It’s no secret the past few years have been harsh on brick-and-mortar businesses.
Government shutdowns put many businesses in the impossible position of having to pay their rent and expenses while being unable to operate and generate revenue.
Desperate for relief, tenants began flocking to the courts for help. They were repeatedly shut down and ordered to pay rent as usual despite the circumstances. (Please see my previous column on this issue).
It may seem like landlords were the winners given that tenants were still required to pay rent during the shutdowns. That is not necessarily true.
A lot of businesses had to close their doors during the pandemic and landlords were still required to pay their mortgages and building upkeep without any rental income. So the shutdowns were not easy for either side.
Recently, another dispute over rent payments during the pandemic wound up in Ontario’s highest's court. The result this time was very surprising and it is certainly not good news for landlords.
In Niagara Falls Shopping Centre Inc. v. LAF Canada Company, 2023 ONCA 159, the tenant operated a fitness centre in 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 it was excused from paying rent due to the force majeure clause in its lease.
It claimed the landlord was required to provide it with a usable premises 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 an accessible premises, rent should not have been payable.
As an alternative argument, the tenant claimed the term of its lease should have been extended for the amount of time it had to shut down. The tenant also claimed it was entitled to a refund of rent paid during the time 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, but it argued that the force majeure clause required the lease to be extended for an equivalent period.
The tenant’s arguments were initially rejected on the basis that 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 a repairs or maintenance obligations.
It was also noted that force majeure clauses were consistently held not to get tenants out of paying rent during government-imposed shutdowns and such clauses could not be used to extend the term of a lease.
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, if the landlord was excused from providing the tenant with usable space for reasons outside of its control (such as a pandemic), the lease should be extended for an equivalent period.
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 have its lease extended for the same amount of time that 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 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 terms of the lease 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 having to provide 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 would 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 honoured 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 uncertainty and potential implications created by this decision, it is difficult to say how landlords can protect themselves from the potential catastrophes that may result.
Before signing new leases and entering into sale or development deals, landlords would be wise to consult with their lawyers to determine whether they may be liable to give their tenants an extension term.
This would mean looking at the force majeure clause in the lease and the circumstances in which their premises were shut down.
If they could bear such liability, they could consider entering into clear written agreements with their tenants to confirm they will vacate by a certain date.
If landlords do not take steps to protect themselves and keep this decision in mind, they may be liable for failing to honour deals made at the end of a lease term.
All the factors are important to consider even though the effects of this decision remain to be seen.