The right of a commercial landlord to terminate for non-payment of rent is well established, but it is not absolute. The Ontario Superior Court of Justice has confirmed in 2268188 Ontario Ltd. (Serenity Decks) v. 1540256 Ontario Ltd., 2026 ONSC 2695, that a landlord acting within the literal terms of a lease may nonetheless be found to have acted in bad faith, and may be ordered to pay damages, where the arrears it relies on are of its own making and the response is disproportionate to the breach. The decision is a cautionary one for landlords and a useful illustration, for those who advise them, of the limits the court will place on the strict enforcement of contractual rights.
The Facts
Serenity Decks held a 10-year lease commencing in 2018. In the fall of 2024, the landlord demanded a range of repairs and, concerned that accepting rent might waive its rights regarding the alleged breaches, began refusing rent payments from October 2024. By March 2025 the landlord resumed accepting rent, and the parties began discussing the months that had gone unpaid. By late July 2025, the tenant had paid all 2025 rent, and its counsel had transferred more than $22,000 toward the disputed 2024 months, leaving about $15,000 outstanding, a little more than one month’s rent.
On the evening of July 29, 2025, the tenant’s principal emailed the landlord’s counsel inviting arrangements to collect any outstanding monies the following day. The landlord did not wait. It locked the tenant out that same evening and purported to terminate the lease. Five days later, after the tenant commenced a court application, the tenant was allowed back in. It has paid all arrears and has paid rent on time since.
The Tenant’s Application: Damages for a Bad Faith Lockout
The court acknowledged that the landlord had technically acted in accordance with the lease, since the tenant was in arrears. But under s. 20(1) of the Commercial Tenancies Act, which gives the court broad discretion to grant relief from forfeiture on such terms as it thinks fit, the court found the landlord acted in bad faith and awarded the tenant $5,777.88 in damages for five days of lost business.
Four factors drove the analysis. First, the arrears originated in the landlord’s own refusal to accept rent. Using arrears one has created as grounds for termination undermines the tenant’s legitimate contractual interests and is contrary to the organizing principle of good faith in Bhasin v. Hrynew. Second, the tenant’s conduct was not serious, since by the lockout date it had paid all rent owing for 2025 and had just transferred over $22,000. Third, the gravity of the breach was small, amounting to just over one month’s rent, seven years into a ten-year lease. The court also pointedly questioned the timing of the lockout, the evening before the tenant said it would pay, which would have removed the landlord’s right to lock the tenant out at all. Fourth, the disparity in harm was stark, as the tenant ran its entire business from the premises.
The Landlord’s Application: Termination for Failure to Repair
The landlord separately sought a declaration that it could terminate based on the tenant’s alleged failure to maintain the premises, relying on a 2024 building report listing potential Fire Code items. The court dismissed the application, applying the principles from Angling Outfitters. The mere existence of a breach does not give a right of re-entry, and forfeiture requires breaches so grave that they deny the landlord substantially the whole benefit of the lease, with conduct that is “persistent, substantial or reprehensible.” Here there was no correspondence about repairs after March 2025, no proven Fire Code violations, and no evidence the landlord considered the deficiencies serious enough to do the work itself and charge it back as the lease allowed. Resuming acceptance of rent in March 2025 was itself an implicit assertion that the lease should continue.
Why This Matters to Transactional Lawyers
For counsel advising commercial landlords, Serenity Decks is a reminder that a client’s strongest contractual right is also its most easily overplayed. The lease will often supply a technical basis for termination, but technical entitlement is no longer the end of the inquiry.
When leasing clients call about a defaulting counterparty, the strict rights in the lease are only the starting point. A landlord weighing a rent-refusal strategy to preserve its remedies should understand the trap this case illustrates. Manufactured arrears make an unreliable foundation for termination, and courts will scrutinize both the origin of the default and the proportionality of the response. Practical drafting and advisory points follow. Build a clear protocol into the lease for accepting rent without prejudice during a default dispute, so the client never feels compelled to refuse rent. Document repair complaints contemporaneously and consistently, since long silences will be read as acquiescence. And before any lockout, pause when the tenant has communicated an imminent cure. Terminating hours before a promised payment looks less like enforcing a right and more like seizing a pretext, and this decision comes at a cost.
