In recent years, brick-and-mortar businesses faced hardship with government shutdowns forcing them to pay expenses without revenue. Desperate for relief, tenants sought court help but were consistently denied and required to pay rent regardless. Refer to my previous column for more on this matter.
Though it may appear that landlords emerged as winners when tenants paid rent during shutdowns, the reality is different. Many businesses closed, leaving landlords to bear mortgage and upkeep costs without rental income. Thus, the shutdowns posed challenges for both sides.
A rent payment dispute during the pandemic recently reached Ontario’s highest court, yielding a remarkably unexpected outcome that brings negative news for landlords.
In Niagara Falls Shopping Centre Inc. v. LAF Canada Company, 2023 ONCA 159, the tenant operated a fitness centre on its premises, which could not open for long stretches in 2020 due to government-mandated closures. After it was forced to close again in 2021, it ceased paying rent, and the landlord sued for unpaid amounts owing.
In defending the landlord’s claim, the tenant argued that it was excused from paying rent due to the force majeure clause in the lease. The tenant claimed that the landlord was required to provide it with a usable premise under the lease, but it was excused from doing so due to the shutdowns. As such, the tenant argued that because the landlord didn’t have to provide it with accessible premises, rent should not have been payable. As an alternative argument, the tenant claimed that its lease term should have been extended for the amount of time it had to shut down. The tenant also claimed that it was entitled to a refund of rent paid when it was forced to close.
The tenant’s position was based on the wording of the force majeure clause, which stated that if the landlord could not perform its obligations under the lease, then “performance of such act shall be excused for the period of delay caused by the Force Majeure Event and the period for the performance of such act shall be extended for an equivalent period.”
Therefore the tenant accepted that the landlord was excused from its obligation to provide usable premises. Still, it argued that the force majeure clause required the lease to be extended for an equivalent period.
The tenant’s arguments were initially rejected because such a result would be “commercially absurd.” It was held that the extension referred to in the force majeure clause was meant to “deal with a time-limited event,” such as repairs or maintenance obligations.
It was also noted that force majeure clauses were consistently held not to get the tenant’s out of paying rent during government-imposed shutdowns, and such clauses could not be used to extend the lease term. The judge also pointed out that while the pandemic forced the premises to close, the landlord was still responsible for paying its mortgage, taxes, and all expenses related to the upkeep of the building, and the tenant, therefore, was not entitled to a refund of rent during that period.
On appeal, however, the court surprisingly read the force majeure clause quite differently. It was held that the clause “expressly provides for what is to happen if a party to the lease is delayed, hindered, or prevented from performing a required act under the lease as a result of a Force Majeure Event.” In such circumstances, the other party (in this case, the tenant) was entitled to that same relief for an “equivalent period.” In other words, the lease should be extended for an equivalent period if the landlord is excused from providing the tenant with usable space for reasons outside of its control (such as a pandemic).
It was also noted that the lower court judge was wrong in restricting the effect of the force majeure clause to “time-limited events” such as repair and maintenance issues. It was held that this went against the broad language clause, which covered “any act” that interfered with the lease, regardless of how long. Therefore, the tenant was entitled to extend its lease for the same time it was shut down.
Although the Court of Appeal ruled that the tenant was not excused for paying rent during the shutdown period, it would not be obligated to pay rent during the period that its lease was extended.
What Does This Mean?
Although this decision comes as good news for commercial tenants, as it finally gives them a victory in the face of all the difficulties over the past few years, it has also caused a lot of concern for landlords, and rightfully so.
Most notably, in ruling that the tenant was entitled to a rent-free extension period, the Court of Appeal essentially rewrote the lease terms and added a provision that neither side ever intended. It is also inconsistent with the lower court’s reasoning that landlords were still responsible for paying their expenses during the shutdowns, despite not being able to provide usable premises to tenants. As such, by providing an extension term rent-free, the landlord, in this case, will have to carry the costs of the building without collecting rent.
This has understandably raised the ire of many landlords because it could open the door to countless court actions from businesses that could not operate during the shutdowns and feel they are entitled to an extended lease term. If that happens, it will put landlords in a difficult position, especially for those who have already signed leases for new tenants at the end of current lease terms. In those cases, landlords could face claims from current tenants who want extended lease terms, as well as new tenants whose leases may not be honored as a result.
This decision is equally concerning for purchasers and mortgagees. For instance, what if a landlord has entered into a deal to sell or redevelop the property at the end of a lease term? If tenants start following this decision and are awarded rent-free extension terms on their leases, that could impede these deals, and the landlord may bear the resulting liability.
So, in short, this could be a serious cause for concern for landlords who could not allow their tenants to operate during COVID.
How Can Landlords Protect Themselves?
Given the decision’s uncertainty and potential implications, it’s unclear how landlords can safeguard against resulting catastrophes.
Before entering new leases or transactions, landlords should consult lawyers to assess liability for granting tenant extensions, considering force majeure clauses and shutdown circumstances.
If liable, landlords may consider clear written agreements with tenants specifying a vacate date.
Neglecting protection measures and disregarding this ruling may render landlords liable for lease term violations. All factors are vital despite the decision’s unknown effects.
About the Author:
Daniel Waldman is Of Counsel in the firm’s Toronto office. He has a broad commercial litigation practice with an emphasis on real property litigation, including commercial leasing, commercial real estate, construction law, and debt collection. Daniel can be reached at 416-644-2838 or firstname.lastname@example.org. To read his full bio, please click here.