When is a 'Default' not a 'Default'

When a lease defines an “event of default “or “default” as being a failure to meet monetary or non-monetary obligations on or before the expiry of a cure period, and the defaulting party has rights that are predicated on not being in default at the time of exercise (such as a right to extend), then landlords and tenants must understand the ramifications arising from the interaction of these provisions when a party purports to exercise an option or right.

This issue, along with a number of other related ones, was material to the September 2011 decision in Ontario involving Firkin Pubs Metro Inc. as tenant and Flatiron Equities Limited as landlord. The lease term was for 10 years beginning January 1, 2001 and ending December 31, 2010, and contained an option to extend for two five-year terms. On April 7, 2010, an officer and director of The Firkin Hospitality Group Inc. (not the tenant) wrote to the landlord’s agent confirming the tenant’s intention to exercise the option to extend the lease for five years. The option to extend provision in the lease provided for the new base to be agreed upon failing which it was to be determined by arbitration. Negotiations between the parties continued into 2011.

On April 26, 2011, the landlord served a notice of default on the tenant (for failure to pay additional rent adjustments relating to 2008) with a 15 day cure period. After the April 26, 2011 default notice but during the cure period, the tenant paid the rent claimed. On May 20, 2011, the landlord asserted that the tenant’s April 7, 2010 exercise of its extension option was not valid due to the alleged rent default by the tenant existing at the time of exercise. The tenant was told to deliver vacant possession of the premises (the premises was also licensed to the tenant’s franchisee since the beginning of the term).

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