Executive summary
Dec 11, 2025
min to read
Renewal Provisions on a Commercial Lease and Offer Subject to Third-Party Approval
Key points to remember
This text was originally published in La Référence by Thomson Reuters under the citation Chronicle – Commentary on the decision 2177 23rd Avenue Holdings v. Pival International inc. – Renewal clauses and an offer conditional upon third-party approval (EYB2025REP3899).
The authors analyze a decision in which the Court of Appeal was called upon to interpret the scope of a clause contained in a commercial lease, where the parties disagreed as to whether the clause constituted a true renewal option. The Court also examines the legal effects arising from the transmission of an offer described as “conditional upon approval.”
Mr. Julien Tricart, Partner at BCF Business Law, is a member of the Civil and Commercial Litigation group. His practice focuses on civil and commercial litigation, construction law, and professional liability.
Ms. Eleonora Eusepi is a Partner in the Business Law group, where her practice focuses primarily on real estate law as well as banking and financing.
Ms. Catherine Gaudreau is a lawyer in BCF’s Civil and Commercial Litigation group.
1. Facts
The respondent, Pival International inc. (“Pival”), operates a transportation and logistics business. In July 2016, Pival entered into a five-year commercial lease with Placement Immobilier Cominar (“Cominar”).
The lease contains a renewal clause under which the lease may be renewed for an additional five-year term. To exercise this option, Pival was required to give Cominar notice of its intention to renew and to negotiate the new rent within 60 days of the notice.
The clause provides that the rent for the renewal term would be determined based on market and/or building rates in effect for an equivalent term, comparable premises, similar use, and located in the same area of the city. It further stipulates that, failing an agreement on rent or the conclusion of a new lease within the prescribed time period, the renewal option would become null and void.
In the spring of 2021, Pival notified Cominar of its intention to exercise the renewal option, and the parties entered into negotiations.
At the same time, Cominar was in the process of completing a going-private transaction, pursuant to which the building was expected to be imminently acquired by a third-party purchaser. In this context, Cominar undertook to obtain the purchaser’s approval before entering into any renewal agreement.
In October 2021, following discussions between the parties, Cominar submitted to Pival a renewal proposal expressly conditional upon the approval of the prospective third-party purchaser of the building. Pival accepted the proposal slightly more than one month later.
The renewal proposal was subsequently presented to the third-party purchaser, who declined to approve it.
Taking the position that a new lease had been formed upon its acceptance of Cominar’s renewal proposal, Pival commenced legal proceedings seeking a declaration that the lease had been renewed.
2. Decision at First Instance
The Superior Court concluded that Pival benefited from a genuine option to renew, as opposed to a mere right of first refusal, on the basis that the renewal clause referred to market rates, thereby rendering the rent determinable.
However, the trial court found that no new lease had been formed. It held that Cominar’s proposal did not constitute an offer to contract within the meaning of article 1388 of the Civil Code of Québec, given that it was expressly subject to third-party approval.
Nevertheless, the judge found that Cominar had failed to comply with its obligation to negotiate in good faith with Pival. In the judge’s view, but for this breach, a new lease would have been concluded. As the court was unable to determine the rent itself, it ultimately ordered the parties to negotiate in good faith in order to fix the rent in accordance with market rates.
The third-party purchasers, the appellants 2177 23rd Avenue Holdings (“Holdings”) and BP Cognac Canada Owner Limited Partnership (“BP Cognac”), appealed the Superior Court judgment, which had partially granted the relief sought by the respondent, Pival.
After examining the issues raised on appeal, including those relating to the renewal clause and conditional offers, the Court of Appeal overturned the first-instance decision. It held that the clause contained in the lease did not constitute a true option to renew. The Court further found that the trial judge erred in concluding that Cominar had breached its duty to negotiate in good faith. Finally, it determined that the remedy granted at first instance was inappropriate.
3. Decision of the Court of Appeal
A. Renewal Option Clauses
Renewal option clauses, whether contained in a lease or in another type of contract, are frequently the subject of litigation due to the often imprecise nature of their conditions and legal consequences.
The Court of Appeal therefore examined whether the clause contained in the lease between the parties constituted a true option to renew. Failing that, the Court had to determine whether the clause conferred some other form of right on the tenant.
Contrary to the trial judge’s conclusion, the Court of Appeal held that the clause did not constitute a genuine option to renew. Rather, it characterized the clause as conferring a right of preference.
The Court explained its conclusion on the basis that the element to be negotiated—namely, the rent—was not determinable. The contractual terms did not refer to a recognized price index, nor did they provide for an objective mechanism external to the parties for determining the rent. Instead, the rent was left entirely to the outcome of negotiations between the lessor and the lessee.
Moreover, the clause expressly set out the consequences of a failure to reach an agreement between the parties, namely that the renewal option would become null and void. As noted by the Court of Appeal, these two features of the clause deprived the renewal option of any binding character, thereby preventing it from qualifying as a true right of renewal.
Unlike a renewal option, a right of preference does not grant the tenant the right to extend the lease upon its expiry. Rather, it operates in a manner akin to a right of first refusal: if the landlord receives an offer from a third party that it is prepared to accept, it must submit that offer to the tenant holding the right of preference, who may then renew the lease on the same terms.
In the present case, it is, in our view, even debatable whether the wording of the lease actually provided for a right of preference of the type identified by the Court of Appeal.
What can be drawn from the Court of Appeal’s decision on this point is that, when drafting a renewal option clause, it is essential to consider carefully the implications of the method chosen to determine the element to be fixed and, where applicable, the consequences of failed negotiations.
Where the element is determinable or where its determination is based on an objective mechanism external to the parties, the exercise of the option is not left to the “mercy” of the parties and therefore retains a binding character.
Conversely, where negotiations are required, it may be necessary to provide for an arbitration clause or for the appointment of an expert to resolve a negotiation impasse, in order to preserve the binding nature of the clause.
Finally, the Court of Appeal also noted that a clause providing for negotiations between the parties gives rise to an implicit obligation to negotiate in good faith.
B. Offers Subject to Approval
Both the Superior Court and the Court of Appeal concluded that the acceptance of Cominar’s offer did not constitute an offer to contract within the meaning of article 1388 of the Civil Code of Québec and, accordingly, that such acceptance did not result in the formation of a contract between the parties.
As noted above, this case was characterized by the fact that Cominar was in the process of selling the property to a third party (Holdings and BP Cognac). When Pival informed Cominar of its intention to renew its lease, negotiations were initiated between the parties. Cominar submitted an offer to Pival, which was conditional upon acceptance by the third-party purchaser who was expected to acquire the property imminently. Although Pival accepted the offer, it was ultimately rejected by the third-party purchaser.
Indeed, even though this type of offer contains all of the essential elements of a contract, it does not constitute a true offer to contract within the meaning of the Civil Code of Québec, as it does not reflect a firm intention to be bound by the offeree’s acceptance—quite the contrary.
In fact, the party who receives and accepts such a conditional offer is considered the true “offeror,” as it is that party who thereby expresses a firm intention to be bound, subject to acceptance by the other party.
Finally, the Court notes that the inclusion of such an approval condition in a contract is not contrary to the principle of good faith and is instead consistent with respect for the parties’ contractual freedom.
This case serves as a clear reminder of the need for caution and precision when drafting a renewal option clause. It also highlights the principles and limits of judicial intervention in contractual matters.
When drafting a renewal clause in a commercial lease, it is essential to ensure that it is legally binding. This requires the inclusion of a clear mechanism for determining rent or for resolving any impasse in the event of a disagreement.
