INTERPRETATION OF LEASES 101: TOP 10 RULES
One of the trickiest parts of drafting any commercial agreement, including a lease, is anticipating how all its provisions will be interpreted once it is in effect. Differing interpretations can lead to disagreements between the contracting parties, and possibly to litigation. If this happens, courts will generally follow certain rules (such as using the literal meaning of the words in the agreement and construing the agreement as a whole) to enact the parties’ actual intentions at the time of contracting. But even with these rules, confusion easily arises, which can be problematic (and expensive). The use of boilerplates can assist with the uncertainty, guiding the courts in applying their interpretive rules to most readily determine the parties’ intentions.
The literal meaning of many terms (especially complex commercial ones) may not represent what the parties really intended. A definitions section can be very useful for interpreting these terms, if it is carefully drafted. One should ensure that a defined term does not create additional confusion (being opposite to the ordinary definition of the word or capitalizing a word and giving it a very different meaning than the ordinary meaning, for example), and also that substantive legal terms are not included in definitions.
2. Previous Agreements
If it is intended that a lease comprise the entire agreement and supersede all previous agreements, this should be clearly stated in the lease. If there are prior documents or parts of prior documents that the parties want to survive from a previous agreement, then state that clearly and also state in the lease that all other parts of the previous agreement are superseded.
3. Headings and Blacklining
Most leases are drafted with headings for each section and with blacklining/bolding to show where changes have been made to the landlord`s standard form. If the parties don’t want the court to look at these in interpreting a lease, a provision should be inserted specifying that they should be ignored.
4. Effective Amendment to the Legislation
Parties need to decide whether any references to legislation in a lease refer to the version of the statute that existed at the creation of the lease or whether courts should automatically apply any subsequent amendments when interpreting the lease. If there is no provision stating otherwise, courts will assume that the lease refers only to the statute as it existed when the lease was signed.
5. Governing Law
Generally leases will be interpreted under the governing law of the jurisdiction where the real estate is located. This can raise complications where there are guarantees or indemnity agreements related to the lease which might relate to different jurisdictions than that of the lease. A provision should be included in the lease indicating which governing law the parties wish to apply to these collateral matters.
6. Business Days
Most leases will measure time in terms of business days rather than calendar days, which leads to a natural question about what constitutes a business day. Rather than assuming that everyone will interpret that expression the same way, it is best to draft a provision stating what days of the week are included, as well as which holidays (statutory or otherwise) to exclude from consideration as business days.
Based on the Currency Act, any money referenced in a lease will be assumed to be in Canadian dollars unless it specifically states otherwise in the agreement. If one wants to add a clause for a different currency, the lease should also specify what date the conversion is to be made so that the exact conversion rate will be clear.
8. Schedules and Appendices
Schedules or appendices should always be mentioned in the body of a lease, either as a reference or in a specific provision discussing them. If not, a court may not find them to be an intended part of the agreement and ignore them when interpreting the lease.
9. Ejusdem Generis
This is a rule that says where a general and a specific list are used, the effect of the specific list is to limit the meaning of the general words to items similar to those on the list. This
can create unintended exclusions as a result. The best way to avoid such a problem is to provide in the interpretation section of the lease that the word “including” means “including, without limitation”.
10. Contra Proferentum
The contra proferentum rule says that an ambiguity in a lease will be interpreted against the lease’s author, which is generally unfavourable for lessors. If the other party has a hand in negotiating the lease, however, it can be argued that the rule doesn’t apply. So it is a good idea to insert an acknowledgement in a lease to the effect that the tenant negotiated the lease (or at least was given the opportunity to do so). This may help to avoid a negative interpretation against the lessor in the event of an ambiguity.
So where do these considerations lead us? We have all heard clients ask us to get rid of the boilerplate but, as we’ve seen, the boilerplate greatly assists courts to interpret leases. Without it the courts must seek out the intentions of the parties at the time of contracting and the results are far less predictable. The effect of this lack of certainty will inevitably create problems for both parties (and their lawyers) in the future.
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