Repair And Replacement In Commercial Leases: Who Fixes What, Who Pays For It, And Must The Tenant Pay Rent In The Meantime?

Repair and replacement disputes under commercial leases have a way of surfacing at the worst possible moments and escalate faster than either party expects. A roof fails in the middle of winter. An HVAC system breaks down during a heat wave or soon after installation. A structural issue is discovered requiring a complete operational shutdown during the tenant’s busy season.

By the time lawyers are involved, there are usually parallel disputes about who is responsible for the repairs, at whose cost, and whether the tenant was entitled to stop paying rent while the repairs are underway. Getting these questions wrong carries significant consequences. A landlord that defers structural repairs after early warning signs can face damages. A tenant that withholds rent without legal justification can find itself in default.

This bulletin draws on recent Canadian case law to consider both the landlord’s and the tenant’s options when a dispute over repair or replacement arises.

Key Takeaways

• The lease governs. Repair and replacement obligations will be enforced as written, including against landlords in “net” leases where the lease contains express landlord repair covenants.
• Terminology and context matter. The meaning of “repair” in a lease does not always include a “replacement”.
• Where the lease language is unclear, courts will look at the surrounding facts and circumstances known to the parties when they signed the lease. This can lead to unpredictable results.
• Insurance covenants can shift repair risk in unexpected ways. A party that covenants to carry replacement-cost insurance may find it cannot pursue the other party for a loss that the insurance was meant to cover, even in the face of separate contractual language making the other party responsible for maintenance and repair costs.
• Automatic rent abatement or set-off is usually the exception, not the rule. Rent generally must be paid in full and repair claims pursued separately, unless the lease contains an express abatement or set-off right.
• Fundamental breach (a breach so serious that it destroys the core bargain and purpose of the lease) and frustration (an unexpected event that makes the lease impossible to perform) are very high bars to meet. Even a serious failure to repair will rarely justify treating the lease as ended where the lease anticipates and allocates the associated risks between the parties.

The Allocation of Repair Obligations: Lease Language Governs

The starting point in any repair dispute is the lease itself. Repair and replacement obligations are engaged both during the ordinary course of a lease and at lease-end when the tenant surrenders the premises back to the landlord.¹ In both contexts, commercial leases divide responsibilities between landlord and tenant and often with reference to stipulated condition standards. Ambiguity in the lease is litigation waiting to happen and ought to be avoided at all costs at the time of drafting. Courts will attempt to resolve ambiguities by reference to the surrounding facts and circumstances known to the parties at the time the lease was entered into, but that process can produce results neither party anticipated nor would have agreed to at the time of drafting.

Where a lease allocates a specific repair or replacement obligation to one party, a court interpreting that lease will endeavour to give effect to that language. For instance, in Metro Ontario Real Estate Limited v Hillmond Investments Ltd., 2024 ONSC 2625, the Court held the landlord responsible for roof repairs and replacement based on the wording and structure of the landlord’s repair covenant and rejected the landlord’s attempt to use a general “net lease” clause to override those express obligations.

On the other hand, where the lease is ambiguous regarding a party’s obligation, the door is left open to the court to attempt to resolve such ambiguities, which can give rise to unpredictable interpretations. For example, in 1049104 Alberta Ltd v Singh Jewelers Ltd, 2026 ABCA 24, a lease required the tenant to “keep” the premises in “first class condition” over the course of the lease, and to return the premises in that same condition on termination of the lease. However, the lease did not define “first class condition.” In the absence of a defined standard, the Court held the starting condition was the relevant baseline for the tenant’s compliance with the “first class condition” standard (a finding upheld on appeal). Unfortunately for the landlord in this case, there was also no evidence of the starting condition, which made it impossible for the Court to assess any alleged disrepair for which the tenant would have been responsible. The landlord’s claim to recover repair costs from the tenant was therefore dismissed.

How Insurance Covenants Can Shift Repair Risk

Beyond the express allocation of repair responsibilities, the lease’s insurance covenants can have an equally significant effect on which party ultimately bears the economic cost of a loss. This aspect of risk allocation is frequently underestimated at the time of drafting. Where the lease requires a certain party to maintain broad property insurance on the premises, that obligation can have the effect of shifting risk away from the other party, even where the tenant carries its own maintenance or repair obligations in respect of certain systems.

In James Dick Construction Limited v Courtice Auto Wreckers Limited, 2024 ONCA 476, the tenant promised to pay the costs of maintaining and repairing sprinkler systems, while the landlord promised to carry replacement-cost insurance. After a fire, the landlord sued the tenant for failing to maintain and repair the sprinkler systems. The Court dismissed the landlord’s claim, reasoning that the landlord’s promise to insure, read in context, meant the landlord bore the risk of fire loss. The tenant’s sprinkler maintenance obligations did not transfer that risk to the tenant.

Conversely, a party that fails to insure where required may find its own claims barred, since the court will recognize a covenant to insure as operating as a positive assumption of risk. By way of example, in 2693693 Ontario Inc. v Palmieri et al., 2024 ONSC 1881, the tenant’s claim for fire-related damages was dismissed where the lease required the tenant to insure and included an exclusion clause (releasing the landlord and its agents from liability for damage to the tenant’s property), and waiver of subrogation. The Court held the tenant assumed the risk of loss by failing to insure, and that this excluded liability not only for the landlord but also for its agents, including the landlord’s principal and roofing contractor.

Once the issue of allocation of repair obligations is determined, the next question is what can each party actually do when the other side fails to perform under the lease?

Landlord Remedies: How Repair Costs Become Additional Rent, and Can Give Rise to Termination Rights

Most commercial leases give the landlord a contractual right of entry to perform the tenant’s repair or maintenance obligations upon default, with the costs recoverable from the tenant as additional rent. That mechanism is significant in two respects. First, it allows the landlord to address deteriorating conditions without waiting for litigation to resolve the underlying dispute about responsibility. Second, characterizing recovered costs as additional rent typically means that non-payment carries the same default consequences as a failure to pay base rent, including, in most cases, a right to terminate the lease if the payment default is not cured.

With the above said, the landlord’s right to perform the tenant’s obligation and recover costs, and to then pursue enforcement remedies, is rarely self-executing. Notice provisions in the lease will usually require the landlord to give the tenant an opportunity to cure the repair default before exercising a right of entry, and the lease’s default and termination provisions will set out the procedural steps the landlord must follow before treating the lease as terminated on that basis. These provisions are reinforced by statutory requirements under the Commercial Tenancies Act (Ontario), to provide notice and a reasonable opportunity to cure prior to terminating a lease for non-monetary defaults.

Where a landlord has followed the requisite enforcement steps and the tenant has not cured, the landlord can then proceed with a lease termination. However, that termination is subject to the tenant’s ability to apply for a court order granting relief from forfeiture, which is a discretionary remedy that allows the court to relieve the tenant of the consequences of its default on just terms, typically including a requirement to cure the underlying default. The success of a relief from forfeiture application following a lease termination will depend on the conduct of the parties, the nature of the default, and whether granting relief is just and equitable in the circumstances. A landlord that skips steps in the notice and default process, or terminates prematurely, risks a finding that the termination itself was wrongful, which can convert what might have been a valid enforcement action into a likely relief from forfeiture.

Tenant Remedies: When Rent Can Be Withheld, and When It Must Be Paid

A tenant whose landlord is not performing its repair obligations faces a decision with real legal risk attached to it. The instinct to withhold rent, reduce rent, or pay rent into a lawyer’s trust account is understandable, but acting on that instinct without legal justification can transform a legitimate repair complaint into a default that the landlord is entitled to enforce. In most commercial leases, the tenant’s obligation to pay rent continues regardless of the landlord’s breach, and the consequences of getting that analysis wrong can be severe. This can include termination of the lease, loss of renewal/extension options, loss of bargained-for exclusivity or assignment rights, and potential liability exposure that is disproportionate to the original repair dispute.

The right to abate rent under a commercial lease most commonly arises under an express abatement provision in the lease. In the absence of such a provision, the prevailing rule is that rent must be paid in full and any claim arising from the landlord’s failure should be pursued separately. The practical significance of this principle is considerable, since a tenant that withholds rent without a sound legal basis exposes itself to a default claim regardless of the merits of its underlying repair complaint. The default can have significant implications not only to the underlying default but can also undermine the exercise of future rights like renewal/extension options during the period in which the default subsists.

Landlords and tenants considering the tenant’s potential right to abate rent in the context of a repair dispute should start with the lease to determine whether an express abatement right is engaged, and whether the conditions triggering it have been satisfied. Where the lease includes express abatement provisions that automatically reduce or suspend rent where specified conditions are met, the lease will generally be enforced as written. Where the lease contains no express abatement right, or the language of the abatement provision does not clearly specify that the abatement right applies automatically, the tenant’s obligation to pay rent in full likely continues.

In rare cases, a tenant may have a self-help right allowing it to carry out the required landlord repairs itself (often after a landlord cure period has expired) and charge back the cost of doing so to the landlord. Ideally, the tenant would also secure a set-off right to proactively subtract this repair cost from rent owing to the landlord, instead of waiting for the landlord to pay for what is potentially a disputed repair obligation. As with rent abatement, however, the tenant may be tempted to set off against rent even without this clause, but the same liability exposure arises. This right is also often less attractive for repairs that the tenant is not qualified to perform or which would be so substantial as to greatly exceed the rent being set-off against.

Where the lease includes a no-deduction, no-abatement or no-set-off clause, the prevailing rule is that the tenant must pay first and sue later unless an express abatement right clearly supersedes that clause. In Gabe Clothing v Centura Real Estate Corp., 2023 ONSC 2790, the lease required rent to be paid without any deduction, abatement, or set off whatsoever, and the Court therefore held that the tenant was not entitled to withhold rent unilaterally. Rather, if the tenant had a claim, the Court found that it had to pay first and then pursue its claims separately. In practice, this interim financial impact can significantly change the dynamic and litigation positioning of the parties in the context of a repair dispute.

When a Breach Is Serious Enough to Terminate the Lease

A party facing a serious repair or replacement failure by the other side may ask whether it can treat the lease as terminated altogether. That question engages the doctrine of fundamental breach, which remains alive and well in commercial leasing jurisprudence. For tenant repair failures, the more typical recourse for landlords is through the lease’s default and termination provisions as set out above in relation to landlord specific remedies. Fundamental breach operates as a distinct and generally more demanding route, available to either party.

Fundamental breach occurs where a party has so egregiously breached the contract as to deny the other substantially the whole of its benefit. In Convocation Flowers Incorporated v Anisa Holdings Ltd., 2025 ONSC 401, the Court confirmed the relevant factors for that assessment: (1) the ratio of the obligations not performed compared to the party’s obligations as a whole; (2) the seriousness of the breach to the innocent party; (3) the likelihood of its repetition; (4) the seriousness of the consequences; and (5) the relationship of the part performed to the whole obligation. Applying that framework, the Court found that the landlord committed a fundamental breach of the lease by deliberately blocking the flower shop tenant’s access to loading docks, that were essential to the tenant’s operations at the premises. A fundamental breach will not be found where the alleged breaches were repeated and material, but merely annoying and aggravating.

Where the lease expressly contemplates the possibility of repairs and addresses the allocation of risk and the abatement of rent during repair periods, it will generally be difficult to characterize even a significant repair failure as a fundamental breach. If the parties have made provision for the circumstances that have arisen, including what happens when one party fails to perform its repair obligations, the argument that the breach has denied the other party substantially the whole benefit of the contract is considerably harder to sustain. For example, in Felton Brushes Limited v Atlantis Properties Hamilton Inc., 2020 ONSC 2315, the tenant alleged that the landlord’s failure to supply adequate heating to a manufacturing facility constituted a fundamental breach. While the court accepted that the landlord had not met its heating obligations, the court concluded that the deficiency was capable of being addressed by the tenant obtaining supplemental heaters and pursuing a damages claim.

A related but distinct concept is frustration, which applies in rare circumstances where a supervening event has occurred after the contract was signed, for which the parties made no provision in the contract (i.e. no “force majeure” or “unavoidable delay” clause covering the event at issue) and performance has become radically different from what was undertaken. As the Supreme Court of Canada held in Naylor Group Inc. v Ellis-Don Construction Ltd., 2001 SCC 58, frustration requires a situation the parties did not anticipate and it cannot be invoked where the parties have addressed or could have addressed the relevant circumstances in their agreement.

The distinction matters in the repair and buildout context. For example, in First Real Properties Ltd. v Biogen Idec Canada Inc., 2013 ONSC 6281, the parties realized after signing a binding offer to lease, that the installation of certain windows in the premises would be more than 10 times the initial cost estimated, because the receiving wall was a load-bearing wall. The landlord had capped its share of the costs in the offer, making the tenant responsible for the lion’s share of this cost increase, unless the tenant accepted much smaller windows. This would have reduced the natural light for the premises, which the Court found was one of the main reasons why the tenant agreed to lease those premises as was thus material to the parties’ bargain. The Court accordingly found that the lease was frustrated.

Despite the findings in the Convocation Flowers and Biogen cases, landlords and tenants should consider that written commercial leases that addresses damage, repair obligations, insurance, and rent abatement are much less likely to be found fundamentally breached or frustrated on similar facts, precisely because the parties have anticipated and allocated the risk of such events. Critically, a party that purports to terminate on the basis of fundamental breach or frustration and turns out to be wrong does not merely lose the argument. It may have itself committed a lease repudiation, leaving it exposed to a claim for the other party’s damages for loss of the lease bargain.

Closing Thoughts

Repair and replacement disputes are typically driven by the specific wording of the lease with surrounding facts and circumstances and general common law principles filling the gaps. The broader theme that emerges from recent case law is that courts will hold each party to what the lease actually says and will resist arguments from either side that seek to use the other’s breach as a basis for denying core rights that were bargained for. Careful lease drafting at the outset remains the best risk management tool available to both landlords and tenants. And where a dispute has already arisen, early legal advice on the specific lease language is essential before either party takes a unilateral step that undermines its litigation posture.

Footnote

1. For a deeper dive into end of term obligations and how to handle disputes surrounding them, please see our Bulletin here.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2025