually want tenants to stay, not leave). If a landlord's breach forces a tenant out or causes loss, the landlord can be liable to pay damages to the tenant.

One specific consequence to highlight: if a landlord terminates a lease improperly, the tenant can ask the court for relief from forfeiture, as mentioned earlier, which can result in the lease being reinstated. Ontario courts have broad discretion to grant this relief on terms that are just.

Here's a clear, point-by-point guide to the Steps to Break a Commercial Lease in Ontario, now formatted as separate numbered steps and including applicable legal provisions:

Steps to Break a Commercial Lease in Ontario

1. Review the Lease Agreement thoroughly

Start by reviewing every row of your signed lease. Search for clauses on early termination or break options, check for assignment or subletting rights, and confirm any required notice periods. Under section 23(1) of the Commercial Tenancies Act (R.S.O. 1990, c. L.7), if the lease restricts assignment or subletting but does not explicitly allow the landlord to refuse, then consent cannot be unreasonably withheld. A valid break clause may permit you to exit early if you follow its exact terms.

2. Determine if you have Legal Grounds to terminate

If the landlord has fundamentally breached their obligations such as failing essential repairs or rendering the premises unsafe, the tenant might have a legal basis to terminate for cause.

3. Negotiate a Mutual Exit with the Landlord

Reach out to the landlord or property manager to discuss your need to exit the lease. Propose a mutual termination or surrender agreement, possibly including a few months' rent or deposit forfeiture, or offering to find a replacement tenant.

4. Explore Assignment or Subletting options

If your lease permits assignment or subletting, find a suitable replacement tenant. Assignment transfers all your obligations to that tenant and ideally releases you from liability; subletting usually leaves you still responsible. Under the Commercial Tenancies Act s. 23, landlord consent cannot be unreasonably withheld unless clearly excluded in lease.

In Rabin v. 2490918 Ontario Inc. (2023 ONCA 49), the court found that a delay beyond 15 days and conditional consent requiring a demolition clause constituted unreasonable withholding of consent. Courts consider whether the refusal is arbitrary, opportunistic or intended to extract advantage- for example, tying consent to new lease benefits.

5. Provide proper Written Notice

Most commercial leases do not carry statutory mid-term termination rights, so any notice requirement will stem from your lease. Even if not mandated, it's prudent to give good-faith notice, to let the landlord mitigate losses.

6. Consult a Commercial Lease Lawyer

At all stages, retain advice from a lawyer experienced in Ontario leasing. They can interpret your lease, assess potential landlord breaches, draft or review exit or assignment agreements, ensure formal notice delivery, and protect you from missteps that could trigger full liability under the lease.

How a Commercial Lease Lawyer Can Help

Commercial lease agreements are complex legal documents, and breaking one involves navigating both the contract and relevant laws. A commercial lease lawyer in Ontario can be an invaluable ally whether you are a tenant or a landlord facing a potential lease termination. Here are several ways a lawyer can help in this context:

1. Case Assessment and Advice: A lawyer will start by hearing the facts of your situation and reviewing the lease. They can quickly identify what your rights and obligations are under the contract and law. If you're aiming for a negotiated exit or resolution, a lawyer can handle communications with the other party. They can also advise you on what is a fair settlement.
2. Ensuring Legal Procedure is followed: If you are a landlord, a lawyer will make sure you follow the correct legal steps to terminate or re-enter. This might mean preparing and serving default notices in the proper form and manner, waiting the correct period (e.g., as required by the lease or the Act), and then effecting a lawful eviction (perhaps by hiring the Sheriff or bailiff, depending on the route). If you are a tenant, a lawyer will ensure that any notice you give or agreement you sign truly releases you from further liability.
3. Documentation and Drafting: Any agreement to modify or terminate a lease should be put in writing. Lawyers can draft surrender agreements, releases, or amendments that clearly lay out each party's rights after the lease ends. This prevents future disputes. If subletting or assignment is pursued, a lawyer can assist in drafting the assignment agreement and obtaining landlord's consent in a legally effective way.
4. Litigation: If it comes down to a legal dispute, A commercial lease lawyer will compile the evidence, formulate legal arguments, and advocate on your behalf in court. They might raise defences like the landlord's failure to mitigate damages if representing a tenant, or press for full compensation if representing a landlord.

FAQ

1. What is the penalty for breaking a commercial rental lease in Ontario?

There's no fixed fine under Ontario law, but if you break a commercial lease early, you may be responsible for paying rent for the rest of the lease term unless the landlord finds a new tenant. For example, if you walk away with 8 months left, you might owe that remaining rent unless it's mitigated by a replacement tenant. You'll likely lose your security deposit, and many leases include additional penalties like paying for landlord expenses (legal fees, advertising, etc.). The landlord must try to re-rent the space, but if you refuse to pay your remaining obligations, they can sue you and get a court judgment. It's usually best to negotiate a deal to minimize your losses.

2. How do I terminate a commercial tenancy in Ontario?

There are three common ways to end a commercial lease: letting it expire naturally, mutually agreeing with the landlord to terminate early (in writing), or ending it due to a serious breach by either party. Tenants often try to assign or sublet the lease to someone else, which typically requires landlord consent. On the other hand, landlords can terminate if the tenant fails to pay rent or breaches the lease but they must follow legal notice requirements and procedures set out in the lease and under Ontario's Commercial Tenancies Act.

3. How do commercial leases work in Ontario?

Commercial leases are legally binding contracts negotiated between landlords and tenants. They cover rent, duration, repairs, responsibilities, and rights upon breach. These leases are not regulated like residential ones, so much depends on the specific wording of the agreement. Most leases are fixed-term, with clear rules about termination and renewal. If disputes arise, they are settled in court not at a tribunal. Landlords can often take direct action, like locking a tenant out after default, but only within the limits of the lease and the law.

4. What steps should I take if my landlord breaches our commercial lease agreement?

Start by keeping a record of the problem and notifying your landlord in writing, giving them a reasonable opportunity to fix the issue. Review your lease to understand your rights- some leases allow rent reduction or repairs at the tenant's expense if the landlord fails to act. If the problem is serious (like illegal lockouts or persistent failure to maintain the property), you might have legal grounds to reduce rent, seek a court order, or even terminate the lease. If the landlord wrongly ends the lease, you may apply for relief from forfeiture in court. It's best to keep paying rent during disputes unless advised otherwise by a lawyer, who can guide you through your options and remedies.

5. What are my rights and options if accused of breaching a commercial lease agreement as a tenant?

If you're accused of breach, you have the right to be notified and given a chance to fix the problem. This includes paying overdue rent or correcting an issue like unauthorized use. If you disagree with the allegation, respond clearly and calmly- disputes can sometimes be resolved through communication. If the lease is terminated, you can apply for relief from forfeiture and may raise legal defenses if the landlord acted improperly. It's also possible to negotiate payment plans or lease amendments. If you are evicted, you're still entitled to remove your trade fixtures and business property. Legal advice is essential to protect your rights and manage the situation effectively.

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.