We are likely to have come across renewal clauses in contracts.
Many contracts have terms that stipulate what happens when a contract reaches the end of its life.
Some contracts renew automatically, some renew under updated terms, or some say that a renewal can be agreed with new terms.
It is the latter form of renewal that can raise legal issues.
A Clause to Agree
Think of a clause in a rental agreement that says: “At the end of the term of this lease, the tenant may renew the lease, on the same terms as the previous lease, with a rental rate to be agreed between the landlord and tenant.”
Sounds straight forward, right?
Actually, no.
The clause is probably unenforceable, because it does not say what the rental rate is going to be.
It does not say that the rental rate will be the market rate, or a rate increased by a certain amount. It simply says: “a rental rate to be agreed.”
That is an “agreement to agree”, and it is not enforceable.
The Case of the Lease Renewal Clause
In the recent case of Gallant v. Johnson, 2024 ONSC 5777, the Ontario Superior Court of Justice grappled with this scenario.
The issue in that case was a renewal clause which said that the tenant would have the option to renew the lease for a further five years, “on such terms and conditions” as contained in the original lease, except for the rental rate “which shall be agreed upon by the Tenant and Landlord”.
The Tenant in that case exercised their right to renew, but the parties then could not agree on the rental rate.
When discussions fell apart, the Tenant sued the Landlord.
The Landlord’s lawyer argued that the term was nothing more than an “agreement to agree”, and the lawsuit should be dismissed because the Court does not have jurisdiction to enforce the unenforceable.
The Court accepted the Landlord’s argument, holding that the renewal term in the lease was nothing more than an agreement to agree, which is no agreement at all.
The Court further held that for a contract to be enforceable, it needs to have meaning beyond just that each party will agree to agree. Terms of a contract that have general language, which only say that the parties will agree to negotiate, cannot be enforceable.
Takeaways
Courts will not make new agreements for the parties, where there was only an agreement to negotiate.
The case serves as a cautionary tale for contract interpretation; to carefully look at clauses that while on their face may appear enforceable, may actually be unenforceable because they only require parties to agree to agree.
In such cases, it is agreed that such agreements cannot be enforced.
At Mills & Mills LLP our litigation lawyers regularly litigate contract cases, including cases involving contractual interpretation and invalid or unenforceable contracts. For information on your specific case, please contact our litigation lawyer and we would be happy to help.
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