Introduction
In 2177 23rd Avenue Holdings v. Pival International inc., 2025 QCCA 19, the Court of Appeal of Quebec held that a lease “renewal option” clause based on market rates does not in fact constitute a true option, and that the duty to negotiate in good faith cannot force the parties to renew the lease.
Summary of the Facts
Pival International inc. (the “Lessee”) entered into a commercial lease with 2177 23rd Avenue Holdings ULC and BP Cognac Canada Owner Limited Partnership (the “Owners”) for industrial premises located in Lachine.
At issue is the interpretation of the scope of the clause below:
[TRANSLATION] “27.6 Renewal Option
Provided that the Lessee performs, in good faith and on a timely basis, all of its obligations under the lease and is not in default under any such obligations during the term of the lease, it may renew this lease for one (1) additional five (5)-year period, being the period starting January 1, 2023 and ending December 31, 2028. A written notice must be given to the Lessor at least nine (9) months before the expiry of this lease. If the Lessee fails to give such notice, this lease shall automatically terminate at the end of its term.
If the Lessee wishes to exercise the option, the new rental price must be negotiated within sixty (60) days of the notice, and a new lease agreement must be entered into between the parties within the same period, failing which the renewal option shall become null and void upon expiry of the sixty (60)-day period. The rates applicable to set the rent shall be the market and/or Building rates for an equivalent term and for a space comparable and of similar use to the Leased Premises and located in the same sector of Montreal”.
[Bold added]
Trial Court Decision
The Superior Court held that clause 27.6 constituted a true renewal option and that Cominar, the Owners’ predecessor in title, had breached its duty to negotiate the rental price in good faith. Consequently, the judge ordered the parties to resume the negotiations in good faith.
Court of Appeal Judgment
The Court of Appeal quashed the trial court decision and found that clause 27.6 did not grant the Lessee a true renewal option, but rather a mere right of first refusal.
Since the clause at issue did not provide for a predetermined rent or an objective mechanism to determine it, rent could not be established according to articles 1373 and 1374 CCQ.
Therefore, due to the absence of an agreement between the parties within the period provided for in the clause in dispute—a 60-day notice period to exercise the “option”—the lease terminated at the end of its term.
The Court of Appeal also noted that the sanction for a breach of the duty to negotiate in good faith should be damages rather than forced specific performance.
Authors’ Comments
This judgment will have a significant impact on the interpretation of this type of clause, which is often mischaracterized as an “option” and is found in countless commercial leases.
Although parties, faced with such a clause, are still free to enter into a renewal agreement, they will have to conduct negotiations in an honest and transparent manner, or risk paying damages.
