Cancelling a commercial lease: is it possible ?

Prior to entering a commercial lease, the prospective lessee (tenant) conducts due diligence and partially relies on the representations made by the lessor (landlord). But what if, after taking possession of the premises, the lessee discovers that those representations were false ? Can the lessee seek the cancellation of the lease ?

Author: M^e Manuel St-Aubin, lawyer and partner at St-Aubin avocats

Date of writing: 2025-01

Date updated: n/a

1. The duty of good faith during lease negotiations

A prospective lessee (tenant) typically engages with various property owners in search of a suitable space to operate their business. During this process, the lessee will visit and inspect available premises, while obtaining key information from the prospective lessor (landlord). This preliminary stage is essential to select an appropriate location and mitigate the risk of future issues. Throughout this process, honesty is expected, as required by the law and affirmed by case law.

Both the lessor and the lessee owe a duty of good faith throughout the negotiation, conclusion and execution of a contract, including commercial leases. These duties are established notably by Articles 6 and 1375 of the Civil Code of Québec:

• 6. Every person is bound to exercise his civil rights in accordance with the requirements of good faith.

• 1375. The parties shall conduct themselves in good faith both at the time the obligation arises and at the time it is performed or extinguished.

The Superior Court of Québec, in Canal médical inc. c. Développement Olymbec inc., 2024 QCCS 2236 , confirmed that at the negotiation stage (i.e., the pre-contractual stage), “[TRANSLATED] the requirements of good faith must be respected and entail a duty to inquire” (para. 13).

During a lease negotiation, the duty to inquire will often rest on the lessee. For instance, they must gather relevant information concerning the premise they intend to lease such as floor area, inclusions, municipal zoning and permitted usage, etc.

The Court, at paragraphe 14 of the previously cited judgment, outlines what the duty to inquire involves. Applied to a prospective lessee preparing to negotiate a lease, the following points can be considered [TRANSLATED]:

• the knowledge, actual or presumed, of the information by the lessee ;

• the decisive nature of the information for the lessee in their decision whether or not to lease the premises ; and

• the impossibility for the lessee to obtain the information themselves or their legitimate reliance on the lessor.

What are the legal consequences, however, when the lessee, having relied on the lessor's representations regarding the leased premises, ends up with a space that does not correspond to what was initially discussed ?

Can the lease be cancelled ? The Superior Court answers this question in Canal médical inc. c. Olymbec Development inc., 2024 QCCS 2236.

2. Can a commercial lease be cancelled due to false representations made by the lessor ?

The Superior Court of Quebec, in the Canal Médicale inc. case. c. Développement Olymbec inc., 2024 QCCS 2236 , weighed in on this question.

In Canal médicale inc. c. Développement Olymbec inc., 2024 QCCS 2236, the lessee alleged that their consent to the lease had been vitiated, in part because the lessor failed to disclose the absence of a ventilation system in the leased premises (para. 15). The Court agreed with this claim.

The lessee operated in the medical equipment industry, particularly in the production of respiratory masks (para. 17).

He communicated his leasing requirements to the lessor's representatives, and inquired whether it would be possible [TRANSLATION] “to install air conditioning in the premises to cycle the warm air generated by the mask production machine” (para. 20).

While the lessor confirmed that the installation was feasible, he failed to disclose to the the prospective lessee that the premises lacked a mechanical ventilation system (paras. 20 and 21).

Ultimately, upon taking possession of the premises, the lessee became aware of this issue, which rendered their operations impossible in the space, particularly due to obligations related to labor standards (paras. 25-27).

The Court concluded that the lessee's consent was vitiated due to fraudulent (or misleading) conduct on the part of the lessor, for the following reasons:

• The lessor knew that the premises lacked mechanical ventilation (para. 43) ;
• This piece of information was decisive for the lessee given the operations he planned to carry out in the premises (para. 44) ;
• The lessee trusted the lessor, [TRANSLATION] “who acknowledges being a major player in the commercial leasing industry” (para. 45). The lessee informed the lessor of the activities he intended to carry out in the local, and the lessor offered the premises in question. The Court ruled that the lessee could legitimately rely on the lessor's representations as to the premises' suitability for his business (para. 45).

Thus, the Court concluded that the lessor had a duty to inform the prospective lessee that leased premises lacked a mechanical ventilation system (para. 46).

The Court further held that the form signed by the lessee indicating that he [TRANSLATION] "acknowledges having inspected the entire Premises, including all relevant equipment, and declares himself satisfied therewith and accepts the Premises on an "as is" basis, with no warranty from the Lessor as to their condition, state or operability", along with the lease's entire agreement clause [TRANSLATION] "does not bar the lessee from seeking the annulment of the lease and from establishing fraudulent misrepresentation, since the error occured during the pre-contractual stage” (para. 65).

The following articles of the Civil Code of Québec (CcQ) on vitiated consent, as addressed in this judgement, are as follows :

• 1399. Consent must be free and enlightened. It may be vitiated by error, fear or lesion.

• 1400. Error vitiates the consent of the parties or of one of them where the error relates to the nature of the contract, to the object of the prestation or to any essential element that determined the consent. An inexcusable error does not constitute a defect of consent.

• 1401. Error on the part of one party induced by fraud committed by the other party or with his knowledge vitiates consent whenever, but for that error, the party would not have contracted, or would have contracted on different terms. Fraud may result from silence or concealment.

• 1407. A person whose consent is vitiated has the right to apply for annulment of the contract; in the case of error occasioned by fraud, of fear or of lesion, he may, in addition to annulment, also claim damages or, where he prefers that the contract be maintained, apply for a reduction of his obligation equivalent to the damages he would be justified in claiming.

The Court accordingly declared the lease null and granted damages to the lessee.

3. Key takeaways

Given the duty of good faith imposed by both the Civil Code and case law, the following should be remembered when entering into commercial lease negotiations :

• Both the lessee (tenant) and the lessor (landlord) parties must act with honesty and in good faith with each other;

• The prospective lessee has a duty to inquire before renting premises, but, he may sometimes legitimately rely on certain information communicated by the lessor;

• The lessor must provide disclose and not omit any essential information to the prospective lessee;

• Cancelling a commercial lease may, in some cases, be an appropriate remedy when the lessee's consent is vitiated.

Ultimately, honesty is essential when negotiating and concluding a contract and will be all the more beneficial for all parties in the long run !

NOTICE: The information in this article is general and does not constitute legal advice or advice nor does it necessarily reflect the state of the law exhaustively. For any legal questions relevant to your situation, we advise you to contact a lawyer.