One of the many issues commonly negotiated between landlords and tenants is the condition of the state of repair that the premises must be in at the expiry of the lease. Typically, a standard form lease will require that the tenant return the premises to the landlord in the same condition as that which it is required to maintain during the term of the lease, and to remove certain tenant improvements. While these restoration clauses can be more or less complex or onerous depending on the nature of the property (i.e. industrial, retail or office), one common thread is that tenants will try to negotiate that their restoration obligations be subject to a “reasonable wear and tear” exception.

This language is regularly agreed to by the parties based on a mutual understanding that the tenant should not be required to deliver the premises in perfect condition at the end of the term or to eliminate all signs of aging to the premises. But this begs the question: how broadly will a court interpret a reasonable wear and tear exception in the event of a dispute?

The decision of the British Columbia Supreme Court (BCSC) in Griffin Holding Corporation v. Raydon Rentals Ltd., 2016 BCSC 2013 serves as a reminder of the legal interpretation given to the words “reasonable wear and tear” when considering a tenant’s restoration obligations in a commercial lease.

The Legal Test for “Reasonable Wear and Tear”

The common law defines reasonable wear and tear as “the reasonable use of the premises by the tenant and the ordinary operation of natural forces”. In Griffin, the BCSC confirmed that the following legal test applied when considering reasonable wear and tear in the context of a tenant covenant to restore leased premises:

(a) the landlord must prove that the premises were not in as good repair and condition at the end of the lease compared to the repair and condition at its commencement, and once proven, the burden shifts to the tenant to prove that the deterioration in condition falls within any “reasonable wear and tear” exception in the lease;

(b) what will amount to reasonable wear and tear is to be considered in light of the purpose for which the premises were leased, the nature of the business carried out thereon, the age of the building, and the length of the lease; and

(c) if a court accepts that the premises have been damaged beyond reasonable wear and tear, the landlord is entitled to the cost to restore the premises to the same state of repair as they were in at the commencement of the lease, regardless of whether the landlord ever intends to incur the cost of those repairs.

In Griffin, the salient facts were as follows:

• in 2006 (prior to the lease being entered into), Griffin retained a commercial concrete polishing company to restore and resurface the concrete slab of the leased premises;
• Griffin Holding Corporation (“Griffin”) leased commercial premises in North Vancouver to Raydon Rentals Ltd. (“Raydon”) for a term commencing in October, 2008 for the purposes of selling, renting and servicing new or used equipment for industrial, residential or farming operations;
• the lease contained various clauses relating to Raydon’s maintenance and repair obligations, including a covenant from Raydon to restore the premises to the same condition as existed at the commencement of the lease, except for reasonable wear and tear;
• in 2015, the lease was terminated in accordance with its terms, and at the end of the tenancy, Griffin found that the floors were damaged with paint, oil and rust stains and were embedded with holes and bolts; and
  Raydon took certain measures to remedy the condition of the floor, but eventually took the position that the condition of the floor reflected “reasonable wear and tear” (which Griffin disagreed with).

The BCSC ruled in Griffin’s favour, primarily on the basis of the evidence provided by each party. Griffin provided first-hand accounts of the 2006 concrete polishing, which convinced the BCSC that the premises were in good condition at the commencement of the term. Accordingly, the burden shifted to Raydon to convince the BCSC that the reasonable wear and tear exception applied, but Raydon was unable to provide satisfactory evidence to the court.

Takeaways

Landlords and tenants should pay close attention to the tenant’s restoration obligations upon termination or expiry of the term (particularly with heavy users) to ensure that their expectations are aligned. Landlords and tenants are also well advised to conduct joint inspections at the commencement and expiry of the lease (and to record such inspections with notes, videos, photographs and other records which confirm the state of repair of the leased space) to ensure that there is adequate evidence in the event of any dispute.

Chad Travis is a member of the Real Estate Group at Lawson Lundell LLP where he assists clients with all aspects of real estate development, commercial leasing and municipal planning. Contact him at ctravis@lawsonlundell.com.

Jada Tellier is an associate in Lawson Lundell’s Real Estate Group. Her practice focuses on assisting clients with all aspects of real estate development, commercial leasing and municipal planning. Contact her at jtellier@lawsonlundell.com.

This article originally appeared in Lawson Lundell’s Real Estate Blog.