The Cost Of Leaving: Restoring Premises At The End Of A Commercial Lease

The end of a commercial lease should be straightforward. The term expires, the tenant hands back the keys, removes its equipment and other personal property, and the parties go their separate ways. In practice, it rarely works that cleanly. Disputes about the condition of the premises at the end of the lease are often hotly contested and turn on the language of the lease and the available evidence (or lack thereof).

This bulletin draws on recent Canadian case law to map the legal landscape on both sides of these disputes and flags the risks that most often catch parties off guard, before and after the keys change hands.

Key Takeaways

• Restoration obligations are contractual. Their scope depends on the specific lease language and may be broader than either party appreciated at signing. Where the lease is silent, there is generally no restoration obligation.
• A landlord’s restoration claim requires sufficient evidence. Without a documented baseline condition at lease commencement, recovery for end-of-term disrepair is difficult to establish. Memories fade and employees depart.
• Overholding is an underappreciated risk for tenants, and a legitimate “hammer” for landlords. A tenant that remains in possession beyond the expiry date, including while completing restoration work, may face indefinite rent exposure at elevated rates.¹

What Leases Typically Require

Most commercial leases impose two distinct categories of obligation at the end of the term:

1. A baseline condition obligation: that the tenant “keep” the premises in a particular state of repair, such as “good order and repair” or “first-class condition”. A court adjudicating a dispute will endeavour to interpret the baseline condition obligation contextually with appropriate regard to the tenant’s permitted use of the premises and will give meaning to customary carveouts written into the lease, such as “ordinary wear and tear excepted”.
2. A reinstatement obligation: that the tenant removes its trade fixtures, and – in some leases – certain leasehold improvements, and restore the premises to their original configuration and in the same condition as received at lease commencement. Enforcement tends to depend on the specific lease language and the landlord’s approvals (or lack thereof) for the tenant’s work during the term.

Both categories of obligation can give rise to disputes with uncertain outcomes. The lease is the starting point, but the balance of available evidence often determines which party will prevail in court.

Policing Tenant Restoration: What Landlords Can and Cannot Recover

Can the Landlord prove that that the Tenant caused the damage and is responsible for it?

Beyond establishing what the lease requires, a landlord pursuing a restoration claim must generally demonstrate that any particular instance of disrepair resulted from the tenant’s breach and not from pre-existing conditions, ordinary wear and tear, or the landlord’s own post-term plans for the space. That evidentiary burden is more demanding in practice than it appears on paper and can often determine the outcome. Consider, for example, a landlord who acquires a shopping mall or industrial property with multiple tenant bays midway through various lease terms, or a property that evolves over time from heavy industrial use to mixed-use with live-work units. In each of these situations, the evidentiary challenge is not simply about proving the tenant’s disrepair insomuch as it is about disentangling such disrepair from everything else that has happened to the premises before, during, and after the tenancy.

Minor versus major cost categories

Cleaning and housekeeping claims tend to fare reasonably well, but major repairs and capital replacements are more challenging to establish. In 4391 King St. Inc. v Alger, 2023 ONSC 4463, for example, the tenant left the premises in poor shape, failing to leave it “clean and tidy” as the lease required, and the Court allowed the landlord to recover cleaning costs. However, in the same case, the landlord was unsuccessful in recovering the cost of replacing an HVAC unit because it could not prove that the tenant had failed to properly maintain the unit during the term. This case reinforces that a landlord pursuing claims for major repairs or capital replacements ought to be prepared to bridge material evidentiary gaps connecting the repair cost to a tenant breach rather than ordinary deterioration or conditions that predated the tenancy at issue.

Landlord must prove tenant’s failure to restore to specified condition standard

Where a lease requires the tenant to keep the premises in a specified condition and return them in the same state, the starting condition of the premises is key, especially when the lease does not provide for a procedure to document that condition. A clause stipulating a joint inspection on lease commencement may be worthwhile, if the parties actually complete the inspection within the required time frame, produce mutually agreed upon documentation that clearly shows the condition, and keep those records accessible for future purposes.

Where a lease requires the tenant to maintain and return the premises in a specified condition, the starting condition may still be decisive where there is no joint inspection or other clarity in the lease. For example, in 1049104 Alberta Ltd v Singh Jewelers Ltd, 2026 ABCA 24, in relation to a lease that required the tenant to keep the premises in “first class condition” without an adequate definition, the Court, instead, found the original condition at lease commencement to be the more appropriate baseline. Here, however, the court found that there was also insufficient evidence of the premises’ condition at lease commencement and therefore refused to award the landlord any damages. In particular, the Court found that the landlord failed to supply sufficient evidence regarding whether modifications to the premises were made as part of the tenant’s initial buildout as approved by the landlord, during the term without requisite approval, or after the tenant was kicked out. This case reinforces that the burden of proof generally rests on the landlord and that an incomplete record will favour the tenant.

Landlord rarely can claim for an improved condition

Restoration provisions are most commonly designed to return the premises to the contractually required condition, rather than to improve them for the landlord’s subsequent purposes. Canadian courts have rejected attempts by landlords to use end-of-lease removal and restoration provisions to compel tenants to deliver the premises in better shape than the lease actually requires. For example, in C. & M. Holdings Ltd. v Tiffany Gate Ltd., 2004 CarswellOnt 9330 (Sup Ct J), varied by 2006 CarswellOnt 7411 (CA), a food prep tenant was found not responsible for repairing concrete flooring as those repairs would have put the floor in a better condition than at lease commencement (being the required state for the flooring).

The Overholding Risk: Restoration Delays May Be Worse Than the Restoration Itself

One of the most underappreciated risks for tenants approaching lease expiry is the consequence of remaining in possession, even briefly, beyond the expiry date. A tenant that stays in the premises to complete restoration work, remove improvements, or simply finish packing up, is legally an overholding tenant (assuming the landlord continues to accept rent), and the financial exposure can be severe and disproportionate to the reason for the delay. Even if a landlord continues to hold a security deposit that it could apply to do the work itself, restoration costs may quickly surpass that amount. and the landlord may not be able or willing to step in and do the work, and may instead insist on collection of overholding rent until the restoration is completed by the tenant.

Some commercial leases are more explicit, expressly deeming the tenant to be an overholding monthly tenant for as long as it may reasonably take to complete required restoration or remediate contamination caused by the tenant – even after the tenant has physically vacated the premises. Under such provisions, overholding rent continues until restoration and remediation is complete, regardless of whether the tenant remains in occupation. The combination of a high overholding rate, an unclear or disputed restoration scope, and systemic court delays to litigate the matter, can produce significant and ongoing financial exposure that continues well past the date that the tenant returns the keys.

For example, in 1400 Castlefield Road Inc. v Threadcount Inc. et al., 2015 ONSC 1751, a tenant that left garbage behind and that had failed to repair walls, floors and a toilet, was held to be overholding until those matters were adequately addressed. In another case, National Courier Services Ltd. v RHK Hydraulic Cylinder Services Inc., 2005 ABQB 856, overholding was found where the tenant’s operations had contaminated the soil, and overholding rent continued until the tenant completed remediation with sign-off from the provincial environmental ministry. Notably, the required sign-off was not obtained until nine months after the tenant vacated the premises and almost one year after the term ended.

Practical Lessons

The parties that fare best are the ones that plan ahead and take legal advice before acting rather than after. Advanced preparation, documenting the state of the premises thoroughly, and taking legal advice before the lease expires remains the most effective approach for both landlords and tenants to appropriately manage risk. Restoration disputes concentrate on lease interpretation and evidence related to the required standard of repair and whether the tenant met that standard, so the better prepared party has a significant advantage.

For landlords, the starting point is often with securing adequate documentation. A landlord pursuing a restoration claim will generally need to demonstrate a baseline condition, a departure from it, and a causal connection to a tenant breach rather than ordinary wear and tear or pre-existing conditions. That record needs to be established at lease commencement and be maintained throughout the term. Where a tenant remains in possession after expiry, a prompt written demand for possession, carefully dated, establishes a stable foundation for a subsequent overholding rent claim, particularly for tenancies in British Columbia, Manitoba, New Brunswick, and Prince Edward Island which are subject to statutory overhold notice requirements by default.

For tenants, it is important to regard restoration obligations as a budget and planning item rather than a negotiation to be had at the end of the lease. The best time to address this issue is when negotiating the lease, with the second-best time being now. The applicable obligations are contractual, and their scope may be broader and more consequential than anticipated at signing. A tenant approaching lease expiry should review its obligations carefully, engage the landlord early where there is genuine uncertainty or major repairs required, and above all ensure that restoration and remediation work is completed within the term. Where additional time is genuinely needed, the time to address the issue is before expiry, not after.

Navigating end-of-lease restoration disputes requires an understanding of both the lease and the litigation that follows when things go wrong. The lawyers in McMillan’s Commercial Leasing and Commercial Litigation groups work together to advise clients on all aspects of their lease obligations. Please reach out for strategic advice tailored to your situation.

Footnote

1. Read our bulletin here for a deeper discussion on overholding and the other ways that a tenant may legally remain in the premises after the term expires.

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.

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