COVID-19 introduced many new challenges for both individuals and businesses across the country. For many businesses, the need to close operations in accordance with pandemic restrictions came with many unknowns, many related to finances and the future of the business. For business owners who conducted operations out of a commercial rental property, it was unclear exactly what rights and obligations tenants and landlords had during such unprecedented times, and these issues continue to be disputed years later.
In a recent decision from the Court of Appeal for Ontario, a commercial tenant argued that they should not be required to pay commercial rent during the period in which the pandemic restrictions prevented them from accessing the premises they were renting.
Commercial tenant locked out of building during pandemic
In Niagara Falls Shopping Centre Inc. v. LAF Canada Company, the respondent landlord, owned a shopping centre outside of Toronto, Ontario. The appellant was a shopping centre tenant who operated fitness centres across Canada. The tenant entered into a commercial lease in April 2013 which stated that the tenant paid a monthly amount which combined rent and the tenant’s portion of operating expenses, which exceeded $101,000.
The Ontario government declared a provincial state of emergency due to the COVID-19 pandemic on March 17, 2020. One week later, the government had mandated the closure of all non-essential workplaces, including gyms and fitness facilities. While the tenant’s business was eventually able to re-open, there were several months of operating interruptions due to surges in the pandemic. In most instances, when the tenant could re-open, it often had to limit and monitor its capacity limits.
Parties enter into rent deferral agreement
In May 2020, the tenant and landlord entered into a rent deferral agreement that provided limited rent relief from April to June 2020. This agreement provided that 50% of the base rent was forgiven and 25% was deferred.
Once the agreement expired, the tenant subsequently paid rent until the end of 2020, despite being open with limited capacity.
Tenant refuses to pay rent during lockdown
The Ontario government implemented another lockdown on December 26, 2020, at which point the tenant refused to continue to pay rent. The landlord responded to this by bringing an action against the tenant for unpaid rent and other charges.
The appellant argued that it had no obligation to pay rent during government-mandated closures, relying on the doctrines of frustration and unjust enrichment, and pointing to the Force Majeure Clause (the “Clause”) in the lease. The tenant further counterclaimed for damages exceeding $618,824 and a declaration that:
- it was relieved of its obligation to pay rent during periods of government-mandated losures; and
- its obligation to pay rent would be reduced proportionately during periods of government-mandated capacity requirements.
Tenant is unsuccessful in defence of position
The landlord moved for a summary judgment, while the tenant did the same. By the time the matter was before the Court in November 2021, the tenant’s business had been closed for approximately nine months.
The motion judge rejected the tenant’s position and accepted the landlord’s argument that the government’s lockdowns constituted “restrictive laws” within the meaning of the Clause. This meant that the landlord was exempt from having to provide the tenant with the use of the rented premises.
The motion judge also rejected the tenant’s position that the Clause required the lease to be extended for a period equal to the closures, calling the notion “commercially absurd.” Further, the motion judge found that the Clause did not relieve the tenant of its obligation to pay rent.
Tenant Appealed Motion Judge’s Findings
The tenant appealed the decision and asked the Court of Appeal to find that the motion judge erred in their interpretation of the Clause.
The tenant sought a finding that either both parties should have been delayed from performing their obligations and, therefore, an extension to the lease should be granted. In the alternative, if the tenant was required to pay rent, they sought a lease extension equivalent to the months during which they paid rent for but could not access the premises.
Court of Appeal Orders Lease Extension
The Court agreed with the tenant that the motion judge had made extricable errors. The Court found that the closure of the premises constituted a force majeure event, thus triggering the Clause. Furthermore, the Court agreed that the lockdown was a “restrictive law.” However, the Court found errors in the motion judge’s decisions following those points of agreement, particularly their comment that the tenant’s position was “commercially absurd.”
The Court wrote that the motion judge made an error in interpreting the word “excuse” to me “exempted,” in reference to the finding that the respondent was not obligated to provide the appellant with access to the building. Instead, the Court of Appeal held that the obligation could be excused, but that the respondent then had an obligation to extend the rental period for a specific period of time after the lease expired.
The Court allowed the appeal and declared that the landlord was excused from their performance under the lease to provide access to the premises during government-mandated closure periods. The Court also ordered that the lease was extended by the extension period, during which time the tenant is not required to pay rent.
The Experienced Real Estate Lawyers at Baker & Company in Toronto Advise on Commercial Leasing Disputes
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