The Evolving Role of Good Faith in Defining Landlord Disclosure Obligations

A commercial lease is a legally binding agreement that provides certainty as to the terms governing the landlord-tenant relationship. Although Ontario law does not impose a general obligation on landlords to disclose all material information under such a lease, the duty of honest performance and the duty to exercise contractual discretion in good faith may require a landlord to provide sufficient information to allow a tenant to verify lease charges, particularly where the landlord controls the relevant inputs. Two recent Ontario Superior Court of Justice (“Ontario Superior Court”) decisions illustrate how courts are applying these principles in the additional-rent context.

Duty of Good Faith: A Brief Overview

In Bhasin v. Hrynew, 2014 SCC 71 (“Bhasin”), the Supreme Court of Canada (“SCC”) recognized good faith as a general organizing principle in Canadian contract law and established a duty of honest performance, which requires parties not to lie or knowingly mislead one another in matters directly linked to contractual performance. This duty imposes a minimum standard of honesty in contractual performance. In C.M. Callow Inc. v. Zollinger, 2020 SCC 45 (“Callow”), the SCC clarified that the duty of honest performance may be breached not only by express falsehoods, but also by half-truths, omissions or silence that knowingly mislead the counterparty about matters directly linked to contractual performance.

The SCC’s decision in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 (“Wastech”) further refined the doctrine by focusing on the exercise of contractual discretion. In Wastech, the SCC affirmed the duty to exercise contractual discretion in good faith. A party breaches this duty where discretion is exercised in a manner that is arbitrary, capricious or disconnected from the objectives of the agreement.

Taken together, Bhasin, Callow and Wastech provide the current framework for good-faith contractual performance in Canada. That framework applies to commercial leases, as it does to contracts generally.

Disclosure in Commercial Leasing: Limits on Silence and When Good Faith May Require Disclosure

Generally, Canadian contract law does not impose a broad obligation on parties to disclose all material information. The duty of honest performance established in Bhasin is limited in scope. It requires parties to act honestly, but it does not impose an obligation to disclose all relevant information. Accordingly, landlords and tenants are not required to volunteer information simply because it may be relevant to the other party. Each party remains entitled to pursue its own commercial interests, provided it does not engage in misleading conduct.

However, in the commercial leasing context, Ontario courts have held that where a landlord controls the information necessary for a tenant to verify lease charges, good faith may support an implied obligation to provide the documents needed to substantiate those charges.

In such cases, silence may constitute a breach of the duty of honest performance where it creates or perpetuates a misleading impression in relation to contractual performance. In a leasing context, this may occur where a party’s communications give rise to expectations that are inconsistent with its actual intentions.

This does not prevent a landlord from acting in its own economic interest or require it to confer benefits not contemplated by the bargain. Rather, it requires that the exercise of discretion remains tied to the commercial objectives of the agreement. Even where a lease appears to permit a particular course of action, courts may examine whether that action aligns with the intended function of the provision and the expectations reasonably arising from the agreement.

Application in Recent Ontario Case Law

Two recent decisions from the Ontario Superior Court illustrate the increased willingness of courts to examine commercial leasing relationships through the lens of the doctrine of good faith.

In Hunt’s Transport Ltd. v. Eagle Street Industrial GP Inc. (“Hunt’s Transport”), the Ontario Superior Court considered a dispute regarding a landlord’s calculation of additional rent. Although the lease did not expressly require the landlord to provide supporting documentation, the Court found that the duty of good faith imposed an implied obligation to provide sufficient information to substantiate its reconciliation. The decision reflects a broader principle that, where one party controls information necessary to verify contractual performance, good faith may require disclosure.

The Ontario Superior Court took a similar approach in 1877352 Ontario Inc. v. 699147 Ontario Inc., holding that it was commercially reasonable to imply a term requiring the landlord to provide the documents supporting its annual additional-rent adjustment. The decision confirms that good faith extends beyond prohibiting dishonesty and may capture conduct that undermines a party’s reasonable expectations in verifying charges under the lease.

Together, these decisions show that courts will look beyond the express terms of the lease to assess whether the parties’ conduct is consistent with the purposes of the agreement and the expectations arising from it.

Practical Considerations for Landlords and Tenants

Both landlords and tenants should approach lease performance with careful attention to how their conduct may be perceived.

Tenant Best Practices:

•  Supporting Documentation: Seek clarification and supporting information where landlord determinations materially affect your financial obligations.
• Communications with Landlord: Ensure that all communications with the landlord are properly documented, particularly where they may give rise to expectations under the lease.
• Dispute Process: If a tenant disputes an additional-rent reconciliation, it should review the lease carefully before withholding payment. In some cases, the lease may require payment first and dispute resolution afterward.

Landlord Best Practices:

• Supporting Documentation: Ensure that any supporting documentation relied upon in the exercise of lease-based discretion, particularly where such discretion is based on landlord-controlled calculations, is readily available upon request.
• Recordkeeping: Maintain comprehensive and accurate records to mitigate risk in the event of a dispute.
• Communications with Tenants: Ensure that all communications with tenants are consistent with the purpose of the relevant lease provisions and avoid any communications that may give rise to unintended expectations.

Ultimately, the duty of good faith introduces a conduct-based constraint on commercial leasing relationships. While the written lease remains central, courts will increasingly assess whether parties have acted honestly, exercised discretion reasonably and conducted themselves in a manner consistent with the underlying purposes of the agreement. A careful, transparent and well-documented approach to lease performance remains the most effective means of managing risk.

Should you require clarification regarding any of the above, or wish to request a consultation, please do not hesitate to contact Paul DeFrancesca ([email protected]), Lovejot Bhullar ([email protected]) or Mila Simic ([email protected]). The authors gratefully acknowledge the assistance of summer student Richard Moshenski-Dubov in the preparation of this update.

This update is intended as a summary only and should not be regarded or relied upon as advice for any specific client or situation.

If you would like further information regarding the contents discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.