- What Happens when an Option to Terminate is not Exercised in Accordance with its Terms?
- July 22, 2013 | Author: Chantal Joubert
- Law Firm: Lavery, de Billy, L.L.P. - Montreal Office
An option for the renewal or termination of a lease generally provides for the mechanism that is necessary to exercise the option. Is the failure to comply with this mechanism fatal to the exercise of the right? If the clause does not state that the fulfillment of the conditions is necessary to validly exercise the option, the clause will be construed in favour of the party exercising the option, even where it has not scrupulously complied with those conditions.
In the case of World Color Press Inc. v. Édifice 800 Industriel Inc. 2012 QCCS 1774, the court had to determine whether the lessee had validly exercised an option to terminate the lease which provided that the lessee’s right had to be exercised by no later than March 31, 2011, for purposes of terminating the lease on March 31, 2012, together with the payment of a penalty of $1 million by no later than March 31, 2011 in “full and final payment of all the lessee’s obligations under the Lease”. The lessee sent the notice on March 30, 2011 indicating that a cheque in the amount of $1 million was attached to the notice; however, no cheque was attached. On discovering the omission, the lessee sent the cheque on April 8, 2011, but the lessor returned it, claiming that the option had not been validly exercised and that the lease would continue until March 31, 2017, the expiry date of the initial term.
In fact, the termination clause was reproduced upon each renewal. Only the dates and amount of the penalty were changed. However, according to the lessor, at the time of the last renewal, the parties had wanted to make the payment of the penalty concomitant with the notice of exercise of the option. On the other hand, the lessee pleaded the whole agreement clause in order to exclude the discussions surrounding the changes made to the last version of the option to terminate.
Two issues were raised in court: was the non-payment of the penalty by the specified date fatal to the exercise of the option to terminate and, if the answer was no, did the penalty serve as the payment of the rent until the end of the term in 2012, since this penalty represented a “full and final payment of all the lessee’s obligations under the Lease”.
The court held that the lessee had validly exercised the option to terminate but that it still had to pay the rent until the end of the term in 2012.
The court found that the entire agreement clause was inoperative in the circumstances and that it did not prevent the court from endeavouring to determine the parties’ true intention since, on the one hand, the option to terminate clause was incomplete and, on the other hand, the literal application of the clause would have had an absurd result from a commercial point of view.
The option to terminate clause was incomplete because it did not specify the nature of the time limits, i.e. whether or not they were mandatory. The court found that the parties never discussed this point and, therefore, that the time limits were not mandatory and that the lessee had validly exercised the option to terminate. As for the penalty, the court held that it should not be considered as rent paid in advance, otherwise, the concept of penalty would lose all its meaning. Consequently, the lessee had to pay the rent until the end of the term in 2012 despite the words “in full and final payment of all the lessee’s obligations under the Lease,” which could be given their full meaning under the previous versions of the option to terminate when the penalty was payable at the end of the term, but which would have yielded an absurd result where the penalty was payable one year prior to the end of the term, as in the present case.