Duty of Disclosure and Unpermitted Improvements Under an As Is, Where Is Clause

The Dispute

A company leased a commercial unit to open a second location. The unit already contained a mezzanine, built before the landlord acquired the building, and the company could not commence operations until the city issued an occupancy permit and a business licence. Obtaining those approvals required the mezzanine to come out, so the company funded the work, lost that floor area, and continued to pay rent on the whole premises.

The Parties’ Positions

The tenant claimed the cost of removing the mezzanine and a reduction in rent, in negligent misrepresentation and for breach of the commercial lease. It contended that the landlord knew or ought to have known that the mezzanine was unpermitted and had not disclosed that fact, and that the stated floor area carried the mezzanine into the rent, so that it was paying for area it could not lawfully occupy. The tenant framed the claim on the five elements set out by the Supreme Court of Canada in Queen v Cognos Inc., [1993] 1 S.C.R. 87, and relied on the evidence of its director as to what it had understood at execution.

The landlord resisted the claim on the executed documents, maintaining that it had bought the building under an unconditional offer and had been unaware of the permit status of the mezzanine until the tenant raised it. The offer to lease conveyed the premises on an “as is” basis, with existing improvements accepted “as found”, and the lease provided them on an “as is/where is” basis. The lease also made the tenant responsible for its leasehold improvements, for the permits its own work required, and for compliance with applicable laws and bylaws at its own cost, and recorded that the landlord had made no representations outside the lease. Because the rent was expressed as a monthly sum rather than calculated by area, the landlord submitted that a reduction in usable area did not reduce the rent.

The Court’s Decision

The court identified three deficiencies in the tenant’s claim and dismissed the claim. It held that the tenant had not established the duty of care alleged against the landlord, and that no untrue, inaccurate or misleading representation had been made out. It found further that damages had not been proven, because no evidence of market rent for comparable premises had been put before it.

The court ordered the tenant to pay the landlord’s reply filing fee under Rule 20(2) of the Small Claims Rules and its interpreter expenses, allowed at a reduced amount against a published tariff. The commercial effect for the tenant was that it absorbed the removal cost, recovered none of the rent attributable to floor area it could not use, and bore the landlord’s trial expenses.

Key Lessons for Businesses

• Verify the permit status of existing improvements before execution. Where an improvement predates the tenancy, the cost of bringing it into compliance may fall on the party to whom the lease assigns responsibility for permits, renovations and regulatory compliance.
• Do not rely on an assumed obligation to disclose. The tenant did not establish the duty of care alleged against the landlord in this commercial relationship, so a party seeking assurance about permits, approved uses or existing improvements should obtain it and record it in the lease.
• Do not assume that losing usable area will reduce a fixed rent. Where rent is expressed as a monthly sum with no area-based adjustment mechanism, a reduction in usable floor space may not reduce the obligation, so a tenant needing that protection should negotiate an abatement provision.
• An entire agreement clause confines the case to the document. That recital is not administrative language: it can materially restrict a claim founded on assurances given in negotiation, so any matter relied upon belongs in the executed document.

The outcome of this matter turned on the terms of the lease and the evidence before the court. A similar dispute may resolve differently.

ATAC LAW advises landlords and tenants on commercial leases and the disputes that arise under them.

Conducted by Raymond Jin, Associate Lawyer at ATAC LAW, who appeared for the claimant tenant at trial. His practice includes civil and commercial litigation.