Indemnity agreements are often included for commercial leases. These agreements allow the landlord to have their losses covered by a third party if the commercial tenant defaults. Indemnities are valuable to landlords as they act as security to ensure that the tenant fulfills their obligations, including paying rent that is due.
In a recent case from the Ontario Superior Court of Justice, FCP (BOPC) Ltd. v. Callian Capital Partners Inc., the Court examined a scenario involving two indemnity agreements for a commercial lease. The Court provided valuable insight for commercial landlords and tenants on how indemnity agreements can impact a finding of damages for defaulting on a commercial lease.
What Is An Indemnity Agreement?
An indemnity agreement in a commercial lease often involves a third party who agrees to cover any losses incurred by the tenant. The third party may be liable to pay the landlord for any losses upon default by the tenant, for example, in the event that the tenant fails to pay rent, unless the indemnifier has a contractual defense.
Commercial Tenant Unable to Pay Ongoing Rent and Arrears
In the case of FCP (BOPC) Ltd. v. Callian Capital Partners Inc., the parties entered into a commercial lease agreement in 2017. When the COVID-19 pandemic began in March 2020, the tenant, Callian Capital Partners, defaulted on their rent payment and the landlord then took steps to take possession of the leased premises.
After negotiations between the landlord and tenant, the parties signed an agreement that the tenant could remain at the premises if they fulfilled certain terms to pay their rent. Under the agreement, the tenant was to accept and acknowledge that the landlord could pursue further remedies if they could not pay their rent. Pursuant the agreement, the tenant was required to pay the landlord approximately $484,000 in unpaid rent.
At the time of the hearing, the tenant had failed to pay approximately $366,000 in rent arrears.
Tenant Continued to Use Premises Despite Not Paying Rent
The tenant claimed that, despite signing the agreement with the landlord, they could not be evicted, as they were approved for the Canada Emergency Rent Subsidy. However, the agreement between the parties contemplated that a stay of eviction would not prejudice the landlord if the tenant applied for the rent subsidy.
Despite the tenant’s inability to pay rent, they continued using the premises daily. Also, the amount of rent subsidy collected by the tenant was never paid to the landlord.
At the hearing, Justice Stewart held that neither the tenant nor the third-party indemnifiers had a defense to the landlord’s claim. Therefore, it was determined that the parties were jointly and severally liable for the tenant’s unpaid rent. Her Honour ordered that the parties pay the landlord $467,156.13 reflecting unpaid rent, in addition to costs and interest up to the date of the judgment. The landlord was also granted costs in the amount of $50,000.
Indemnifiers Claim Lesser Amount Owed Due to New Tenant
Following the decision, the landlord rented the premises to a new commercial tenant. The rent under the new lease was higher than that of the original lease.
One year after the new tenant entered into the lease, the landlord commenced a separate action against the indemnifiers, which were two companies associated with the tenant. The landlord claimed that the third-party indemnifiers should be required to pay the tenant’s unpaid rent of over $400,000, plus unpaid rent for the 12 months during which the new tenant entered into the lease, which totalled approximately $506,000. The landlord claimed that despite the new tenant entering the premises with a new lease, the indemnifiers remained liable for the original monthly rent based on their indemnity agreements.
Funds Seized From Indemnifier’s Bank Account
Approximately $478,000 was seized from one of the indemnifier’s bank accounts and the funds were held to the landlord’s credit.
One indemnifier sought to set aside the judgment and prohibit the sheriff from paying out the judgment funds to the landlord. The indemnifier claimed that if the new tenant continued paying rent until the previous lease had expired, the landlord would have received approximately $727,000 more in rent than if the tenant never defaulted due to the increased rent amount.
Landlord Incurred $500,000 in Expenses Due to Tenant’s Default
The Court noted that the landlord had incurred expenses over $500,000 to address the previous tenant’s default and arrange to lease the premises to a new tenant. These additional costs included:
- costs of arranging for the sheriff and others, etc. to enforce the original judgment;
- commission payable on the new lease;
- improvements made to the premises to accommodate the new tenant; and
- a 5-month abatement in base rent given to the new tenant as an inducement to enter the lease.
One of the indemnifiers claimed that the rent received from the new lease was a mitigation of damages and, therefore, an order for damages must consider this.
Landlord Not Required to Mitigate Losses
The Court recognized that an increase in rent received from a subsequent lease would be deducted from a landlord’s claim. However, this principle would only apply to a landlord’s action against the tenant.
Here, the landlord claimed damages against the indemnifiers under the indemnity agreements, which included stricter terms than those in the lease. In particular, the indemnity agreements did not require the landlord to mitigate damages. Further, if the landlord had mitigated their losses, it would not have reduced the indemnifiers’ obligations.
Court Confirms Indemnifiers Liable to Pay Over $505,000 in Unpaid Rent
In arriving at its decision, the Court first highlighted the strong language used in the indemnity agreements. The Court determined that the indemnifiers remained liable to pay the amount of unpaid rent from the date of the judgment to the date on which the new lease commenced, which was close to $505,000. This amount was not reduced despite the landlord entering into a new lease with the new commercial tenant.
The Court also ordered the funds, which were collected by the sheriff, were to be paid out to the landlord.
The landlord was instructed to provide an annual reconciliation from 2023 through until 2028 when the lease ends, describing the difference between the rent collected from the new tenant and the rent payable under the original lease. If the difference between the amounts exceeds the rent, interest, or other costs incurred that are owed to the landlord, that amount would be reimbursed to the indemnifiers.
The Commercial Real Estate Lawyers at Baker & Company in Toronto Regularly Advise Clients on Indemnity Agreements and Commercial Leases
Despite being a standard clause in commercial leases, indemnity agreements can significantly impact those involved. The skilled real estate lawyers at Baker & Company have extensive experience drafting, reviewing and negotiating commercial leases and can assist you in understanding your legal obligations before you sign any agreement. To schedule a confidential consultation with a real estate team member, please contact us online or by phone at 416-777-0100.