When good intentions lead to bad results: how to avoid the unanticipated consequences of waiver and estoppel

In almost every leasing arrangement there is the potential for the parties to unwittingly alter their ability to exercise their rights under their lease by reason of their words or conduct. Much like my personal mantra “no good deed goes unpunished”,  these scenarios most often arise in situations where the landlord is wishing to accommodate the tenant in some way, such as by accepting late payment of rent or otherwise agreeing not to hold the tenant to the strict terms of the lease. Tenants are also not immune. They, by their conduct, accept incorrect measurements and pay operating costs that do not accord with their leases. In each case, there is the potential that their conduct may give rise to claims of waiver or estoppel.

Background

The doctrines of waiver and estoppel are equitable principles that allow the Court to recognize the reasonable expectations of the parties to a contract, despite the fact that the promise or conduct being relied upon by one of the parties was not supported by consideration.¹ Although the Courts have offered conflicting descriptions of the distinction between waiver and estoppel, the classic articulation of the relationship between the two doctrines comes from a British Court of Appeal decision of Lord Denning. He stated that:

When “waiver” is used in its legal sense, it only takes place when a man, with knowledge of a breach, does an unequivocal act which shows that he has elected to affirm the contract as still existing instead of disaffirming it as, for instance, in waiver of forfeiture. …

The basis of [estoppel by conduct] is that a man has so conducted himself that it would be unfair or unjust to allow him to depart from a particular state of affairs which another has taken to be settled or correct. … ²

This distinction bears repeating. The essence of waiver, is an intentional relinquishment of a known right, whereas estoppel does not require an examination of intention. Estoppel is premised on detrimental reliance. It arises in circumstances where it would be patently unfair to permit the one party to enforce its strict legal rights in circumstances where the other party has, acting reasonably, detrimentally relied on the other party’s conduct to the contrary.

Reliance Based Estoppels³: The Basics

The principle of reliance based estoppel assumes the existence of a legal relationship between the parties when the representation is made. As such, when a contractual relationship has come to an end before the representation is made, there can be no resort to the doctrine. ⁴

In order for estoppel to be raised, it must be shown that a party made a promise or representation intended to be relied upon by the other and that the other did rely upon it to his or her detriment.⁵  The foundation of estoppel is the recognition that it would be unconscionable to allow a party to enforce a contract or bargain or a term of it after representing to the other party to the contract or bargain that it would not rely on its legal rights, thereby inducing the other party to change its position.⁶ However, such reliance must have been reasonable.

The party against whom estoppel is being pleaded, may later reinstate its rights as originally bargained for, by giving the other party notice of its intention to do so.  Such notice does not need to be a formal notice, but must give the other party reasonable opportunity of resuming its former position.  If, however, it is not possible for such party to return to its former position, then the promise or representation is  final and irrevocable.⁷ 

Lastly, the prevailing view is that, subject to certain exceptions⁸, reliance-based estoppel cannot form the basis of a cause of action but may be employed only as a defence.⁹

Waiver: The Basics

Waiver is a voluntary relinquishment or abandonment of a legal right, interest or advantage.  It can be express or implied and it relates to a past or present right, interest or privilege. The act of waiver must be unequivocal and intentional.

Waiver does not require detrimental reliance by the other party.

The party that waived its right, interest or privilege may restore them upon reasonable notice to the other party of its intention to do so.

Waiver and Estoppel in the Context of Commercial Leasing

In the context of commercial leasing, waiver and estoppel may arise in a variety of situations. One of the most common examples of waiver occurs where a landlord allows the tenant to remain in possession of the leased premises, despite having knowledge of a default that would allow the landlord to terminate the lease. This is known as waiver of forfeiture. Moreover, unless it is a continuing default, a landlord with full knowledge of the breach irrevocably waives its right to forfeiture where it shows a definite intention to treat the lease as subsisting, whether or not a notice of default has been issued.¹⁰ Acceptance of rent is one such act that will unequivocally serve to confirm the existence of the lease. 

The doctrine of estoppel is commonly relied upon in the context of commercial leases in relation to operating costs. Commercial leases are most often formulated on a net basis, whereby the tenant is responsible for paying its pro rata share of operating costs in addition to a base or minimum rent. Adjustments to the amount owing are done by the landlord after the end of the fiscal year. Upon the sale of a commercial building, a purchaser may discover that these charges were calculated improperly, whether pursuant to a term of a lease or due to a mathematical mistake (for example, the use of an incorrect figure for the square footage in the pro rata calculation). Following this type of due diligence review, the tenant who is found to have been underpaying may argue that the landlord/purchaser is estopped from claiming the higher amount owed. The circumstances are frequently inverted, however, and a landlord may equally rely on a claim of estoppel where an assignee of a tenant makes a similar discovery.  

The aim of this paper is to provide some practical tips for dealing with waiver and estoppel and to illuminate, for landlords and tenants alike, some of the circumstances in which these claims arise.

Estoppel

Tip. 1 Dealing with Estoppel: Do Your Homework

As with any commercial transaction, it is important to do a thorough due diligence review before completing any major transaction. Any purchase, sale, sublease or assignment should be accompanied by an extensive document review by the parties and their counsel. This is to ensure that the party entering into the agreement is fully apprised of all material considerations of the contracts. In the context of a commercial leasing arrangement, this entails reviewing not only the lease, estoppel certificates, statements of agreements, etc., but all correspondence between the landlord and tenant. The case of 789247 Ontario Inc. v 215 Piccadilly Properties Inc.¹¹ serves to highlight the importance of this practice. In this case, the assignee landlord was estopped from claiming from the tenant for payment of real property taxes for the lower level of the leased premises contrary to an express provision in the lease. This was so because the original landlord had agreed, through letter correspondence, that it would bear this cost for the term of the lease. The court found that the original landlord’s letter formed part of the lease and that the assignee was estopped from denying that it did not. The current landlord, as an assignee of the original landlord, was bound by its assignor’s prior promise.

Tip 2. Dealing with Estoppel: Understand the Extended Consequences of Your Actions

As evidenced by the previous case, promissory estoppel is capable of extending beyond the relationship of the parties whose conduct gave rise to the original promise or assurance. As such, it is important for landlords and tenants to recognize that their actions may have extended consequences. A landlord may wish to give a concession to a certain favoured tenant, for example, without intending to be bound by such a concession in the event that the tenant assigns its lease. Although the landlord may well decide to continue with this practice, despite the inherent risks, at minimum, it be should be fully aware of the potential repercussions. Further, the landlord should attempt to mitigate its risk by using explicit language in any communication to the tenant, indicating that the change in the legal relations is either limited in time or is for the sole and exclusive benefit of that tenant in particular. This will guard against a Court finding that the reasonable expectations of the parties were something other than what the landlord intended.

Promissory estoppel may even survive bankruptcy. In Med-Chem Health Care Inc. (Re)¹² , the tenant paid a lower amount of rent than what was stipulated in the offer to lease for a period of three years. Upon the bankruptcy of the tenant, the landlord attempted to claim the balance due under the offer to lease. The court denied the landlord’s claim on the basis that the course of conduct indicated that there was an intention by the landlord not to rely on the strict terms of the offer to lease, and a corresponding reliance by the tenant. Accordingly, reversion to the terms of the written offer to lease was found to be inequitable and detrimental to the bankrupt tenant’s creditors.

This case adds an additional layer to the typical quandary of a landlord who has a tenant who is undergoing financial troubles. Many landlords may not wish to evict a longstanding tenant with whom it has enjoyed a good commercial relationship if it believes the tenant’s difficulties to be of a short term nature. As such, a landlord may be willing to temporarily accept a lower rent in the hopes that the tenant’s financial situation will improve. This case raises the possibility that landlords who elect to take their chances on such tenants do so at the risk of adversely affecting their claim for the balance of the rent if the tenant goes bankrupt. Thus, landlords must understand that accepting a lower rent may bind them to this promise when competing with the bankrupt tenant’s creditors.

Tip 3. Dealing with Estoppel: Manage Expectations

Lawyers must also be clear in their communications with their clients that there are limitations to their legal advice. As estoppel may arise from the words or conduct of the parties, lawyers must ensure that their opinions are manifestly qualified by the actions of the parties. This should be addressed at the earliest point in the solicitor-client relationship. The prudent lawyer will also want to be sure to review all estoppel certificates provided by the respective parties and to interview all individuals involved with the negotiation of the lease and the interaction with the other party, such as the property manager, broker, etc., to ensure that the prior conduct of these persons is taken into account when advising their client.

Lawyers would also be wise to convey to their clients the shortcomings of estoppel certificates. These certificates, which are normally provided by a tenant to a landlord under circumstances where the landlord is either selling or mortgaging the property within which the premises are located, are used to give a third party critical information about the relationship between the landlord and tenant¹³, including the area of the premises, the term of the lease, the rent payable and whether there are any outstanding disputes between the parties. As these certificates are commonly amended by the tenant to provide that the statements given are true “to the best of the tenant’s knowledge and belief,” they cannot be relied upon as representing a guaranteed account of the relationship between landlord and tenant. More specifically, if so amended, such certificates will only be effective to the extent that the person signing has actual knowledge of the matters addressed.

Waiver

Tip 1. Dealing with Waiver: Determine Your Objective Before Acting

When a landlord is faced with a tenant who commits a default that is not a continuing default, it must make an important election: terminate the tenancy or provide notice and time to cure. The courts have consistently held that the two options are inconsistent. Selection of one course of action will forever disentitle the landlord from pursuing the other. Therefore, in order to choose which route to pursue, the landlord must first determine its objective. If the landlord ultimately wants to retain the tenant, it should send the tenant a notice of default and allow it a period of time to cure. If, instead, it would prefer to end the tenancy and lease the premises to a new tenant, the landlord must not (or must be careful in doing so) accept the payment of rent from the tenant and should proceed to terminate the lease for the default. This is complicated in Ontario by the mandatory requirements under the Commercial Tenancies Act  to give notice and reasonable time to cure non-rent defaults as a precondition to the landlord’s option to terminate the lease for such default¹⁴. The longer the landlord waits to make this decision, the longer the tenant is in possession of the premises, and the more likely a court will consider the landlord to have performed an “affirming act,” i.e. an acknowledgment of the continued existence of the lease. For this reason, time is of the essence when making this election.

Tip 2. Dealing with Waiver: Don’t Rely on Waiver Provisions in the Lease

Many practitioners and landlords may mistakenly believe that so long as the lease includes a clause that stipulates that “acceptance of rent shall not operate as a waiver,” the landlord will be free to accept payment of rent without prejudice to its right to terminate. This is not so. In Sledz v Edmonton Home Fair Ltd.,¹⁵ the Court held that the acceptance of post-dated rent cheques after the landlord terminated the lease constituted a waiver at law, even though the lease specified that the waiver had to be communicated in writing. Likewise, in Fitkid (York) Inc. v 1277633 Ontario Ltd., the Court stated that “[e]ven where there is a term in the lease governing wavier, the cases on waiver indicate that courts look at the conduct of the landlord to determine whether it has elected not to terminate the lease in the circumstances after the right of forfeiture arises.”¹⁶ It is therefore essential for counsel to communicate to their client the limitations of a no waiver clause and likewise for landlords to avoid relying on this clause in their dealings with their tenants.

One may wonder why these clauses are included in lease agreements if courts are unwilling to enforce them. The answer is simple: although their inclusion offers no guarantee of protection to the landlord, their exclusion will certainly weaken its position. In Windmill Restaurant Ltd. v 933351 N.W.T. Ltd. the Court determined that a written clause in a lease providing that no forbearance by the landlord will operate as a waiver was “a factor to take into consideration.”¹⁷ Accordingly, it is wise for counsel to always include these types of provisions in the lease, in spite of their inherent limitations.

Tip 3. Dealing with Waiver: Make Your Intentions Clear

Regardless of which option the landlord has selected, it should, by its conduct, make it very clear which of its remedies it is pursuing. If the landlord elects to terminate the lease, it should not engage in negotiations with the tenant. The landlord should instead make it obvious that the lease has ended and that all discussions going forward will surround the terms upon which it is willing to enter into a new lease. If the landlord does not make this distinction clear, it risks having its conduct misconstrued as an affirmation of the continuance of the original lease.

Although the acceptance of rent significantly weakens a landlord’s ability to deny a waiver of forfeiture, if a landlord elects to accept payment of rent, despite its desire to terminate the lease, it must make every reasonable effort to indicate that the payment is being applied on account of any arrears relating to the period prior to the tenant’s breach. In Mohawk Oil Co. v Kingsgate Auto (1974) Ltd., the Court held that “[i]t seems nonsense … where the landlord has made unrelenting and persistent efforts to re-enter following its termination of the monthly overholding tenancy, to conclude that acceptance of rent should be viewed as an unequivocal act recognizing the continued existence of a monthly tenancy.”¹⁸ This case makes clear that above all else, the basis upon which the landlord has accepted the rent should be unmistakably communicated to the tenant. The intention of the landlord will be the dominant consideration when making a determination of whether or not waiver has occurred.

Conclusion

The doctrines of waiver and promissory estoppel have their origins in the law of equity. As such, parties seeking to rely on these claims must remember that principles of good faith and clean hands will be crucial to successfully seeking the application of these doctrines. If a party knowingly relies on the mistake of another to obtain some advantage, equity will not intervene to uphold any representations made in this regard.¹⁹

It is important to understand that neither estoppel nor waiver completely eliminate the right that the parties initially bargained for as set out in the contract. In most cases, a return to the prior status quo is possible on reasonable notice.

Lawyers must ensure that their clients are made aware of the issues of waiver and estoppel and best efforts should be made to manage or reduce the level of risk where the landlord or tenant do not wish to act on the strict terms of the lease. As with many other legal problems, these issues are best tackled by applying a basic three-step solution. First, clarify the client’s objectives by determining what it ultimately wishes to achieve. Second, manage the client’s expectations by ensuring that it understands the limitations under the terms of the lease and at law. Finally, assist the client with implementing a solution that best protects its interests and most strongly furthers its overarching objectives. If these principles are followed, a great deal of surprise and disappointment can be avoided.

The comments contained in this article provide general information only. They should not be regarded as or relied upon as legal advice or opinions. Gowling Lafleur Henderson LLP would be pleased to provide more information or specific advice on matters of interest to the reader.