Beyond The Breach: The Intersection Of The Duty Of Good Faith And Commercial Lease Enforcement

Commercial lease enforcement should be straightforward. The tenant breached. The landlord gave notice. The tenant did not fix it. The landlord terminated. With that said, courts are asked regularly to look past the technical existence of a breach and consider a more nuanced question. Was the enforcement legitimate, or was it engineered to get the tenant out for reasons that have nothing to do with the breach? A lot can turn on the answer to this question, for both sides.

This bulletin draws on recent Ontario case law to map the legal landscape on both sides of these disputes and flags the practical risks that often determine outcomes before and after a default notice is served.

Key Takeaways

• Manufactured defaults are judicially scrutinized. Courts will look beyond the technical existence of a breach if the enforcement process was driven by an ulterior motive. The court will give effect to landlord’s contractual rights, but the landlord’s conduct may impact on the available remedies.
• Relief from forfeiture is a meaningful tenant remedy. Even after a valid lease termination, a tenant can apply to have the lease restored. The outcome turns on the parties’ conduct, the gravity of the breach, and whether the termination is proportionate to the actual harm.
• The duty of honest performance applies to lease enforcement. Since Bhasin v. Hrynew, a landlord that knowingly misleads a tenant, or conceals intentions that directly affect the tenant’s ability to perform, is more likely to see a termination unwound.
• Tenants cannot withhold rent as self-help. A tenant with a legitimate grievance must continue paying rent and pursue its claims separately. Withholding disputed rent may hand the landlord the very default it was looking for.
• Maintaining a reliable and credible record will improve litigation posture. The communications and conduct in the weeks and months before a default notice is served will usually impact the outcome of the dispute.

The Pattern Courts Recognize

Two scenarios that engage the duty of good faith in the context of commercial lease enforcement generate most of the litigation in this area.

The first is the manufactured default. The landlord has already decided to reclaim the space for redevelopment, a better-paying tenant, or a related business, and works backwards through the lease to find justification. What follows is usually a series of complaints about minor or disputed breaches, short cure deadlines, and little genuine intent to resolve anything. The paper trail exists not to address a problem but to evidence one.

The second is the bad-faith defence. The tenant has genuinely breached its lease and responds to a valid enforcement process with allegations of landlord misconduct, hoping to delay an eviction that is, in substance, fully justified.

Courts see through both. The doctrinal tools they use to do so are the law of relief from forfeiture and the duty of honest contractual performance.

Relief from Forfeiture: The Merits Behind the Breach

Even after a lease is validly terminated, a tenant can ask the court to restore it under s. 20 of the Commercial Tenancies Act and through the court’s equitable jurisdiction under s. 98 of the Courts of Justice Act. The test under either statute is the same. Courts apply the three-part framework from Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., [1994] 2 SCR 490.

1. Review of the Tenant conduct. Was the tenant’s behaviour around the breach reasonable? Did it take steps to address the problem, or did it ignore warnings and run out the clock?
2. Consideration of the Gravity of the Breach. How serious was it? A monetary default curable by a single payment is treated very differently from a deliberate, ongoing, non-monetary breach.
3. Proportionality Between Breach and Termination. How does what the tenant stands to lose as a result of the termination (i.e. its business, its investment in the premises, its goodwill) compare to the actual harm the breach caused the landlord?

These factors are weighed together against the full history of the relationship. Critically, the landlord’s conduct is also in play. A landlord whose enforcement was driven by an objective other than addressing the breach is in a materially weaker position than its technical legal rights might suggest.

Courts have granted relief from forfeiture where the landlord’s own conduct played a role in the tenant’s breach that underlies the termination. For example, in 100 Bloor Street West Corp v. Barry’s BootCamp Canada Inc., 2022 ONSC 5054, a landlord served a demand for nearly $1 million in realty tax arrears despite having previously told the tenant the issue would be resolved after a pending appeal, and while itself having failed to provide the tax reconciliations the lease required it to produce. The court granted relief from forfeiture. In doing so, it reasoned that the tenant had developed a reasonable expectation that the landlord would discuss the amount of taxes owing after the landlord had received certainty regarding the taxes owing.

Conversely, courts have denied relief where the underlying breaches are legitimate and the tenant’s conduct in relation to the breach is unreasonable. The doctrine of relief from forfeiture is equitable, and it cuts both ways. For example, in Rahawanji v. Gwendolyn Shop (1973) Ltd., 2011 ONSC 4828, a chronic history of late payment, followed by an application in which the tenant did nothing to advance the proceeding and continued paying no rent for months even after the landlord offered to accept interim payments, did not attract the court’s equitable sympathy. A tenant that uses the proceeding as a delay mechanism rather than a genuine remedy will find courts unsympathetic.

The Duty of Good Faith in Commercial Lease Enforcement

Since the Supreme Court’s recognition of a freestanding duty of good faith contractual performance in Bhasin v. Hrynew, 2014 SCC 71, parties to a contract in Canada cannot knowingly mislead each other about matters that directly affect performance. In the commercial lease enforcement context, this can undermine enforcement where the underlying defaults are identified as post-hoc justifications of a pre-planned termination.

In Textile City Inc. v. 10451029 Canada Inc., 2024 ONSC 5824, the landlord had disclosed to the tenant, in writing, that it intended to use the premises for its own separate business. The landlord subsequently sought to identify defaults upon which to pin a termination and otherwise cause nuisance to the tenant. The landlord’s conduct included charging additional rent with no legal basis, confiscating the tenant’s garbage bins, delivering a defective termination notice and then ambiguously withdrawing it, and replacing the tenant’s signage with that of the related business it intended to install in the space. While the court ultimately found that the tenant was in clear breach of the lease by operating a non-compliant retail business from the premises, the court still granted relief from forfeiture due to the landlord’s bad faith conduct.

Practical Takeaways

The validity of a termination can often turn less on whether a breach technically occurred than on how the parties conducted themselves and whether the remedy sought is proportionate to the actual harm. A landlord with a genuine breach, a clean enforcement process, and a proportionate termination will generally prevail. A landlord whose enforcement is driven by something other than the breach may find the court’s equitable jurisdiction working against it.

The most important practical observation for both sides is that these disputes are almost always better managed before a default notice is ever delivered. The communications and conduct in the weeks and months leading to formal enforcement steps are usually the most important evidence before the court.

For landlords, this means documenting complaints carefully, communicating expectations clearly, and taking legal advice before acting. If prior indulgences have been granted, the record should demonstrate the landlord’s intention to enforce its rights moving forward. A landlord that suddenly acts contrary to an existing course of conduct and moves unilaterally to construct a justification to terminate is in a far weaker position than one that builds a clean, contemporaneous enforcement record from the start.

For tenants, this means responding promptly and in writing to a default notice, even one that is regarded as disingenuous. This approach establishes that the tenant is seeking to contemporaneously understand asserted defaults, preserves options, and enhances positioning should a relief from forfeiture application become necessary.

Lease enforcement disputes are often won or lost on the parties’ conduct and correspondence long before any court application is filed. Planning ahead, documenting thoroughly, and taking legal advice before a default notice is ever delivered remains the most effective approach for both landlords and tenants to protect their positioning.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.