In Shanahan v. Turning Point Restaurant Ltd. [Shanahan], a recent decision of the BC Court of Appeal, the tenant gave the landlord two months’ rent ($7,600.00) as a deposit (the “Deposit”) but the lease did not specify the purpose of the deposit.
The tenant subsequently defaulted in payment of monthly rent. The landlord served a notice of default advising of its right to terminate the lease when the arrears reached 30 days and demanded rent be brought current right away. The tenant asked the landlord to apply the Deposit to the rent arrears.
The landlord refused and purported to terminate the lease for non-payment of rent, changed the locks and blocked access to the premises. The Tenant sued for wrongful termination of the lease and damages.
At trial, the landlord said the Deposit was on account of the first and last months’ rent, and the tenant said it was a general deposit which it was entitled to have applied to any rent in arrears.
The trial judge found that the executed lease made no mention of the Deposit being on account of the first and last months’ rent although the landlord could have required that in the lease negotiations but did not.
So, the tenant had the right to ask that the Deposit be applied to the arrears. By failing to do so the landlord had illegally terminated the lease which was a “high-handed, unjustified action” resulting in the tenant losing the opportunity to continue with its business.
The tenant was awarded damages of about $100,000. The landlord appealed.
On appeal, the BC Court of Appeal upheld the trial judge’s findings but reduced the trial judge’s damage award to $12,500 for wrongful termination. The Court of Appeal found, on the evidence, that the tenant’s business would likely have failed shortly after the landlord’s termination even if the lease had continued, so damages had to be reduced accordingly.
However, value had to be attributed to the chance the tenant could turn its business around and become profitable or at least cut its losses.
The Lesson: 1. Accurate drafting should always be the objective to achieve clarity in the parties’ intentions. Be certain it is clear what a deposit can be used for i.e. security deposit, a security deposit and last month’s rent or merely last month’s rent.
2. A landlord needs to be sure it has “followed the book” in terms of lease termination or it risks a damage award for wrongful termination (which can be large of if the tenant loses a profitable business) as “self-help” remedies can backfire and result in the landlord wrongfully terminating the lease.
4. Wrongful lease termination can unexpectedly trigger the tenant’s right to terminate the lease in which case the tenant would be “off the hook” for future lease obligations.
5. If a tenant’s business is not profitable, the tenant may still have a claim for damages for wrongful termination as the court will look at many factors, including potential lost opportunity, however remote, and a struggling business today can sometimes “weather the storm” and become very profitable.
6. Before terminating a lease, seek legal advice. It pays to be cautious and to consider all factors which could impact a damage award for wrongful lease termination.
Disclaimer: This article is for general information purposes only and not intended as or to be relied upon for legal advice. Consult with a lawyer for your unique situation.
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