Lease Termination Clauses: Know the Target Before Pulling the Trigger

Written By Michael Mysak, David McKinnon, Ciara Mackey and Heather Taskey

In the glow of negotiating a commercial lease, no landlord or tenant wants to think about how it might end early. But recent developments again remind us that a nuanced termination clause will significantly affect if, when and how a termination right is triggered. And then there is the practical question, how will the parties know when that termination right has been triggered? The recent decision in CNOOC Petroleum North America ULC v 801 Seventh Inc, 2025 ABKB 145 provides important insights into these questions and several other legal issues, including the interpretation of Alberta occupational health and safety legislation respecting asbestos, and the legal duties of good faith in contractual performance when parties are contemplating or planning litigation.

This blog is the first in a series on the decision, and focuses on the key findings and takeaways for landlords and tenants concerning termination clauses in commercial lease agreements.

Case Background

801 Seventh Inc. (the Landlord) owned a 37-storey building in downtown Calgary. In 2013, the Landlord leased virtually all of the office space in the building to Nexen in a strong office leasing market and when Nexen expected it would be expanding. The lease ran until 2031.                                                                    

Soon after, two things happened. First, global oil prices dropped, dramatically depressing the office leasing market. Second, Nexen had been taken over by the Chinese National Offshore Oil Company, eventually becoming CNOOC North America ULC (CNOOC or Tenant)—and was under immense pressure from its Beijing headquarters to cut costs. CNOOC downsized its staff, leaving several floors vacant. CNOOC began exploring ways to relieve the cost burden of the lease.

In November 2017, the Tenant discovered that the building's original fireproofing contained trace amounts of asbestos. This fireproofing is very common in buildings constructed in the 1970s and early 1980s and is present in many buildings in downtown Calgary (and throughout North America).

The Tenant alleged that the mere presence of trace asbestos breached the lease and Alberta occupational health and safety legislation. It said it would not stay in the building unless all the fireproofing was removed.  Notwithstanding that, the Tenant remained in the building for another 18 months, throughout which it conducted significant testing for asbestos fibres, all of which showed that the building was safe.

The Landlord tried to work with the Tenant to address its concerns, and to meet the Landlord’s own obligations under the Lease and Alberta law. The Landlord even brought a declaratory Court application in early 2019 to obtain a direction as to what its obligations were. But the Tenant refused the Landlord's efforts and did not cooperate in the declaratory proceeding, and in May 2019 the Tenant instead terminated the lease and sued the Landlord for $70 million alleging breaches of the lease, negligence, and unjust enrichment. The Landlord countersued both the Tenant and its guarantor parent company for $550 million representing the foregone rent.

After a lengthy trial on liability in 2022 and 2023, the Court ultimately:

• dismissed the Tenant’s assertion of a right to terminate the lease, finding that the building was, in fact, always completely safe and would remain so, and that the Landlord had not breached the lease in any material way, and
• allowed the Landlord's counterclaim against the Tenant and its guarantor parent company, finding the termination was wrongful.

A key issue before the Court was the interpretation of a “damage and destruction” clause, which provided both parties with a contractual right to terminate the Lease and which CNOOC wrongly concluded had been triggered by the discovery of asbestos.

Termination Clause Triggers: Cause or Effect?

The lease had an express termination clause with a threshold trigger in the preface: whether the building was "damaged or destroyed, or otherwise rendered unfit for occupancy by the Tenant". The Tenant said the clause was triggered by the discovery of trace asbestos in the building's original fireproofing. The Landlord disagreed.

The Court undertook an extensive, wholistic, and nuanced analysis of the language in the lease. It found that the discovery of asbestos could have triggered the termination right, but did not because the building was never rendered "unfit for occupancy"—that condition was the trigger.

By adding the broadening words "or otherwise rendered unfit for occupancy by the Tenant", the parties chose the condition of the building (being unfit for occupancy), not the cause (an event of damage or destruction), as trigger. 

Had the parties intended the trigger to require only an event of "damage or destruction", they needed to expressly say that. Instead, they said more.  As a result, the Court found that discovery of latent, trace asbestos, though not a specific event of damage or destruction, could have triggered the termination clause if it had rendered the building unfit for occupancy.

Deciding What Determines "Unfit for Occupancy"

The termination clause at issue described "unfit for occupancy" as "inaccessibility to the Leased Premises due to emergency, health, safety, or other reasons". The Tenant alleged a health and safety impediment. But the Court found that the parties had agreed in the lease that "inaccessibility" was to be the gauge for whether the premises had been rendered unfit for occupancy due to "emergency, health, safety, or other reasons". The Tenant had to show inaccessibility due to health and safety reasons, and it failed to do so.

Having agreed to set the trigger for termination at the point of inaccessibility (rather than any other specific legal or factual finding (for example, finding a single asbestos fibre)), the applicable test was whether the building was inaccessible for health or safety reasons. The Court emphasized that the parties' own opinions of fitness or safety were not relevant—the question was whether the building was in fact unfit or unsafe. For questions of fact, the Court turned to scientific expert evidence.

After thousands of tests over dozens of months, and extensive expert evidence at trial (including that the building became the second most tested building in North America—next only to testing after 9/11 of the Deutsche Bank Building next to ground zero), the Court found there was no health or safety risk in the building from the "almost non-existent" asbestos. Accordingly, the Court found that the building was safe prior to termination and was not on any trajectory to becoming unsafe for the duration of the lease. The evidence did not prove the building was rendered unsafe in fact; even less was the building rendered inaccessible safely.

Key Takeaways

• Both landlords and tenants should be mindful that termination clauses which go beyond events of "damage and destruction" to include changes to the condition of premises may change the focus for triggering a right of termination from being event-based to effect-based, broadening the scope of potential termination grounds.
• Specific contractual language will define the threshold for termination. Here, the parties could have chosen a legal threshold (such as a legislative definition), a scientific finding (based on expert evidence) or a specific fact (such as a single asbestos fibre) as the trigger for termination.
• A contractual right to terminate should be exercised cautiously and with careful regard to the triggering contractual language. Termination in the absence of evidence that the agreed test has been met could lead to liability for breaching your lease.

A Bennett Jones team including Blair Yorke-Slader KC, Michael Mysak, David McKinnon, Ciara Mackey, David Wahl, Tyler McDonough, Alicia Yowart and Heather Taskey acted for the Landlord in this case. If you have any questions about the Court's decision or its implications for commercial leases or landlord/tenant obligations, please contact the authors.

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