Article by :
Harry H. Dikranian
Article written in collaboration with Sahra Moghe, a bachelor’s degree student in law at the Université de Sherbrooke.
In commercial leases, the distinction between a genuine renewal option and a simple invitation to contract or right of first refusal is fundamental. The classification of the clause directly determines whether there is an enforceable right to renew the lease. Quebec case law has gradually clarified this distinction, notably through the decisions Place Lebourgneuf Inc. v. Autodrome de Val Bélair Inc. (1985)1, (hereinafter, “Lebourgneuf”), 9021-6714 Québec Inc. v. 9069-5834 Québec Inc. (2003)2 and Wei v. Immeubles Pierre Léger Inc. (2019)3 (hereinafter “Wei”). Similarly, this concept was most recently studied in the case of 2177 Avenue Holdings v. Pival International Inc. (2025)4 (hereinafter “Avenue Holdings”). Together, these decisions establish a consistent analytical framework regarding the actual scope of so-called “negotiable” renewal clauses.
- The genuine option: a complete and irrevocable offer
In civil law, an option constitutes a firm and irrevocable offer, maintained for a specified period, which the beneficiary may accept unilaterally. To be binding, the clause must contain all the essential elements of the future contract or provide an objective mechanism for determining them.
In commercial leases, rent is an essential element. Therefore, a renewal clause can only constitute a genuine option if the rent is already fixed or can be determined according to a clear mechanism (indexation, arbitration, objective formula, etc.). In such cases, the tenant’s exercise of the option is sufficient to form the renewed contract, without the need for renegotiation.
- The “subject to agreement” clause: a simple invitation to contract
The difficulty arises when the clause provides that the renewal is “subject to agreement” on the future rent. Case law consistently holds that such a stipulation does not constitute a genuine option. (Lebourgneuf, para. 7).
- a) The Place Lebourgneuf decision: basis of the principle
In Lebourgneuf, the Quebec Court of Appeal laid the foundations for modern analysis. The clause in question provided for a right of renewal subject to agreement on the terms and conditions of the renewal. The Court concluded that a right drafted in this way gives the lessor the freedom to propose unacceptable conditions, thereby rendering the alleged right of renewal meaningless.
The Court specified that when the terms and conditions of renewal must be the subject of a new agreement, it is in fact a new lease that must be negotiated. An “agreement to agree” cannot, under Quebec civil law, give rise to an obligation to conclude.
This ruling clearly establishes that contractual freedom takes precedence: the court cannot impose the terms of a future contract whose essential elements remain undetermined.
- b) Subsequent confirmations
This approach was reiterated in 9021-6714 Québec Inc. v. 9069-5834 Québec Inc. (2003), where the Court of Québec concluded that a clause providing for renewal at a rent to be determined later does not constitute an option, but merely an invitation to negotiate. In the absence of an agreement on the rent, the lease terminates and the occupation becomes unlawful.
Similarly, in Wei, the Superior Court reaffirmed that a renewal clause “subject to agreement” has no binding effect on the renewal itself. The lack of agreement on the rent prevents the formation of the renewed lease, and the court cannot make up for this deficiency.
All this case law converges on a clear rule: the option implies a complete commitment; future negotiation of an essential element excludes its qualification.
- c) The 2025 Avenue Holdings decision:
In the recent Avenue Holdings case, the Court emphasized that when the clause expressly stipulates that the renewal becomes null and void in the absence of agreement within a specified period, the court must apply this consequence. In such circumstances, the clause does not confer a true option to renew, but at most a right of first refusal.
- The role and limits of good faith
The obligation of good faith governs all contractual relationships, including pre-contractual negotiations. In the context of commercial lease renewals, it requires the parties to conduct themselves in a fair and consistent manner. This means that the parties may not engage in delaying, misleading, or abusive behavior during discussions surrounding a potential renewal.
As the Court confirmed in Avenue Holdings, even when a party is found to have negotiated in bad faith, the appropriate remedy is generally the award of damages. The court cannot rewrite the clause, impose renewal, or set the rent when the parties themselves agreed that the option would lapse in the absence of an agreement. The Court of Appeal in Avenue Holdings also expressed serious reservations about the specific performance of an obligation to negotiate in good faith, emphasizing that such a remedy risks undermining the principle of freedom of contract and may prove ineffective in practice. (See also Wei, para. 27; Lebourgneuf, p. 368).
However, good faith does not transform an incomplete clause into a binding commitment. The case law is explicit: even if a party negotiated in bad faith, the court could not impose the essential terms of a new lease. It remains and confirms that the penalty for a breach of good faith lies in the possible award of damages, not in the forced formation by the courts of the contract.
- The consequences of the widespread use of “false options”
Contractual practice shows frequent use of ambiguous clauses leaving the rent “to be determined by agreement.” This widespread use has several effects that should concern practitioners.
First, it creates an illusion of security for the tenant, who believes they have a firm right to renew when in fact they only have the possibility to negotiate. Second, it transfers a significant economic risk to the tenant, particularly when substantial investments have been made in the leased premises. Finally, it encourages litigation at the end of leases, with the courts being called upon to rule on disputes concerning the interpretation of the clause and allegations of bad faith.
Case law, notably from Lebourgneuf and most recently in Avenue Holdings, reminds us that legal certainty depends on precise wording. An imprecise clause cannot be saved even by a general invocation of good faith.
Conclusion
Case law developments in commercial leases establish a clear guideline. A genuine option requires that the essential elements of the renewed lease be determined or determinable. Otherwise, the clause constitutes merely an invitation to contract.
Good faith requires fair conduct in negotiations, but it does not allow the court to fill in the gaps where there is no agreement on an essential element such as rent. Both the recent Avenue Holdings decision and Lebourgneuf, remain the cornerstone of this distinction.
Careful drafting is therefore required when it comes to commercial lease renewal clauses. Only a precise and comprehensive clause can ensure a genuine right of renewal and avoid the pitfall of a mere promise to negotiate.