In 1100 Walkers Line Inc. v Elliott Sports Medicine Clinic Inc., 2021 ONSC 5067, Justice E.M. Morgan considered a commercial lease containing a renewal provision, which stated that if the parties could not agree on the applicable market rent to be paid during the renewal term, that issue “shall be determined by arbitration”. When the Tenant terminated the lease, but did not give the required 6 months’ written notice and thereafter vacated the premises, the Landlord sued, asserting that the automatic renewal provision was triggered and rent during the renewal term was owing. The Tenant claimed that the renewal provision was ambiguous and unenforceable, in part, because the applicable market rent during the renewal term had never been agreed upon by the parties, nor determined by arbitration since neither party had commenced an arbitration. Justice Morgan found that the renewal provision was unambiguous and enforceable and that the mandatory arbitration clause did not require the Landlord to initiate an arbitration in which the Tenant would obviously not participate. Further, because only the Landlord adduced any evidence of the applicable market rent, the arbitrator would have fixed the rent at that rate. Therefore, Justice Morgan granted judgment in favour of the Landlord.
This issue came before Justice Morgan by way of a motion by the Plaintiff Landlord for judgment under Rule 21.01 of the Ontario Rules of Civil Procedure (determination of a question of law before trial that may dispose of all or part of an action) against the Defendant, its former tenant. The issue was whether the automatic renewal provision in the lease was enforceable and, if so, what was the applicable market rent rate for the renewal term.
The lease agreement was dated October 2, 2015 (with two amending agreements dated October 5, 2015). The term of the lease was for 5 years, ending on October 4, 2020. The lease contained a renewal provision that granted the Tenant the option of renewing the lease for an additional 5-year term beyond the initial term. In that case, the lease would continue for the duration of the renewal term under the same terms and conditions as the initial term, with the exception that rent for the renewal term would be adjusted to reflect current market rates. If the parties could not agree on current market rent, it “shall be determined by arbitration as set out by the Arbitration Act of Ontario”. Further, the Tenant was to provide a minimum of 6 months’ written notice, prior to the expiry of the then-current term, of its intent to terminate the lease. If the Tenant failed to provide such notice, the lease was deemed to automatically renew for a 5-year term.
Justice Morgan found that both parties were fully aware of these provisions, were represented by counsel when they negotiated the lease, and were sophisticated commercial actors who understood what they were signing.
As it transpired, prior to the expiry of the lease, the Landlord proposed a market rent rate for the renewal term. The Tenant did not propose any alternative rate of rent, but instead, announced its intention to terminate the lease in June 2020. However, in doing so, the Tenant failed to give the required 6 months’ written notice, which would have been due in April 2020. The Landlord advised the Tenant that it had exercised the renewal option under the lease, which was to now terminate on October 4, 2025, and that current market rates would apply to the renewal term, as provided for in the renewal provision of the lease. The Tenant abandoned the premises in September 2020 and failed to make any rental payments thereafter. Despite the Landlord’s attempts to re-lease the premises, they remained vacant at the time of the motion.
Neither party commenced an arbitration. Instead, the Landlord brought an action and this Rule 21.01 motion for a determination of a legal question before trial. The Landlord asserted that the lease renewed automatically in October 2020, while the Tenant claimed that the tenancy ended without renewal on October 2020. The Tenant asserted that there was no agreement as to market rent and no arbitration had been commenced to determine the applicable market rent rate, as a result of which the renewal provision in the lease was vague and unenforceable – this was nothing more than an “agreement to agree”. As Justice Morgan put it:
 Counsel for the Defendant [Tenant] concedes that an arbitration clause with respect to rent can create the necessary certainty, but states that this would only be the case if the Plaintiff [Landlord] had triggered an arbitration. Citing the British Columbia Supreme Court’s decision in Hirex Holdings Ltd. v. Chrysler Canada Ltd., 1991 CanLII 1111, he states at paragraph 25 of his factum:
In the case at bar, because no arbitrator was ever appointed, the fair market value of the rental for the renewal term has never been agreed upon or otherwise determined. The fact is that a renewal at ‘fair market value’, without an independent decision maker breaking the deadlock is unenforceable.
 Here, the [Tenant] points out, the [Landlord] has simply provided its version of a market rate and never engaged in arbitration. It is the [Tenant’s] position that this failure on the [Landlord’s] part prevented the otherwise enforceable Renewal Provision from being firm and enforceable.
 With respect, this argument ignores the fact that well before the actual renewal the [Tenant] had already rejected renewal outright (although not in a timely fashion). For the [Landlord] to have “acted” on the arbitration clause in the face of the [Tenant’s] June 2020 notice [of termination] would have been to engage in a unilateral and wasteful exercise.
 A mandatory arbitration clause, which kicks in if there is non-agreement on rent, does create certainty and makes the Renewal Provision enforceable. But the clause does not require the [Landlord] to spin its wheels initiating an arbitration in which the [Tenant] will obviously not participate. The result of a one-sided arbitration would have been a foregone conclusion – with only the [Landlord’s] version of the current market rate in evidence, the arbitrator would have fixed the rent at precisely the rate at which the [Landlord] fixed it.
Justice Morgan granted the Landlord’s motion for judgment. He found the renewal provision to be precise, unambiguous, and easy to interpret. It was therefore enforceable. He accepted the Landlord’s unchallenged evidence as to market rent and ordered the Tenant to pay the present value of the foregone rent during the October 2020 to October 2025 renewal period as damages, subject to an accounting for any monies received by the Landlord in future in mitigation of those damages.
First, for previous Case Notes on the interplay between court proceedings and mandatory arbitration clauses, see: Québec – courts assert consequences of not undertaking/participating in mandatory legislated arbitration – #084, N.L. – “shall” is not “must” and can be directory rather than mandatory – #165, and Alberta – participation in court proceedings prior to stay application waives mandatory arbitration – #273.
Second, the “ambiguous and unenforceable” renewal term in the lease in Hirex Holdings Ltd. v. Chrysler Canada Ltd., 1991 CanLII 1111, relied upon by the Tenant and referred to by Justice Morgan, is distinguishable on the basis that it contained no mandatory arbitration clause or other mechanism to resolve the parties’ dispute as to market rent during the renewal period, as a result of which the court found it void for uncertainty. It stated:
“That the Lessee shall, in the event that there shall have been no substantial default hereunder, have the option to extend this lease for an additional term of five (5) years from the end of the original term, at a rental to be agreed upon by the Lessor and the Lessee, as being the fair market rental for the demised premises when compared to other buildings of comparable design, age, location and condition, the other terms, conditions and covenants to be the same as herein save and except the right of further renewal. The Lessee may exercise this option and extend this lease for the said additional term of five (5) years by giving to the Lessor written notice by registered mail at least three (3) months prior to the end of the term.” (emphasis added.)