Category: Commercial Leases

The Ontario Court of Appeal recently decided the matter of 402 Mulock Investments Inc. v. Wheelhouse Coatings Inc.. The issue in this case arose from a dispute between a commercial landlord and tenant regarding the meaning of the provisions relating to unpaid rent and payment of repairs in their Lease Agreement. Both parties appealed the initial decision and were successful in their own right.

This case is a reminder to both commercial landlords and tenants to ensure that relief is requested in the proper form.

Commercial tenant alleges landlord illegally terminated lease

The commercial landlord, Wheelhouse Coatings Inc., terminated the lease with the tenant, 402 Mulock Investments Inc., early in December 2020. Approximately two weeks after the termination, the landlord entered the unit to remove the tenant’s property and subsequently leased the unit to another party.

In January 2021, the tenant commenced an action against the landlord alleging that the landlord had illegally terminated the lease and removed the tenant’s property. The tenant sought an injunction from the Court, in addition to the return of the security deposit in the amount of $65,000 which the landlord was holding under the lease.

Commercial landlord was ordered to vacate the premises and return tenant property

Under the Commercial Tenancies Act, commercial landlords cannot enter premises occupied by a tenant as they please, even after issuing a notice of termination of a lease as a “non-enforcement period” applies after a notice is issued. At the initial hearing, the Court determined that the non-enforcement period ran from the date the notice was issued, December 8, 2020, through January 3, 2021.

The landlord was ordered to give vacant possession of the portion of the leased premises which were not subject to subleases by April 15, 2021, and return the tenant’s property to the tenant. 

There was no order made regarding the security deposit.

Commercial landlord claims tenant responsible to “top up” security deposit

After the initial hearing, the landlord sent the tenant an invoice to split the cost of replacing the roof. When the tenant’s invoice was not paid, the landlord held the invoiced amount back from the return of the security deposit. The landlord claimed that the Lease Agreement required the tenant to “top up” the security deposit to the full $65,000. Since the tenant did not do so, the landlord considered the tenant to be in default and applied for an order for writ of possession.

The tenant argued that it was not obligated to pay the invoice and that the landlord should have returned the security deposit months earlier. Even if it was obliged to pay the invoice, the tenant submitted it was not required to “top up” the security deposit.

Commercial landlord application for writ of possession is unsuccessful

The application judge held that the tenant had to pay the roof invoice. While the Lease Agreement required the deposit to be returned by August 2020, the application judge found that the landlord should have returned the deposit to the tenant much earlier in August 2017. Furthermore, the invoiced amount should not have been deducted from the deposit, nor should the landlord have asked for a “top up.” 

The application judge ordered that the tenant pay the invoice and offset this amount against the deposit. The deposit, less the unpaid invoice, was to be paid by the landlord to the tenant. No writ of possession was issued by the Court.

Both parties appealed parts of the application judge’s findings

Both the landlord and the tenant appealed the application judge’s decision to the Ontario Court of Appeal. The landlord appealed on the basis that the application judge should not have ordered the return of the security deposit to the tenant. The tenant cross-appealed, claiming that the invoice was not in accordance with the Lease Agreement and should not have been used to offset what the landlord owed.

Court of Appeal finds the security deposit did not have to be returned as the commercial tenant was in default

The Court of Appeal was required to interpret section 1.9 of the Lease Agreement, which provided that the:

“The Landlord may… apply all or any portion of the Second Security Deposit to any Tenant default. In the event that… the Second Security Deposit is applied by the Landlord on account of any Tenant default, the Tenant shall pay to the Landlord an amount sufficient to restore the Second Security Deposit to the original amount… The Second Security Deposit shall be held for a period of Three (3) Years from the Commencement Date, August 15, 2017. At the end of the Three (3) Year period, on August 14, 2020, and provided that the tenant is not then in default at that time, the Second Security Deposit shall be returned to the Tenant, and provided there has been no deduction from the amount of the Second Security Deposit by the Landlord as a result of default by the Tenant, without any setoff or deduction. If the amount of the Second Security Deposit has been reduced… then the remaining amount of the Second Security Deposit shall be returned to the Tenant.”

The application judge interpreted this provision to mean that the landlord was required to return the security deposit to the tenant without deducting any amounts in default. However, the Court of Appeal found that this interpretation did not factor in the clear wording relating to defaul, therefore the landlord was entitled to retain the deposit if the tenant was in default as of August 2020. The application judge did not assess whether the tenant was in default, however, the Court of Appeal found that the tenant had not paid rent when it became due on August 1, 2020, therefore the landlord was allowed to retain the deposit.

The cost of the roof replacement was to be amortized over its useful life, not over two years

Regarding the tenant’s cross-appeal, the Court of Appeal considered sections 2.6 and 1.6 of the Lease Agreement, under which the landlord was responsible for “serving the Leased Premises and amortizing this cost in the Additional Rent.” 

Regarding additional rent, section 1.6 read:

“Notwithstanding the foregoing, (i) the landlord shall, at its own expense, be responsible for all structural repairs or replacements and all work done specifically for other tenants, (ii) any other capital repairs or replacements shall be amortized over the useful life of the repair or replacement determined in accordance with generally accepted accounting [principles], consistently applied, and (iii) the Landlord’s management and administration fees shall not exceed fifteen percent (15%) of the Additional Rent excluding taxes and insurance.”

The application judge had concluded that the cost of replacing the roof at the premises could be amortized as additional rent. However, the Court of Appeal found that the application judge erred in allowing the cost of the roof replacement to be amortized over two years when it should have been “amortized over its useful life.” The roof replacement was found to be a “capital repair.”

The parties did not request declaratory relief 

Given that neither party applied for declaratory relief, or a determination of the amount payable to the landlord, the Court of Appeal merely struck two findings from the application judge’s decision. 

Since both parties were successful in their own right on appeal, an order for costs was not awarded. 

Contact the Lawyers at Baker & Company in Toronto for Experienced Advice on Commercial Leasing

At Baker & Company, our real estate lawyers take the time to learn about each clients and understand their unique needs when it comes to commercial and residential real estate matters. Our team utilizes our broad base of experience and expertise to provide exceptional risk management and legal advice when guiding clients through leasing disputes. To speak with a member of our team regarding your real estate concerns, call us at 416-777-0100 or contact us online to schedule a consultation.

An arbitration clause is a clause in a contract that requires the parties to resolve any disputes through arbitration, rather than proceeding through the courts.

While many commercial lease disputes are resolved in the courts, a recent Ontario case considered the impact of an arbitration clause in a commercial lease on the parties’ dispute.

Parties Enter Into Commercial Lease with Arbitration Provisions

In October 2017, the landlord and the tenant entered into a commercial lease for premises in Toronto. The term of lease began on November 1, 2017 and was set to expire on December 31, 2022.

The lease required the tenant to pay monthly base rent, as well as monthly additional rent.

The lease also contained arbitration provisions.

Tenant’s Business Impacted by COVID-19 Pandemic, and Tenant Ceases to Pay Rent

The tenant paid the rent required for over two years. However, the COVID-19 pandemic impacted the tenant’s business, causing the tenant financial difficulties.

Initially, the landlord and tenant worked together to address the problem. The landlord was prepared to defer some rent, and it initially worked with the tenant to apply to the Canada Emergency Commercial Rent Assistance Program so that the tenant could obtain some relief. 

However, following failed negotiations to terminate the lease, the tenant made some rent payments late and eventually stopped paying the rent entirely beginning in January 2021.

Landlord Commences Court Action and Tenant Attempts to Stay in Favour of Arbitration

As a result, the landlord commenced a court claim seeking the amounts it claimed were owing to it under the lease, consisting of arrears of base rent and arrears of additional rent. The landlord made no attempt to take possession of the leased premises, instead electing to treat the lease as ongoing.

In response, the tenant initially served the landlord with a Notice of Intent to Defend and, later, brought a motion before the court seeking to stay the landlord’s action on the basis of the arbitration provisions contained in the parties’ lease.

The tenant’s motion was grounded in s. 7(1) of the Arbitration Act, 1991. Under the provision, if a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration under the agreement, the court in which the proceeding is commenced must stay the proceeding on the motion of one of the other parties to the arbitration agreement.

Court Sets Out Framework for Granting Stay of Court Action in Favour of Arbitration

The court began by noting the mandatory nature of s. 7(1) of the Arbitration Act and the statutory presumption in favour of arbitration over litigation. However, the court also stated that under s. 7(2), the court may refuse to stay the proceedings in certain circumstances, including where the court determines that “the matter is a proper one for… summary judgment”, as was argued by the landlord.

The court then set out the five questions to consider in determining whether to grant a stay under s. 7(1), as established by the Ontario Court of Appeal in Haas v. Gunasekaram:

(1)  Is there an arbitration agreement?

(2)  What is the subject matter of the dispute?

(3)  What is the scope of the arbitration agreement?

(4)  Does the dispute arguably fall within the scope of the arbitration agreement?

(5)  Are there grounds on which the court should refuse to stay the action?

Court Analyzes Each Factor of Framework for Stay of Litigation

On the first question, the court determined that the arbitration provisions in the parties’ lease constituted an arbitration agreement.

On the second question, the court found that the subject matter of the dispute related to the rent and other amounts owed to the landlord by the tenant under the lease.

On the third question, the court noted that the scope of the parties’ arbitration agreement as stated in the lease provision extended to “any dispute between the parties…which touches upon the validity, construction, meaning, performance or effect of [the lease] or the rights and liabilities of the parties hereto or any matter arising out of or connected with [the lease]…” 

Fourth, the court held that the dispute clearly fell within the scope of the arbitration agreement. 

Having found that the first four criteria had been met, the court then set out to determine whether the fifth factor applied in light of the landlord’s argument that the matter was proper for summary judgment under the Arbitration Act.

Court Refuses to Stay Action in Favour of Arbitration

First, relying on the threshold for summary judgment in r. 20 of the Rules of Civil Procedure and the Supreme Court of Canada’s decision in Hryniak v. Mauldin, the court stated that litigation may only be allowed to proceed in the face of an arbitration clause where the case is a proper one for summary judgment because there are no genuine issues requiring a trial.

The court proceeded to review the tenant’s Notice of Arbitration. It noted that the notice raised two main issues: 1) the arrears of additional rent, and 2) mitigation.

With respect to the arrears of additional rent, noting that the tenant had not raised any issues with respect to the accuracy of the accounting or contract interpretation, the court concluded that the matter did not require a trial and could properly be resolved on a summary judgment motion.

Turning to the issue of mitigation, the court noted that the tenant’s argument had not been particularized. The court further acknowledged the landlord’s argument that, under the circumstances, it had no duty to mitigate. The court then stated:

“I wondered whether the tenant’s mitigation argument relates to its assertion that the landlord failed to assist it to obtain COVID-19 relief through government programs, but it has not alleged mitigation in connection with the facts it asserts about the landlord’s failure to provide it with a letter that it was in good standing. In any event, the record also indicates that the landlord had earlier assisted the tenant with its application for COVID -19 relief, and also that the tenant was not in good standing in January 2021, and had failed to furnish the agreed-upon rent cheques for January to June 2021. I am not satisfied that this factual issue raises a genuine issue requiring a trial, if the tenant even intended to rely on it for that purpose.”

As such, the court ruled that mitigation was not a genuine issue requiring a trial.

In the result, the court, therefore, exercised its discretion to dismiss the tenant’s motion to stay the litigation, holding that the case was a proper one for summary judgment before the court.

Finally, the court observed:

“Although not determinative of my decision, I also note that the arbitration provision in the lease is onerous, in that it requires three arbitrators, which seems an unnecessary and disproportionate expense for the parties in the context of this dispute. This factor lends support to my conclusion that arbitration is an impractical alternative in the circumstances.”

Contact Baker & Company for Experienced Advice on Commercial Leasing Matters

At Baker & Company in Toronto, our real estate lawyers take the time to speak with you and understand your unique needs in order to guide you through your real estate matter, whether commercial or residential. We rely on our broad base of experience and expertise to provide exceptional legal advice and risk management in a variety of leasing issues. Call us at 416-777-0100 or contact us online for a consultation.

We have been closely following Canadian cases in which commercial tenants have attempted to get out of their commercial leasing obligations due to the COVID-19 pandemic and the related shutdowns, in many cases citing force majeure clauses. 

More recently, the Quebec Court of Appeal examined a case in which the tenant invoked a force majeure defence in the landlord’s claim for unpaid rent during the pandemic.

Commercial Tenant Stops Paying Rent During COVID-19 Pandemic

The commercial tenant rented space from the landlord in Montreal at $39,600 per month pursuant to a ten-year lease. 

During the COVID-19 pandemic, and with the cooperation of the landlord, the tenant benefited from the Canada Emergency Commercial Rent Assistance (“CECRA”) program from April 1, 2020 to September 30, 2020 and paid a reduced rent during this period.

However, as of October 2020, when it ceased benefiting from the CECRA program, the tenant stopped paying rent to the landlord. 

Tenant Blames Pandemic for Unpaid Rent and Invokes Force Majeure Defence

The landlord took the tenant to court.

In response, the tenant claimed that the COVID-19 pandemic justified its failure to pay rent and invoked the force majeure defence.

On the date of the hearing, the total arrears was $277,201, representing seven months of past rent, charges and taxes.

At the outset, the Superior Court stated:

“During a global pandemic, should a commercial tenant be ordered to pay rent while the parties wait for a trial on the merits? This is the question the Court must answer.

As is so often the case, the answer is: It depends.

It depends on the facts and the particular circumstances of the case. Whether the tenant is occupying the premises and how the premises are being used are important considerations.”

Lower Court Rejects Tenant’s Claim of Force Majeure

In response to the tenant’s claim regarding the COVID-19 pandemic, the court stated that the sole existence of the pandemic did not excuse the tenant from its obligation to pay rent. The court explained that, while the Civil Code of Quebec may entitle a person to be freed from their legal obligations where there is proof of a superior force (or “force majeure”), the tenant’s situation did not meet the relevant criteria. The court further explained that a force majeure defence requires proof of both an unforeseeable and irresistible event. 

While the court accepted that the COVID-19 global pandemic was unforeseeable, it did not find that the pandemic met the criterion of an “irresistible” event, stating:

“For [the tenant’s] COVID defense to work, at the very least, it must prove that, as a result of the pandemic, there is nothing it can do to pay its rent because, no matter what it does, it cannot operate a business center on the premises and generate revenue.

[The tenant] has made no such proof.”

While the court acknowledged that the tenant had offered evidence of a decrease in its revenues due to the pandemic, it stated that such a decrease was not enough to free the tenant of its legal obligations following the doctrine of superior force.

As a result, the court issued a safeguard order compelling the tenant to pay the landlord $79,200 for the rent of April and May 2021 within 10 days and to further pay the landlord $39,600 in rent on the first of every month, beginning on June 1, 2021 and for a period of six months up to and including the rent for November 2021.

The tenant applied for leave to appeal to the Quebec Court of Appeal.

Court of Appeal Refuses to Hear Tenant’s Appeal

On appeal, the tenant claimed that the lower court had erred in law by ruling that the COVID-19 global pandemic was unforeseeable, but that the tenant had not satisfied the irresistibility requirement in its force majeure defence. The tenant further claimed that the lower court had made palpable and overriding errors by not giving proper weight to its loss of revenues. 

However, the Court of Appeal held that the lower court had applied the correct legal test and conducted a careful analysis of the circumstances. It therefore dismissed the tenant’s application for leave to appeal.

Contact Baker & Company for Experienced Advice on Commercial Leasing Matters

At Baker & Company in Toronto, our real estate lawyers take the time to speak with you and understand your unique needs in order to guide you through your real estate matter, whether commercial or residential. We rely on our broad base of experience and expertise to provide exceptional legal advice and risk management in a variety of leasing issues. Call us at 416-777-0100 or contact us online for a consultation.

We have been closely monitoring how courts have been ruling on commercial rent disputes in response to the COVID-19 pandemic, writing about various cases across Canada here, here and here. With the exception of one Quebec case, courts have so far been rejecting commercial tenants’ attempts to reduce or excuse rent payments during the pandemic.

In the most recent case, a British Columbia court ruled that the tenant, Hudson’s Bay Company (“HBC”), was required to pay rent despite the COVID-19 pandemic. However, the court also granted HBC relief from forfeiture, provided it pay rent as due.

HBC Fails to Pay Rent During Pandemic

The landlord operates a shopping centre in Penticton, British Columbia. HBC has leased retail space for one of its stores in the shopping centre since 1996. The lease had been renewed several times and was set to expire in 2023.

Pursuant to the terms of the Lease, HBC was required to pay annual rent for the year 2020 in the total amount of $936,437. The annual rent was to be paid in 12 monthly installments of $78,036 each. The lease also contained a clause that required rent be paid “without any abatement, set-off or deduction whatsoever except as specifically provided for in this lease”.

Further, the lease contained a clause that set out the landlord’s right to terminate the lease for non-payment of basic rent, provided notice of default was given and the tenant failed to remedy the default within 30 days. Finally, the lease contained a force majeure clause, which excused a party from non-performance of certain lease obligations during a period of “unavoidable delay”, which was defined as follows:

“’Unavoidable Delay’ means any prevention, delay, stoppage or interruption in the performance of any obligation of the parties hereunder due to strike, lockout, labour dispute, act of God, or the occurrence of fire or other casualty, condition or cause which is beyond the reasonable control of the party obligated to perform despite all reasonable efforts of such party to perform (but shall not include any inability to perform because of any lack of funds or any financial condition).”

In March 2020, due to the COVID-19 pandemic, HBC closed its store at the shopping centre and it did not re-open until mid-May 2020. Moreover, beginning in April 2020, HBC ceased paying its monthly rent to the landlord. HBC had requested that the landlord restructure the lease in response to the disruptions caused by the COVID-19 pandemic. The landlord suggested that HBC apply to its tenant relief program, but HBC refused. 

Thus, on April 15, 2020, the landlord delivered a notice of default to HBC and demanded payment of the outstanding rent within 30 days. 

In response, on May 4, 2020, HBC wrote to the landlord advising it would not be paying rent due to the COVID-19 pandemic. 

In the following months, HBC continued to not pay rentand the landlord sent HBC a notice of default each month.  

Then, on September 4, 2020, HBC wrote to the landlord alleging that it was in default of the lease for failing to maintain the shopping centre in accordance with “first class regional shopping centre” standards and by failing to take extraordinary marketing initiatives during the COVID-19 pandemic. HBC requested an abatement of rent.

On November 9, 2020, the landlord issued a notice to quit and notice to terminate the lease agreement. The landlord alleged that HBC had been in wrongful possession of the premises since that date.

In its application to the court, the landlord submitted that pursuant to the terms of the lease agreement, HBC was required to pay the full amount of the agreed upon rent, without abatement or set-off, and that failure to do so entitled it to terminate the lease and retake possession of the rented premises.

In response, HBC submitted that the landlord was in breach of the terms of the lease in that it failed to provide a “high quality” shopping centre. HBC stated that, in the circumstances, the court should exercise its equitable and legal jurisdiction to prevent it from having “to bear the entire economic burden of an unprecedented public health and economic crisis”. HBC further argued that the COVID-19 pandemic amounted to “unavoidable delay” as defined in the lease and that the “unavoidable delay” clause operated to suspend its obligation to pay rent. Finally, it sought relief from forfeiture.

Court Grants HBC Relief from Forfeiture

After reviewing the applicable legal principles and the terms of the parties’ lease, the court first held that HBC was in default of its obligation to pay rent pursuant to the terms of the lease and was not entitled to an abatement or set-off.

However, the court ultimately held that HBC was entitled to relief from forfeiture of its interest in the premises, stating:

“Notwithstanding that HBC deliberately chose to not pay rent, I am satisfied that this is an appropriate case to grant relief from forfeiture. A significant factor leading to this conclusion is that the sum to be forfeited is out of all proportion to the loss suffered. HBC has leased the Premises since 1996, a period of almost 25 years. It undoubtedly has a substantial investment in the Premises. Moreover, the evidence before me is that there are no other premises in the area where the HBC store can be located. Accordingly, if forfeiture is granted, HBC would not only lose its lease and its investment in the Premises, but would not be able to relocate the store. In contrast, the loss suffered by [the landlord] is not large….

A further significant factor in my decision is the Covid-19 pandemic. The pandemic is, as HBC submits, unprecedented and has inflicted devastating economic losses on many, including HBC. It is the pandemic that is the root cause of the current dispute. In the circumstances, the court must attempt to ameliorate the consequences of the pandemic, where it can do so with equity and fairness.”

In the result, the court therefore declared that HBC was entitled to relief from forfeiture on the condition, however, that it pay the landlord all rent arrears, plus interest in accordance with the terms of the lease, and provided it pay ongoing rent to the landlord as provided by the terms of the lease.

Get Advice

Baker & Company has adopted all of the COVID-19 safety precautions and vulnerable employees have been invited to work from home. We are fully operational and continue to work on client assignments. Where possible, meetings are being held via video link or by telephone conference.

At Baker & Company in Toronto, our real estate lawyers take the time to speak with you and understand your unique needs in order to guide you through your real estate matter, whether commercial or residential. We rely on our broad base of experience and expertise to provide exceptional legal advice and risk management in a variety of leasing issues. Call us at 416-777-0100 or contact us online for a consultation.

Earlier this year, we wrote about an Ontario decision in which the court took judicial notice of the landlord’s anti-black racism after the landlord attempted to terminate the tenant’s commercial lease.

Last week, the Ontario Court of Appeal released its decision in the case in which it found no errors with the application judge’s assessment of the evidence and dismissed the landlord’s appeal.

Landlord Tries to Evict Tenant

In 2013, the tenant took assignment of a lease for a commercial unit located in a shopping plaza in Toronto. The tenant was a family business, run by a husband and wife team.

The tenant operated a restaurant and bar, serving what was described as African/Black/Caribbean cultural foods and catering to a primarily, but not exclusively, Black community customer base. 

The lease was for a five-year term, ending July 31, 2017. There were two options to renew for additional five-year periods. The lease provided that written notice of the exercise of the option was to be given by registered mail at least six months prior to the expiry of the lease (i.e., by January 31, 2017).

The tenant had not given written notice of its exercise of the option as required, although it had attempted to contact the landlord on numerous occasions. The landlord kept the tenant as an overholding tenant from August 2, 2017 to May 28, 2020, when it terminated the lease. 

The tenant applied to court, seeking relief from forfeiture pursuant to s. 98 of the Courts of Justice Act.

Lower Court Take Judicial Notice of Landlord’s Anti-Black Racism

Ultimately, the application judge found in favour of the tenant for several reasons, including that the tenant had not breached the lease, had made improvements to the premises, had attempted to contact the landlord numerous times, and had acted in good faith. 

Additionally, the application judge took judicial notice of the landlord’s attitude towards the tenant and its racist undertones. The application judge found that the affidavits of the landlord and its agents were “almost a caricature of racially derogatory themes”. 

While the application judge opined that the landlord’s position may not have been consciously racially motivated, he stated nonetheless:

“While a single adjudication dealing with a discreet conflict between a commercial Landlord and Tenant cannot possibly address society’s many challenges with respect to racial justice, it equally cannot ignore them. At the very least, the societal realities pertaining to Black businesspeople like the Tenants must be factored into the exercise of the Court’s discretion in considering equitable remedies like injunctions and relief from forfeiture.”

The landlord appealed the decision to the Ontario Court of Appeal. Among the issues raised, the landlord took issue with the application judge’s observations with respect to anti-Black racism. 

Ontario Court of Appeal Dismisses Landlord’s Appeal

At the outset, the court held there had been sufficient evidence to support the application judge’s conclusions on the facts and that the landlord had not demonstrated a palpable and overriding error in the application judge’s assessment of the evidence. 

With regard to the application judge’s comments on anti-Black racism, the court stated:

“There was language in the Landlord’s affidavits that suggested its concern to find a tenant that would attract “like minded family-oriented customers” as opposed to a “liquor bar” was stereotypical labelling. The evidence supported the application judge’s conclusion that the real issue for the Landlord was the fact that the “Tenant is a Black-owned and operated business and caters to an Afro-Caribbean community”.

The application judge was entitled to take judicial notice of anti-Black racism in Canada. He found that whether the Landlord’s racial stereotyping was conscious or not, it was a matter he could take account in the exercise of his discretion to grant relief from forfeiture. As he put it…“the societal realities pertaining to Black businesspeople like the Tenants must be factored into the exercise of the Court’s discretion in considering equitable remedies like injunctions and relief from forfeiture.”

Based on all the evidence, including the Tenant’s evidence and the evidence of the Landlord’s own witnesses, the application judge was entitled to conclude that anti-Black racism was relevant to the Landlord’s refusal to negotiate a renewal of the lease, regardless of whether the Landlord’s actions were consciously motivated by racism.”

In the result, the court therefore dismissed the landlord’s appeal.

Get Advice

Baker & Company has adopted all of the COVID-19 safety precautions and vulnerable employees have been invited to work from home. We are fully operational and continue to work on client assignments. Where possible, meetings are being held via video link or by telephone conference.

At Baker & Company in Toronto, our real estate lawyers take the time to speak with you and understand your unique needs in order to guide you through your real estate matter, whether commercial or residential. We rely on our broad base of experience and expertise to provide exceptional legal advice and risk management in a variety of leasing issues. Call us at 416-777-0100 or contact us online for a consultation.

We have previously written about cases in which commercial tenants tried to avoid paying rent, citing the COVID-19 pandemic and the related shutdowns. 

In a first case, in a decision that made headlines, a Quebec court issued a ruling in which it excused a commercial tenant from paying rent during the closure of its business due to the COVID-19 pandemic.

In a second case, an Ontario court came to a different conclusion, ruling that the commercial tenant was not relieved from its obligation to pay rent despite the COVID-19 pandemic and the government shutdowns.

More recently, a Quebec court faced a similar issue, in which a debtor applied to be relieved of its rent obligations due to COVID-19 shutdowns.

Company Stores Shut Down Due to COVID-19 Pandemic

The company in the recent Quebec case operated over 300 retail stores in Canada and the U.S.  However, its business was severely impacted by the COVID-19 pandemic and the government-imposed restrictions which followed.   

As a result, the company filed an Application for an Initial Order and an Amended and Restated Initial Order for the purpose of pursuing a restructuring of its business under the Companies’ Creditors Arrangement Act (the “CCAA”).

The court issued an Initial Order, which imposed a stay to prevent the company’s creditors from bringing or continuing proceedings or enforcement orders against it or its assets. The stay period had been extended several times and it remained in force.  

The Initial Order also provided that no person who supplied goods, services or the “use of leased property” to the company after the Initial Order, could be prohibited from requiring immediate payment.  

On November 11, 2020, the government of Manitoba issued an order closing non-essential businesses to the public in order to stem the rise in cases of COVID-19 in the province. The company’s Manitoba stores were covered by the Manitoba Order and had been closed to the public since November 11, 2020.  

On November 22, 2020, the government of Ontario also closed non-essential businesses to the public in several areas of the province.  Certain of the company’s Ontario stores were covered by the Ontario Order and had been closed to the public since November 23, 2020.  

The company thus claimed that so long as the Manitoba and Ontario Orders were in place, it was not “using” the premises it leases in those provinces and post-filing rent was neither due nor payable.  

The company applied to the court, seeking a declaration that where it was unable to operate a store in leased premises as a result of a federal, provincial, state, county or city decree, regulation or order, and it did not use the leased premises as a result, no rent would be due or payable during the lockdown period. The company’s application was based on section 11 of the CCAA, which gives the court discretion to make any order that it considers appropriate in the circumstances, subject to the restrictions set out in the Act. 

The company’s application was contested by the landlords of its Manitoba and Ontario Stores, citing s. 11.01(a) of the CCAA, which reads:

Rights of suppliers

11.01 No order made under section 11 or 11.02 has the effect of

(a) prohibiting a person from requiring immediate payment for goods, services, use of leased or licensed property or other valuable consideration provided after the order is made […].

In response, the company argued that for a debtor to be making “use” of property within the meaning of section 11.01 (a) of the CCAA, it must necessarily be carrying on the activity for which the property was leased, which was not its case due to the government shutdowns.  

Court Rejects Company’s Application

The court rejected the company’s argument relating to its use of the leased premises, stating:

“The Court does not agree with [the company] that for a debtor to be making “use” of property within the meaning of section 11.01 (a) of the CCAA, it must necessarily be carrying on the activity for which the property was leased. If that were the case, a debtor could choose to temporarily shut down operations in leased premises and the landlord would not have the right to insist on immediate payment. This could not have been what Parliament intended. 

While there is no doubt that [the company’s]’s ability to operate the Manitoba and Ontario Stores is severely limited by the COVID Restrictions, it is still using those premises….[…]

[T]he Court agrees with the Landlords that under the terms of the leases, [the company] is not relieved of the obligation to pay rent even if a government regulation or a situation of force majeure prevents one of the parties from fulfilling its obligations.”

As a result, the court refused the company’s application.

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Baker & Company has adopted all of the COVID-19 safety precautions and vulnerable employees have been invited to work from home. We are fully operational and continue to work on client assignments. Where possible, meetings are being held via video link or by telephone conference.

At Baker & Company in Toronto, our real estate lawyers take the time to speak with you and understand your unique needs in order to guide you through your real estate matter, whether commercial or residential. We rely on our broad base of experience and expertise to provide exceptional legal advice and risk management in a variety of leasing issues. Call us at 416-777-0100 or contact us online for a consultation.

In a recent Ontario decision, a court took judicial notice of the landlord’s anti-black racism in a dispute over a commercial lease.

Landlord Tries to Evict Tenant

In 2013, the tenant took assignment of the lease for a commercial unit located in a shopping plaza in Toronto. The tenant operated a restaurant and bar in the unit. It had spent $150,000 in installing improvements to the premises when it took it over in 2013.

The restaurant and bar are owned and operated by a husband and wife team, served what was described as African/Black/Caribbean cultural foods, was licensed by the LCBO to serve alcoholic beverages, and catered to a primarily, but not exclusively, Black community customer base. 

The tenant’s restaurant business was quite successful. Even during the COVID-19 pandemic, the tenant maintained its takeout business and had never missed paying any base rent or additional rent. 

Ownership of the plaza changed during the term of the tenant’s lease, with a new landlord acquiring the plaza in 2016. 

The original lease was for a 5-year term, from August 1, 2012 to July 31, 2017, with options to extend the term for two additional 5-year periods. The lease’s option to renew clause stated that the cutoff date for the tenant to provide written notice of its desire to exercise the option to renew was January 31, 2017. 

While no written notice of exercise of the option was provided by the tenant prior to the cutoff date, the tenant did try on numerous occasions, both before and after the cutoff date of January 31, 2017, to get in touch with the landlord and the manager by phone in order to start the renewal process, but with no success. In fact, it appeared that their calls were deliberately avoided.

After nearly a year of unanswered calls, the tenant had its leasing lawyer write to the manager indicating that it wanted to exercise its option. In his letter, the tenant’s lawyer explained that his clients had been advising the manager by phone message that they wanted to renew the lease, and that all they had gotten in return was a voice message saying “We’re looking into it.” 

Then, on May 28, 2020, the landlord delivered a letter to the tenant, stating: “The landlord hereby exercises its right to terminate the lease now deemed a monthly lease”. 

In its court filings, the landlord stated that the tenant was not to its liking because it did not attract what he called “like minded family-oriented customers”. 

In addition, a contractor who had worked for the landlord in the plaza stated to the court that: “The customers visiting [the tenant’s restaurant] seemed to me to be quite unlike, in a negative way, the usual clientele visiting other tenants…” He went on to say: “the [tenant’s restaurant] does not attract family-oriented customers and detracts from the appeal of the Plaza for families.” 

Finally, the landlord argued that if the tenant were to vacate the premises and make way for a new tenant, the landlord’s rental income would increase.

In response, the tenant sought relief from forfeiture and moved to enjoin the landlord from evicting it from the premises.The tenant claimed that the landlord’s real point was that the “wrong” kind of families ate at its particular establishment. It submitted that there was a barely veiled tone of racism in the observations made by and on behalf of the landlord about a Black community restaurant. Additionally, the tenant submitted that the landlord had recently failed to renew leases when they came due of at least one other tenant owned or operated by persons of colour. It was the tenant’s perception that the plaza was gradually being transformed in a racially defined way. 

Court Rules in Tenant’s Favour

Citing previous case law, the court began by explaining that the power to relieve from forfeiture is discretionary and fact-specific and is predicated on the existence of circumstances in which enforcing a contractual right of forfeiture, although consistent with the terms of the contract, visits an inequitable consequence on the party that breached the contract. It found that  none of the usual factors weighing against a party seeking relief had come into play. The court then stated:

“Since the Tenant was not in breach of the Lease, and no financial loss has been established by the Landlord, there is little to balance on the Landlord’s side of the equation other than the Landlord’s subjective view of what it called an “unattractive” Tenant. […]

More importantly, the prejudice that would allegedly be suffered by the Landlord is not one which carries weight in considering a balance of equities. As already indicated, the Tenant is of the view that it is the fact that the Tenant is a Black-owned and operated business, and caters to an Afro-Caribbean community, that is the real issue for this Landlord. I have already observed that the Landlord’s stereotypical portrayal of the Tenant’s customers’ behaviour fits an established pattern in society. In the Tenant’s view, the only “prejudice” the Landlord will have suffered if the Tenant does not have to forfeit the Premises is that the Tenant and its African Canadian customer base, who, as the Landlord’s affiant said, are “quite unlike, in a negative way” the rest of those at the Plaza, will remain in the Premises. With respect, this is precisely what legal scholars have identified as the “‘Othering’ of minority people…in the guise of legal method.” 

Generally speaking, a trier of fact can take judicial notice of facts that are “so notorious or generally accepted as not to be the subject of debate among reasonable persons”. To this I would add the observation that, “The existence of anti-black racism in Canadian society is not the subject of debate among reasonable people”.”

While the court observed that its decision in the matter at hand could not address society’s many challenges with respect to racial justice, it stated that it could equally not ignore them. It stated that, at the very least, the societal realities pertaining to Black businesspeople like the tenant had to be factored into the exercise of the court’s discretion in considering equitable remedies like injunctions and relief from forfeiture. 

The court then explained that s. 98 of the Courts of Justice Act provides that a court “may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just” and that the justice considerations entails, among other things, an assessment of the good faith of the parties. Ultimately the court held:

“The equities, as well as the balance of convenience, weigh in the Tenant’s favour. There is, objectively speaking, no prejudice to the Landlord in allowing the Tenant to remain as a rent-paying tenant of the Premises at the present base rent and additional rent, plus any applicable HST. Terminating the Tenant’s tenancy under present circumstances risks giving force to the Landlord’s subjective, if perhaps unconscious prejudices. 

On the other hand, if the tenancy were ended now, while the Tenant is in good standing in every respect, the Tenant would suffer irreparable harm. That is, it would lose not only its substantial investment in the Premises, but the goodwill associated with its well-established location. Its owners and customers would also suffer the indignity of being excluded from the Premises based on what can be seen as a form of bias which Ontario law rejects.”

As a result, the court found that the test for injunctive relief had been met and ordered that the tenant’s term under the lease would continue until July 31, 2022, which was the date when its first 5-year extension would have ended. It further ordered that all other terms and conditions of the ongoing tenancy would remain the same as in the lease, including the tenant’s option for a second 5-year renewal.

 Get Advice

Baker & Company has adopted all of the COVID-19 safety precautions and vulnerable employees have been invited to work from home. We are fully operational and continue to work on client assignments. Where possible, meetings are being held via video link or by telephone conference.

At Baker & Company in Toronto, our real estate lawyers take the time to speak with you and understand your unique needs in order to guide you through your real estate matter, whether commercial or residential. We rely on our broad base of experience and expertise to provide exceptional legal advice and risk management in a variety of leasing issues. Call us at 416-777-0100 or contact us online for a consultation.

We have previously written about a Quebec decision in which the court excused a commercial tenant from paying rent during the closure of its business due to the COVID-19 pandemic.

In that case, the court concluded that superior force caused by the COVID-19 pandemic had prevented the landlord from fulfilling its part of the lease, thus relieving the tenant from paying rent and the court ordered a reduction of rent in the amount of $26,950.

Ontario Court Rejects Tenant’s Claims

In a more recent Ontario case, the court came to a different conclusion.

In that case, the commercial tenant had closed its business from March 18, 2020 to May 25, 2020, due to public health mandated closures related to COVID-19 in Ontario. It later opened with limited operations and only resumed full operations in August 2020. 

At trial, among other issues, the tenant asked the court to relieve it of its obligation to pay rent during the shutdown period and pay a prorated amount of rent during the period of limited operations. The tenant based its claim on frustration and force majeure, arguing that the lease had been frustrated during the shutdown and was a force majeure.The tenant further submitted that the lease contained a force majeure clause and it should correspondingly be relieved of its obligation to pay rent.

The landlord disputed the tenant’s claim.

The court found that the force majeure clause in the lease did not relieve the tenant from the obligation to pay rent, stating:

“The obligation of the Landlord to provide quiet enjoyment is always subject to the payment of rent by the Tenant, as stated [in] the Lease. As [the tenant] did not pay rent during the subject periods, the Landlord’s obligation to provide quiet enjoyment correspondingly did not arise. […]

Government legislation enacted during the shutdown and the [limited operation period] to ensure the survival of small businesses focused on preventing eviction by landlords but did not suspend the payment of rent.”

As a result, the court rejected the tenant’s claim and ordered it to pay the rent.

Quebec Court Rejects HBC’s Claims

Similarly, in a Quebec decision this week, the court also rejected a commercial tenant’s claim that it should not have to pay rent due to the COVID-19 pandemic.

In that case, Hudson’s Bay Co. (“HBC”) was ordered to pay rent at six malls in Quebec after the company had ceased to pay rent in April. The landlords for the mall locations had gone to court to obtain safeguard orders to force HBC to pay rent. 

HBC had stated that it believed that the burden posed by the pandemic should be shared fairly by both landlords and retailers.

However, the interim safeguard orders did not decide whether the pandemic restrictions could be cited as a legal disturbance to justify not paying rent, so the issue will still need to be decided in court at a later date. Rather, the orders are intended to force HBC to keep paying as an emergency measure until the fundamental issue is settled.

The six safeguard orders require HBC to pay 100 per cent of the rent for a period of up to six months, starting in the month in which the landlords’ petitioned the court for help.

As a result, HBC must now pay upwards of $1.8 million in unpaid rent for the properties.

Get Advice

Baker & Company has adopted all of the COVID-19 safety precautions and vulnerable employees have been invited to work from home. We are fully operational and continuing to work on client assignments. Where possible, meetings are being held via video link or by telephone conference.

At Baker & Company in Toronto, our real estate lawyers take the time to speak with you and understand your unique needs in order to guide you through your real estate matter, whether commercial or residential. We rely on our broad base of experience and expertise to provide exceptional legal advice and risk management in a variety of leasing issues. Call us at 416-777-0100 or contact us online for a consultation.

In a decision that made headlines, a Quebec court recently issued a ruling in which it excused a commercial tenant from paying rent during the closure of its business due to the COVID-19 pandemic.

In July 2020, the tenant and landlord went to court over a number of issues, including the validity of the tenancy and the landlord’s claim for unpaid rent.

Bankruptcy, Assignment of Lease and Tenancy

The landlord, who owns a commercial building in Montreal, Quebec, had entered into a 5-year lease with a company in 2017. After the company made an assignment in bankruptcy in December 2017, the company assigned the lease to a new company (the “tenant”) in January 2018, who began operating a gym on the premises.

One of the first issues the court addressed was the landlord’s claim that the tenant was never allowed to occupy the premises.

The landlord’s claim stemmed from the fact that the original lease was signed with a company that subsequently declared bankruptcy and only then assigned its lease to the current tenant.

The landlord claimed that if it had been aware that the first company had gone bankrupt, it would never have allowed another company to take possession of the premises and would have immediately sought to have it evicted. It claimed that as soon as it became aware of the bankruptcy it sought an order of eviction. The court rejected this claim, finding that the landlord was well-aware of the bankruptcy and consented to the assignment.

The landlord further claimed that a company in bankruptcy was not legally capable of assigning the lease and only a trustee in bankruptcy would be allowed to do so.

However, the court rejected the landlord’s argument, finding that while a creditor of the bankrupt company might have had grounds to contest the transfer, the landlord did not. 

Claims for Unpaid Rent and COVID-19

According to the landlord, the tenant owed $145,311 in unpaid rent as of June 15, 2020. 

In response, the tenant made claims for reductions in rent and damages. One of the tenant’s claims for a reduction in rent stemmed from the time during which it was unable to operate its business on the premises due to the COVID-19 pandemic.

Pursuant to the Quebec government’s emergency decree on the COVID-19 pandemic, the tenant was forced to close its gym as of March 24, 2020 because its business operation was not on the list of essential services allowed to remain open. As a result, the tenant asked for a reduction of rent for the period of March to June 2020.

The tenant claimed that it was excused from paying rent because the COVID-19 pandemic constituted superior force, while the landlord denied that the pandemic qualified as superior force. Additionally, the landlord submitted that the lease included a provision which required the tenant to pay rent notwithstanding an event of superior force.

Superior Force (Force Majeure)

As we discussed in a previous post, a force majeure clause is included in a contract in case an unforeseen event occurs, making it impossible for one or more parties to carry out their obligations under the contract. This clause is usually contemplated with respect to what are often referred to as “acts of God”, such as earthquakes or hurricanes.

In Quebec, force majeure is called “superior force” and is defined in Art. 1470 of the Civil Code of Québec (the “CCQ”) as: 

1470. A person may free himself from his liability for injury caused to another by proving that the injury results from superior force, unless he has undertaken to make reparation for it.

Superior force is an unforeseeable and irresistible event, including external causes with the same characteristics. 

Court Finds in Favour of Tenant

The court rejected the tenant’s argument that it had been prevented from paying rent due to superior force cause by the COVID-19 pandemic, instead finding that superior force caused by the pandemic had prevented the landlord from fulfilling its part of lease, thus relieving the tenant from paying rent. The court explained:

“In the Court’s view, it is the Landlord that was prevented by superior force from fulfilling its obligation to [the tenant] to provide it with peaceable enjoyment of the Premises. While it is true that [the tenant] still had access to the Premises, continued to store its equipment there and benefited, to some extent, from services, the Lease provides that the Premises are to be used “solely as a gym” and this activity was prohibited by virtue of the Decree. As a result, it is the Court’s view that [the tenant] had no peaceable enjoyment of the Premises during this period.

According to Article 1694 [of the] CCQ, a “debtor released by impossibility of performance may not exact performance of the correlative obligation of the creditor”. Consequently, while the Landlord was prevented by superior force from providing peaceable enjoyment, it could not insist that [the tenant] pay rent.”

For similar reasons, the court found that the lease’s provision relating to superior force did not apply.

As a result, the court concluded that the tenant was not liable for unpaid rent for the months of March, April, May and part of June, 2020. Consequently, the court ordered a reduction of rent in the amount of $26,950 for those months.

Get Advice

Baker & Company has adopted all of the COVID-19 safety precautions and vulnerable employees have been invited to work from home. We are fully operational and continuing to work on client assignments. Where possible, meetings are being held via video link or by telephone conference.

At Baker & Company in Toronto, our real estate lawyers take the time to speak with you and understand your unique needs in order to guide you through your real estate matter, whether commercial or residential. We rely on our broad base of experience and expertise to provide exceptional legal advice and risk management in a variety of leasing issues. Call us at 416-777-0100 or contact us online for a consultation.