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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.

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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 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.

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