Does “Good Faith” Impose a Duty to Disclose on a Commercial Landlord?

Canadian law imposes two obligations on all parties to a commercial agreement, such as a lease: 

• the duty to act “honestly” in the performance of the contract;[1] and
  
• the duty to exercise contractual discretion in the contract “reasonably”, in a manner consistent with the underlying purposes for which that discretion was granted.[2]

The duty to exercise contractual discretion reasonably means that Courts could very well imply terms to give commercial efficacy and business sense to the contract.

Nowhere is this more likely than in a commercial lease, where the parties’ obligations, as they evolve during the contract, could impose requirements not expressly set out in the agreement.

Two decisions of the Ontario Superior Court illustrate when Courts could impose a positive obligation on landlords to provide disclosure to the tenant, particularly when demanding “additional rent” under the lease.

An Implied Term to “Prove” the Reconciliation

In Hunt’s Transport Ltd. v. Eagle Street Industrial GP Inc.,[3] an applicant tenant who rented warehouse space at a distribution centre brought an application against its commercial landlord, challenging how the landlord calculated the tenant’s proportionate share of the actual common expenses for “Additional Rent”, incurred in the previous year of the tenancy.

The lease did not require the landlord to substantiate its reconciliation with invoices or other documentation. Any overpayment or underpayment of rent would be credited or charged to the tenant in the subsequent month’s rent. 

The tenant disputed the landlord’s reconciliation of the previous year’s additional rent and requested that the landlord provide invoices and other documentation to support its reconciliation. 

While the landlord provided the tenant with certain invoices, the tenant argued that the landlord provided insufficient disclosure.

The Court held that the duty of good faith imposed an implied term in the lease requiring the landlord to produce all documentation necessary to support its reconciliation:

I accept the Tenant’s submission that the duty of good faith imposed on the Landlord by virtue of the case of Bhasin v. Hyrnew…renders it commercially reasonable to imply a term into the Lease requiring the Landlord to provide copies of all documents which support the amounts claimed form the Tenant in the year-end reconciliation of Additional Rent for 2019…[4]  [emphasis added]

Disclosure obligations notwithstanding, the Court did hold, however, that the landlord’s failure to abide by its disclosure obligations did not justify the tenant withholding payment of the adjusted amount claimed. 

The lease provided a mechanism for the tenant to submit any concerns about the reconciliation to arbitration. But the tenant could not withhold payment of the additional rent claimed by the landlord, as this withholding would amount to a breach of the lease. 

The Court did award the tenant relief from forfeiture for 20 days from the date of judgment, to allow the tenant to pay all rental arrears to the landlord.

Hunt’s Transport makes it clear that where a commercial lease fails to require a landlord to substantiate a reconciliation, the duty of good faith will intervene to fill in the gaps in the contract itself.

The reasoning in Hunt’s Transport echoes a previous decision of the Ontario Superior Court, 1877352 Ontario Inc. v. 699147 Ontario Inc.[5]

In that case, the commercial tenant was required to pay base and additional rent. The tenant did not accept the landlord’s claim for additional rent, including expenses for property management.

The Court held that the landlord’s method of calculating additional rent was inconsistent with the lease.

The “Additional Rent” provision under the lease was to be “based on estimates provided by the landlord” and was to be adjusted on an annual basis. The tenant demanded further documents from the landlord to support its claim for additional rent. 

The Court held that the tenant’s request was justified pursuant to the duty of good faith and the principle of commercial reasonableness:

Both parties agree that the tenancy relationship is governed by an obligation to deal in good faith. The duty of the Landlord to honestly and reasonably perform its obligations under this Lease is served by requiring it to deliver all documents that are the basis for the annual adjustment: see Bhasin v. Hyrnew…In my view, it is commercially reasonable to imply a term into the Lease that requires the Landlord to deliver with its annual adjustment for Additional Rent a copy of all the documents, such as tax bills, insurance premiums, property management invoices, which support and explain the amounts claimed from the Tenant in the adjustment. [emphasis added]

An Implied Term of Good Faith Disclosure

187735 Ontario Inc. and Hunt’s Transport illustrate a number of key themes about how Canadian Courts will approach the duty of good faith in the interpretation of a lease:

• The duty of good faith applies to all commercial leases in Canada, regardless of the language of the lease itself;
  
• The duty includes an obligation to perform the contract honestly and reasonably;
  
• Courts will not hesitate to use the duty of good faith to imply necessary or obvious terms in a commercial lease, including the positive obligation for a landlord to provide documentation to substantiate its reconciliations under the lease; and
  
• In doing so, Courts give commercial efficacy to the agreement, ensuring landlords to not evade duties to act reasonably and in a forthright manner, to justify claimed rent and expenses under the lease.
  

Marco P. Falco is an appellate and public law litigator at Torkin Manes LLP. You can contact Marco about your commercial agreement at mfalco@torkin.com. A conflict check must be conducted before your matter is discussed.