Staying Litigation In Light of Lease Arbitration Provision
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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.

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