MATERIAL COVENANTS and DEFAULT
Contact Neufeld Legal for commercial leasing legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
Commercial real estate leases are built upon a foundation of mutual promises, commonly referred to as covenants, with "material covenants" being those promises that are deemed so vital to the agreement that its breach fundamentally alters the essence of the lease, giving the non-defaulting party, typically the landlord, the right to terminate the agreement and claim substantial damages. While payment of rent (including base rent and additional costs like property taxes and maintenance, collectively known as additional rent) is the quintessential material, or monetary, covenant, non-monetary obligations can also be material. These often include the tenant's promise to continuously operate its business (an "operating covenant," common in retail), prohibitions against unauthorized assignment or subleasing, maintaining necessary insurance, and restrictions on making alterations to the premises without the landlord's consent. The lease document itself will meticulously define which covenants are deemed "material," often by stipulating that any breach of certain clauses constitutes an event of default.
An event of default occurs when a tenant fails to perform any of its obligations under the lease. Defaults are commonly categorized as either monetary (non-payment of rent or other charges) or non-monetary (breach of any other covenant, like failing to repair the premises or operating outside the permitted use). The distinction is crucial because the remedies and notice periods often differ. A landlord's primary right upon default is the right of re-entry and forfeiture, allowing the landlord to terminate the lease and take back possession of the premises. While certain non-monetary breaches usually require the landlord to give the tenant formal notice and a reasonable cure period, the landlord's ability to act quickly on monetary defaults, such as the right to seize and sell the tenant's goods (distress), is often much more immediate, underscoring the importance of timely rent payment.
Following a material default, Canadian jurisprudence, notably the Highway Properties case, grants the landlord four mutually exclusive options. The landlord may (1) elect to keep the lease alive and sue for rent as it comes due; (2) terminate the lease and sue for accrued arrears; (3) re-enter the premises, re-let on the tenant's account, and sue the original tenant for the difference; or (4) terminate the lease and sue for damages for the loss of the benefit of the bargain for the unexpired term. Choosing this fourth option is key, as it treats the lease as a contract repudiated by the tenant, triggering a duty to mitigate losses on the part of the landlord. This means the landlord must make reasonable efforts to find a replacement tenant. Tenants facing a default action may seek relief from forfeiture from the court, which is an equitable remedy often granted if the breach was minor or inadvertent, and the tenant is able and willing to promptly cure the default [more on default remedies].
For knowledgeable and experienced legal representation in negotiating, reviewing and drafting lease agreements, and protecting your business’ legal rights thereunder, contact lease lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.
