CASE BRIEF: EMPRESS TOWERS LTD. V BANK OF NOVA SCOTIA [1991]

INTRODUCTION 

Empress Towers Ltd. v. Bank of Nova Scotia is a significant decision in Canadian contract law, particularly in the context of commercial lease agreements. The case revolves around the interpretation of a renewal clause in a lease between the Bank of Nova Scotia, a lessee, and Empress Towers Ltd., a property owner. The legal conflict arose as a result of the parties’ inability to reach a consensus on the rent for the renewal period, which resulted in a disagreement regarding the enforceability and interpretation of the lease’s renewal provisions.

A renewal option was granted to the Bank of Nova Scotia, the lessee, in the original lease. This option allowed the parties to renew the lease “on terms to be agreed” upon. Nevertheless, the parties were unable to agree on the rent amount as the renewal period approached, and Empress Towers declined to renew the lease. Empress Towers contended that the renewal clause was unenforceable due to its absence of essential terms, including the rent amount.

The primary legal question was whether the renewal clause was null and void for uncertainty as a result of the lack of an agreed-upon rent. The British Columbia Court of Appeal determined the clause to be enforceable. The court concluded that the clause required both parties to negotiate in good faith and reach a reasonable rent agreement, utilizing objective standards such as market rates, despite the absence of a specific rent amount.

This case is frequently cited as an illustration of the courts’ preference for a flexible approach to contract interpretation, particularly in commercial contexts. In such cases, the courts may fill in any lacking terms if the parties clearly intend to enter into a binding agreement. The decision reaffirms the principle that parties are obligated to negotiate in good faith when confronted with ambiguous or insufficient contractual provisions.

FACTS

It leased property directly from the owners of Empress Towers in 1972 but canceled that in 1984. The parties thereafter signed a new lease in 1984, which exposed the parties to a renewal provision whereby Scotiabank is entitled to renew the lease for two successive terms of five years, each upon giving three months’ written notice. The “rental for any renewal period” was to be the market rental that was prevalent at the commencement of the renewal term, as mutually agreed upon between the landlord and the tenant. Scotiabank exercised its option to renew for an additional five years from 1 September 1989.

On 23 June 1989, Scotiabank offered $5,400 monthly, which was highly significant compared to the then-applicable lease of $3,097.92. Once again, Empress Towers failed to respond in writing. On August 31, Empress Towers replied that Scotiabank would be permitted to remain if they paid $15,000 before September 15 (an employee of Empress Towers was robbed of $30,000 at that branch of the bank, and only $15,000 of insurance was paid) and if they paid a rent of $5,400 a month henceforward. The tenancy would be terminable with 90 days’ notice henceforward. Empress Towers filed for a writ of possession. At trial, Empress Towers appealed the judgment of Scotiabank.

ISSUE RAISED

Was the clause void either because of uncertainty or because it was an agreement to agree?

PLAINTIFF’S ARGUMENTS

Empress Towers Ltd., the plaintiff, presented numerous critical arguments. The primary argument was that the renewal clause in the lease was unenforceable because it lacked specificity, particularly in relation to the rental amount for the renewal term. Empress Towers contended that the clause, which required that the renewal be “on terms to be agreed” by both parties, was too vague and ambiguous to be legally binding. They contended that the property was not obligated to be leased to the Bank of Nova Scotia in the absence of a valid renewal agreement regarding such a critical term as rent. Consequently, they were not obligated to continue.

Empress Towers also maintained that the tenant was not entitled to enforce the renewal option due to the failure to reach a rent agreement. They argued that the clause necessitated a mutual agreement on all critical terms, and the lease renewal could not be considered complete or enforceable until the rent was settled. This argument aimed to invalidate the tenant’s position by suggesting that the lease had effectively come to an end and that the landlord had the right to seek new tenants or renegotiate the lease under wholly new terms.

Lastly, Empress Towers contended that the renewal clause did not expressly impose a legal obligation to negotiate in good faith in order to reach a rent agreement. They argued that the lease’s failure to specify essential terms should not obligate them to renew the lease under ambiguous conditions or continue negotiations indefinitely.

RESPONDENT’S ARGUMENTS

The Bank of Nova Scotia, the respondent, presented numerous counterarguments in response to Empress Towers’ allegations. The bank’s leading argument was that the renewal clause in the lease, despite stating that the renewal would be “on terms to be agreed,” still imposed a binding obligation on both parties to negotiate the terms in good faith, particularly the rent amount. The bank underscored that the parties had a long-standing commercial relationship and had already reached an agreement on the fundamental terms of the lease, with the renewal option being a critical component of their agreement.

The respondent also contended that the renewal clause was not rendered unenforceable due to the absence of a specific rent amount. They argued that the courts could establish an equitable market rent using objective criteria, thereby upholding the renewal clause. The Bank of Nova Scotia maintained that it was entitled to renew the tenancy, and the absence of a predetermined rent should not deprive it of this right.

In addition, the bank contended that Empress Towers was violating the tenant’s right to remain on the property by refusing to renew the lease and exploiting the absence of stable rent. The bank emphasized that the renewal option was intended to safeguard their tenancy and that the court should intervene to ensure that the parties’ intent to permit a renewal subject to a reasonable rent was fulfilled.

JUDGEMENT

The British Columbia Court of Appeal ruled in favor of the Bank of Nova Scotia in Empress Towers Ltd. v. Bank of Nova Scotia, determining that the renewal clause in the lease was enforceable despite the absence of a specified rent. The court determined that the clause implied an obligation for both parties to negotiate the rent in good faith despite the precise rent not being agreed upon. The court also maintained that if the parties were unable to reach an agreement, a reasonable rent could be determined using objective standards, such as prevailing market rates. The judgment underscored the importance of a flexible interpretation of commercial contracts to ensure that the parties’ intentions are fulfilled and prevent a party from evading its obligations under the pretext of uncertainty.

CONCLUSION

In commercial lease negotiations, the significance of good faith is underscored by this case, particularly in the context of renewal clauses. The court’s decision to maintain the enforceability of a vaguely worded clause, despite the absence of an agreed rent, is indicative of a judicial preference for respecting the intention of the contracting parties. Additionally, it underscores that parties are prohibited from employing ambiguity as a pretext to circumvent contractual obligations. The court established a precedent that safeguards tenants from potential exploitation when landlords attempt to undermine renewal options by determining that a reasonable rent can be determined through objective standards.

This decision is noteworthy for its affirmation of the obligation to negotiate in good faith, mainly when contracts entail renewal options or other terms that are “to be agreed upon.” The court’s methodology prioritizes a pragmatic, adaptable interpretation of commercial contracts. The court avoided a strict literalist interpretation of the renewal clause that could have invalidated the lease by interpreting it as imposing a duty to negotiate.

The ruling is intended to safeguard commercial tenants in situations where landlords may otherwise attempt to circumvent their obligations as a result of ambiguities in lease agreements. It reaffirms the principle that the courts will endeavor to fulfill the fundamental purpose of an agreement in business transactions rather than allowing one party to capitalize on uncertainty. This case illustrates the courts’ reluctance to permit the enforcement of a binding agreement that is inherently incomplete, such as the rent in this instance.

In general, Empress Towers Ltd. v. Bank of Nova Scotia reinforces the notion that the courts will frequently endeavor to “fill the gaps” and maintain the validity of commercial contracts where the intent to be bound is evident. Still, specific terms are either absent or in dispute. It also motivates parties to negotiate the fundamental terms of a contract in good faith, even if those terms are not initially specified.