Jul 2nd, 2020
Nov 19th, 2018
By Daniel Frajman
My commercial clients, often for example commercial landlords and tenants, frequently ask whether unforeseen market changes can affect their future obligations under the lease or other contract in question. At least in situations where the contract was at the outset subject to a degree of negotiation, the usual answer is that “a deal is a deal”, and new circumstances do not affect obligations.
Therefore, when dealing with commercial leases for example, a party will want to take care to insert clauses at the outset that speak to and cover future uncertainties and developments, otherwise the terms and conditions that govern likely will not take account of that future development. For example, a commercial landlord will want to insert clauses that keep future rental adjustments from decreasing due to possible deflation (recall that a period of deflation did occur during the 2008-9 financial crisis), clauses that try to impose limitations on the permitted use of premises in situations such as tenant insolvency (for example, s.84.1 of the federal Bankruptcy and Insolvency Act seems to give a judge discretion to have a bankrupt tenant’s lease rights assigned when appropriate to a solvent and reasonable third party operator), or clauses that oblige the tenant to provide stronger security (for example, a bank guarantee rather than a security deposit) should that become reasonable in the circumstances. From a commercial tenant’s perspective, it will for example want to try when appropriate to provide for a “go dark” clause (allowing operations to cease due to perhaps a decrease in the tenant’s sales so long as rent continues to be paid), or a clause for rights of first refusal to lease neighbouring premises should they become available.
The Supreme Court of Canada (“SCC”), in a recent decision of November 2, 2018 on appeal from Quebec, in the case of Churchill Falls (Labrador) Corporation Limited v. Hydro-Quebec, 2018 SCC 46 (“Churchill Falls”), though not dealing with a lease but rather a contract for the provision of electricity, made it clear once again that in many commercial situations, a deal is indeed a deal.
Churchill Falls concerns a 1969 contract (set to run until 2041) among Hydro-Quebec (“HQ”) and the Newfoundland and Labrador hydro company (“HN”), by which HN agreed to provide HQ with electricity over a long period at a fixed rate that in addition is actually decreasing over time. Since the contract was entered into, electrical prices skyrocketed (unforeseen by the parties at the outset), and by some estimates the deal has since delivered more than $27.5 billion in profits to HQ and about $2 billion in profits to HN. HN went to court to reopen the deal, but lost in this attempt in the recent Churchill Falls judgment.
Some of the principles set out by the SCC in Churchill Falls in upholding the terms of the contract, notwithstanding unforeseen developments arising after the contract was formed, are:
Without a doubt then, it is important when preparing a commercial lease or any other contract to look out in advance for potential contingencies and other future scenarios, and to draft appropriate clauses to address those potential future events. If this is not done, the Supreme Court of Canada tells us in the just decided case of Churchill Falls that it can be very hard to later reopen the terms and conditions of the deal.
Please do contact me to address your particular commercial lease, sale agreement, shareholder agreement, trust, foundation or other commercial or estate planning document.
This publication is of a general nature, is as of the date indicated and is not intended to constitute an opinion or legal advice. The facts and circumstances of your particular situation should be specifically identified and addressed before appropriate legal advice may be given.