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Commercial Leases: Overview of Lessor/Lessee Rights and Obligations
Your commercial lease expires next month and you’re wondering if it will be automatically renewed? Are you entitled to remain on the premises? Under what conditions can the lessor terminate your lease and force you to vacate the commercial space? Is it legal to have the lease terminated immediately if you are in default of one month’s rent? What can be included in a commercial lease agreement?
The rights and obligations of the lessee and lessor are established in articles 1851 to 1891 of the Civil Code of Québec (hereinafter: C.C.Q.). It should be noted that most of these articles are not matters of public policy in the context of a commercial lease. It is therefore possible for the lessee and the lessor to derogate from these articles and adjust their contractual relationship as they wish. In other words, with respect to commercial leases, the parties may agree on rules that differ from those of the C.C.Q. and the contract agreed upon becomes the law of the parties. It is only when the lease fails to provide for your rights and obligations that the provisions of the C.C.Q. will apply.
It is therefore up to you and the lessor to choose which articles of the C.C.Q. you want to apply and which ones you want to set aside. You must take the time to properly negotiate the clauses of your commercial lease to ensure that they suit your needs and are in your best interests.
This article will review some of the rights and obligations of the lessee and lessor as provided for in the C.C.Q.
Various Rights and Obligations of the Lessee as Provided for in the C.C.Q.
One of the principal obligations of the lessee, as set out in article 1855 of the C.C.Q., is to pay rent according to the terms agreed upon in the contract, throughout the term of the lease. In commercial leases, it is common to include a clause indicating that the lessee must pay, in addition to the fixed monthly rent (base rent), all or a percentage of the expenses of the leased building, such as insurance or property and school taxes. It is therefore very important to read your commercial lease carefully to verify what you will be required to pay as a lessee.
The lessee must also use the leased property with prudence and diligence. For example, this requirement includes the obligation to repair any loss to the leased premises, as provided for in article 1862 of the C.C.Q. Article 1862, paragraph 1 of the C.C.Q. is drafted in favour of the lessor, because, as soon as it is proven that the leased premises have sustained loss, it is presumed to be due to the fault of the lessee. To avoid being held liable for the loss to the premises, the lessee will have to show that the loss sustained “is not due to his fault or that of persons he allows to use or to have access to the property.”[1] Article 1862 paragraph 2 of the C.C.Q. provides an exception to the lessee’s liability in the event of loss of the leased premises due to fire. In fact, the lessee will only be held liable for loss suffered if it is proven that the fire “was due to his fault or that of persons he allowed to have access to the immovable.”[2] It should be noted that article 1862 of the C.C.Q. is a matter of public policy, so that it cannot be derogated from in a commercial lease contract to provide otherwise.[3]
Article 1890 paragraph 1 of the C.C.Q. also requires the lessee to return the leased premises at the end of the lease in the condition in which it was received. However, the lessee is not liable for any changes resulting from aging or fair wear and tear of the property or superior force[MU1] . Article 1891, paragraph 1 of the C.C.Q. provides that the lessee is bound, at the end of the lease, to remove any constructions, works or plantations he has made. It should be emphasized that the parties to a commercial lease may decide that these obligations will not apply to their contractual relationship, since these articles are not matters of public policy.
Various Rights and Obligations of the Lessor as Provided for in the C.C.Q.
The lessor’s primary obligation to the lessee is to provide the lessee with peaceable enjoyment of the leased business premises throughout the term of the lease. This obligation, set out in article 1854, paragraph 1 of the C.C.Q., has been deemed essential by jurisprudence.[4] The only way for a lessor to avoid it is to prove that they were unable to ensure the peaceful enjoyment of the premises because of superior force[MU2] or the fault of a third party for which they are not responsible.[5] For example, it was decided that the ice storm that hit Quebec in January 1998 was a case of superior force[MU3]. As a result, lessors were released from their obligation to provide peaceful enjoyment of the premises and were not held liable for damages caused by the storm. Under the circumstances, those lessees affected were still entitled to a rent reduction.[6]
When it comes to commercial leases, the obligation to provide peaceful enjoyment of the premises is not a matter of public policy. However, the lessor’s freedom to restrict this obligation is regulated. The courts have ruled that “a clause that restricts the lessor’s obligations cannot have the effect of depriving the lessee of all enjoyment, given the essential nature of the related obligation.”[7] Thus, it is important to pay particular attention to exclusion of liability clauses drafted in favour of the lessor, to ensure that they are legal.
In addition to being bound to guarantee the peaceful enjoyment of the premises, the lessor is bound to deliver the leased property in a good state of repair in all respects, in accordance with article 1854 paragraph 1 of the C.C.Q. However, since this provision is not a matter of public policy in the context of a commercial lease, a clause stating that the lessee accepts the premises “as is” is legal, unless this has the effect of depriving the lessee of the enjoyment of the premises.[8]
Article 1854 paragraph 2 of the C.C.Q. provides that the lessor is “bound to warrant the lessee that the property may be used for the purpose for which it was leased and to maintain the property for that purpose throughout the term of the lease.”[9] In the case where the commercial premises are leased for the operation of a restaurant, for example, the lessor may be liable if the lessee cannot obtain the necessary operating permits because the premises do not comply with municipal standards.[10] However, in the case of commercial leases, this provision is not a matter of public policy and the lessor has the right to exclude its liability in this regard. The parties may even agree that it is the lessee’s responsibility to ensure that the premises meet municipal standards in order to operate a restaurant.
Standard Clauses Found in Commercial Leases
In the case of a commercial lease, unlike the lessee of a residential lease, the commercial lessee does not have an automatic right to remain in the premises at the end of the lease. This means that without a renewal clause included in your lease, your contract will end at the expiration of the agreed term. It may be a good idea to negotiate renewal options with your lessor to ensure that you keep your premises and are not forced to move your business.
Lease Termination Clause
For commercial leases, the parties may stipulate in their contract the situations in which their lease will be terminated by including a lease termination clause.
Often, this type of clause stipulates that if the lessee defaults, the lessor can terminate the lease and force the lessee to leave the premises without having to go to court to obtain permission. For example, it may be stipulated that the lessor may terminate the lease and force the lessee to vacate the premises if the lessee fails to pay one month’s rent. The Quebec courts have recognized that this type of “as of right” termination clause is legally valid. However, a lessor who avails itself of such a clause must act reasonably. The courts have recognized that a lessor who acts in bad faith or in an abusive manner towards the lessee may be liable for damages.
The lessor and the lessee may stipulate grounds for terminating a lease in their favour. It is important for the lessee to negotiate this type of clause with their lessor and to anticipate the situations in which they too can terminate the lease. For example, it would be advantageous for the lessee to be able to terminate the lease if the lessor fails to perform any work identified as being its responsibility in the commercial lease.
It should be noted that a lease termination clause must be clearly and unequivocally drafted to be valid. It is therefore recommended that an attorney be consulted when drafting such a clause.
Steps to Take Before Signing a Commercial Lease
Be vigilant and pay particular attention to the clauses stipulated in the lease before signing it. In the case of a commercial lease, the lessee is not as well protected by the law as in the case of a residential lease, which has several public policy provisions that benefit the lessee.
Drafting a commercial lease is not a simple task that should be taken lightly. It is therefore prudent to consult a lawyer, who will be able to guide you through all the essential clauses of your commercial lease.
[1] Art. 1862 para. 1 C.C.Q.
[2]Art. 1862 para. 2 C.C.Q.
[3]Louise LANGEVIN and Nathalie VÉZINA, Le louage, in Collection de droit 2019-20, École du Barreau du Québec, vol. 6, Obligations et contrats, Cowansville, Éditions Yvon Blais, 2019, p. 282.
[4] Placements de Lavoie Inc. c. 9154-1490 Québec Inc., 2012 QCCQ 669 (CanLII)
[5]Ibid.
[6] L. LANGEVIN and N. VÉZINA, prec., note 3, p.275.
[7]Société de gestion Complan (1980) Inc. c.Bell Distribution Inc., 2011 QCCA 320
[8]L. LANGEVIN and N. VÉZINA, prec., note 3, p.274.
[9]Art. 1854 para. 2 C.C.Q.
[10]L. LANGEVIN and N. VÉZINA, prec., note 3, p. 277 and 278.