Ontario’s Planning Act contains rules regulating how land in the Province is used, divided, and developed. Some of the authority under the Planning Act is delegated by the Province to the applicable municipality. For example, municipalities are given authority to divide their areas into various zones and create bylaws regulating uses and building specifications therein (i.e., zoning bylaws).
Municipalities are also given some authority under the Planning Act to regulate how land can be divided into smaller pieces for sale or lease. This is referred to as “subdivision control”. Subdivision control rules help to prevent various landowners from conveying a hodgepodge of oddly shaped lots that are difficult to service. They also help to promote good community planning.
Section 50(3) of the Planning Act establishes the rules around subdivision control. This section operates by voiding any conveyance of land (including a lease), unless it fits into one (or more) of the expressly listed exceptions. When considering leases, the most common exceptions are: (a) the term of the lease is less than 21 years; (b) the lease is within a building; or (c) the municipality’s Committee of Adjustment (the “CoA”) has granted its consent. Importantly, the 21-year threshold is not determined solely by the initial term of the lease. In determining the length of the lease term, the length of any renewal or extension options granted to the tenant in the lease are counted as well.
A common scenario requiring consent from the CoA arises when a landlord wishes to lease a portion of a parking field in a shopping plaza for the construction of a new pad site. In this scenario, it is common for the lease term (including all granted options to extend or renew) to exceed 21 years. Assuming that the pad is not a freestanding parcel for the purposes of the Planning Act, in order to give effect to such a lease, the parties must seek and obtain consent from the CoA. However, leasing parties often don’t want to spend the time and money seeking CoA consent until a binding lease (or agreement to lease) is signed. Therefore, in contemplation that CoA consent will be sought after the lease (or agreement to lease) is signed, the parties often include a “saving clause”, which provides that until consent is obtained, the maximum term of the lease is 21 years, less one day. This clause saves the lease (or agreement to lease) from being rendered void from the outset by removing the need for consent (by reducing the lease term) if consent is not obtained. These clauses also regularly oblige the landlord or the tenant to seek Planning Act consent.
In a recent decision, the Ontario Court of Appeal weighed in on the operation of a “saving clause” when CoA consent remained outstanding. In McDonald's Restaurants of Canada Limited v North Elgin Centre Inc., the landlord leased a pad site to the tenant for an initial 20-year term and two successive 10-year renewal terms. The lease included the common “saving clause”, which provided that until CoA consent was obtained, the term of the lease would be limited to 21 years, less one day. The lease also obligated the landlord to diligently pursue CoA consent.
Consent had not been obtained by the 21st year of the lease. However, by that time, the parties were already embroiled in litigation (at the Superior Court and the Court of Appeal) regarding whether the tenant had validly exercised its first option to renew (i.e., for years 21-30 of the term) and whether the landlord had satisfied its obligation to diligently pursue CoA consent. As a result of those proceedings, the Court of Appeal held that the tenant had validly exercised its first option and that the parties needed to arbitrate the fair market rent for the first renewal term. The Court of Appeal also ordered that the tenant apply for CoA consent and that the landlord provide all reasonable cooperation.
By the 26th year of the lease, consent was still outstanding and the parties returned to court. There was a dispute as to whether the landlord had done enough to comply with the order to cooperate and whether the tenant had taking sufficient steps to advance the CoA application. It also appeared that there were delays with the CoA, which may have been exacerbated by the municipality’s confusion about the impact of the ongoing litigation on the CoA consent application. Nevertheless, the CoA consent application “remained alive”.
In the period between the court proceedings, the landlord’s intentions shifted. It now planned to pursue redevelopment of the site and the continuation of the lease was an impediment to its plan. The landlord pointed to the “saving clause” in the lease, asserting that since CoA consent had not been obtained, the lease expired on the day prior to the end of the 21st year of the term and that the tenant had been overholding ever since. The landlord gave the tenant notice of termination.
Upon returning to court, the Superior Court held that, as sophisticated parties, the landlord and tenant would be aware of the statutory curative provision set out in section 50(14) of the Planning Act, which provides that CoA consent can have retroactive effect. On this basis, the Superior Court held that the correct interpretation of the “saving clause” in the lease was that the parties conclude the CoA consent process, notwithstanding that the 21-year deadline had lapsed. If CoA consent was granted, the lease would persist. If CoA consent was not granted, the lease would come to an end. The Court of Appeal upheld the decision.
In ordering that the landlord and tenant must “await the determination of the CoA”, even after the 21-year deadline has passed, the efficacy of the “saving clause” in the lease is unclear. It appears that the Court didn’t want to let delays in the CoA process create a way for the landlord to avoid the lease in favour of its redevelopment plans. Since consent could be obtained at a later time and given retroactive effect pursuant to section 50(14) of the Planning Act, the ruling introduced some uncertainty as to where landlords and tenants stand while consent is outstanding and the 21-year mark arrives. It’s hard to know whether the Court would have come to the same conclusion where the tenant was the party initially required to seek consent. It would be better for leasing parties to seek CoA consent well in advance of the 21-year deadline. Leaving things to the last minute left the ongoing status of this lease in the hands of the municipality.
The information contained in this article is provided for general informational purposes only and does not constitute legal advice. No recipient of this content should act, or refrain from acting, based on any information included without seeking appropriate legal or other professional advice on the particular facts and circumstances at issue.
The information contained in this article is provided for general informational purposes only and does not constitute legal advice. No recipient of this content should act, or refrain from acting, based on any information included without seeking appropriate legal or other professional advice on the particular facts and circumstances at issue.
