Contractual interpretation plays a role in many cases in law, and Commercial Landlord and Tenant disputes are no different. This is why working with a trustworthy team of lawyers is especially important to ensure your affairs are properly managed.

The Ontario Superior Court of Justice recently decided on Horn Ventures International Inc. v Xylem Canada LP that an “obligation to purchase” in a Lease Agreement could only arise if certain legal obligations transpired.

Leased property required environmental remediation

In this case, the parties entered an unusual Lease Agreement in 1996. A clause within the agreement bestowed an “obligation to purchase” upon the tenant, Horn Ventures International Inc., at a fixed price on certain conditions. In the agreement, Horn agreed to lease the property for 15 years. 

The property was being leased with the knowledge of both parties that the land was contaminated and required environmental remediation. In the agreement, the landlord, Xylem Canada LP, undertook to address the property’s environmental conditions within the first ten years of the lease. The parties could agree to extend the remediation period up to five more years if Xylem could not fulfill its undertaking in the initial set out timeframe.

The Lease Agreement required the tenant to purchase on specific terms

The obligation to purchase was contained in section 11 of the Lease Agreement. That text read:

11.      The Landlord and the Tenant agree that the Tenant shall have the obligation to purchase the Premises upon the following terms:

  1. The Landlord shall advise the Tenant that the Landlord has completed the Remediation and shall provide an unqualified and unconditional certificate from an environmental consultant…. The foregoing requirement for delivery of the said certificate is inserted for the sole benefit of the Tenant and may be waived by the Tenant at any time by written notice delivered by the Tenant to the Landlord.
  1. Within twenty (20) business days of either receipt by the Tenant of the certificate referred to in paragraph 11(a) or receipt by the Landlord of the waiver referred to in paragraph 11(a), the Tenant shall deliver an executed copy of the agreement of purchase and sale in the form of the agreement and [sic] purchase and sale (the “Agreement of Purchase and Sale”) attached hereto as Schedule “D”, together with the required deposit cheque. Upon delivery of the Agreement of Purchase and Sale to the Landlord, the Agreement of Purchase and Sale shall be firm and binding and shall be completed in accordance with the terms thereof.

[Emphasis added.]

In 1998, Horn purchased a small parcel of land next to the leased property, to which Xylem took the title. The Lease Agreement was amended to include the new parcel of land, though no change in rent was made.

The tenant exercised its option to renew the lease two times

Xylem did not complete the remediation within the ten-year limit. So, the parties entered into a supplementary agreement, an Amendment of Lease. This new agreement allowed Horn to renew the lease for five years, with an option to renew for an additional five years. Xylem was obligated to make “commercially reasonable efforts to complete the remediation” during this time. Otherwise, the Lease Agreement stayed largely the same. Horn exercised both options to renew and, in April 2016, requested a new option to renew for a further five-year term (to July 2026). Xylem denied this request.

As Horn was now in its final five-year term of the lease, in November 2016, Horn wrote to Xylem seeking to prepare to exercise its obligation to purchase the land. To do this, Horn requested copies of any remediation activity that had transpired, as well as any applications to relevant government Ministries and the like. Horn also requested information on Xylem’s future planned activities for the property. Discussions continued back and forth into 2018. In May 2018, Xylem claimed that the obligation to purchase was not a part of the Amendment of Lease or the subsequent renewal. Horn, in response, applied to the Ontario Superior Court of Justice to determine its rights under the lease.

The landlord took issue with the tenant’s intention to purchase

In May 2018, Xylem claimed that the obligation to purchase was not a part of the Amendment of Lease or the subsequent renewal. The Superior Court of Justice sided with Horn. On appeal, the Ontario Court of Appeal agreed with the lower court. So, in June 2021, on the Lease Agreement’s expiration date, Horn wrote to Xylem to trigger the obligation to purchase. Horn wrote that it would waive the requirement for Xylem “to provide an unqualified and unconditional certificate from the environmental consultant” pursuant to section 11(a) of the Lease Agreement. Xylem refused to execute the Agreement of Purchase and Sale because the conditions precedent had not been met, and the remediation was incomplete. Xylem’s position was that the condition had to be met first for Horn to waive the requirement for the environmental certificate.

Horn brought this action in response, seeking a declaration that the Agreement of Purchase and Sale is valid and binding and an order for specific performance by Xylem under the Agreement of Purchase and Sale.

The Court first considered the context of the Lease Agreement

In coming to its conclusion, the Court considered the surrounding circumstances giving rise to the contract and the context of the document as a whole. Regarding the circumstances, it was clear that both parties were aware they were dealing with land with extensive environmental challenges. With this knowledge, Horn did not want to take on additional liabilities if it had purchased the property back in 1996. Certain parts of the contract were renegotiated in 2016 to allow Horn to terminate the agreement should any unacceptable air quality or environmental concerns arise. Horn also had Xylem sign an agreement absolving it of any liability for historical environmental hazards or clean-up responsibilities that would have pre-dated the Lease Agreement.

In terms of the document as a whole, the Court noted that the Lease Agreement did not mention that the remediation work would be complete within the terms of the lease. This did not change with the signing of the Amendment of Lease, which confirmed that all other terms of the Lease were unchanged. Xylem merely reiterated it would continue its remediation efforts, although it was understood that it could take an indefinite amount of time. 

The wording of the Lease Agreement did not create a right to purchase the property

Turning to the text of the Lease Agreement, the Court ultimately determined that the obligation to purchase under section 11 of the agreement could only arise if Xylem informs Horn of the competed remediation. Horn is only able to waive the delivery of the environmental certificate. The Court distinguished between the right to purchase and the obligation to do so. While Horn was operating as if it had the right to purchase, no open-ended right to purchase was created by the wording of the Lease Agreement. So, the obligation to purchase had not been triggered and would not be until Xylem advises Horn that remediation is complete.

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