Court Clarifies “Clean Hands” Doctrine Applies to Post-Breach Conduct

Yona Gal, J.D., LL.MCommercial, Commercial Leasing0 Comments

In 232702 Ontario v 1305 Dundas, 2019 ONSC 1885, the Ontario Superior Court of Justice recently considered the “clean hands” doctrine in the context of a terminated commercial lease for non-payment of rent.

Importantly, the Court clarified that the doctrine of “clean hands” is not restricted to conduct occurring prior to the breach, but encompasses subsequent conduct as well.

The Test for Relief from Forfeiture

Under s. 98 of the Courts of Justice Act and s. 20 of the Commercial Tenancies Act, a court may grant relief from forfeiture, including forfeiture of a lease for non-payment of rent.

The court’s power to relieve from forfeiture is an equitable remedy.  It is discretionary, fact-specific and granted sparingly.  The party seeking relief must prove that enforcing the contractual right would lead to inequitable consequences.

In Saskatchewan River Bungalows Ltd. v Maritime Life Assurance Co., the Supreme Court of Canada held that a court will exercise its discretion by considering the following factors:

  • The conduct of the party seeking relief;
  • The gravity of the breach;
  • The disparity between the value forfeited and the damage caused by the breach.

The Test in the Context of Non-Payment of Rent

In the context of a default due to non-payment of rent, a court will also consider the following factors:

  • Whether the Tenant comes to court with clean hands;
  • Whether there is an outright refusal to pay rent;
  • The extent of the rental arrears;
  • Whether the Landlord has suffered serious loss due to the delay in paying rent.

The Doctrine of Clean Hands

Despite its seemingly open-ended scope, courts have developed the “immediate and necessary relation” standard to define which conduct triggers the clean hands doctrine.

Equity, according to this standard, does not demand blameless lives.  Rather, as the Ontario Court of Appeal held in City of Toronto v Polai, there must be an “immediate and necessary relation” between the misconduct and the transaction before the court, and the misconduct must be done to the other party.

In applying the “immediate and necessary relation” standard, the Ontario Superior Court of Justice held that conduct occurring subsequent to the breach was still relevant to the doctrine of clean hands as:

“…the subsequent conduct involved the same parties and arose in the context of their ongoing landlord/tenant relationship, those actions are ‘immediate and necessarily’ related to the equity sued for.”

The Court added that this conclusion was logical since the suit in equity for relief occurs at the moment before the court, not at the time of the earlier breach and termination.

If you require legal advice and representation in respect to a commercial lease, please contact us for an initial consultation.

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Yona Gal, J.D., LL.M

Yona Gal, J.D., LL.M

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