Litigation, Real Estate Law

Case Comment: The COVID-19 Pandemic and Landlord-Tenant Relations

Jul 23rd, 2020

By Barry Landy

Two Superior Court cases create unfavorable precedents for landlords attempting to collect rent that became due during the pandemic.

In the case of Hengyuen International Investment Commerce Inc. v. 9368-7614 Quebec inc.[1], decided July 16, 2020, Justice Peter Kalichman had to deal with a landlord-tenant dispute involving multiple recriminations by each party against the other.

Part of Justice Kalichman’s decision addressed the issue of whether or not the tenant was entitled to a rent reduction for the period March to June 2020, in circumstances where the tenant, a gym operator, was forced to close by government decree as of March 24, 2020 due to the Covid-19 pandemic.

The lease between the parties contained the following clause:

Notwithstanding anything in this Lease to the contrary, if the Landlord or the Tenant is delayed or hindered in or prevented from the performance of any term, obligation or act required hereunder by reason of superior force, strikes, lockouts, labour troubles, riots, accidents, inability to procure materials, restrictive governmental rules, regulations or orders, bankruptcy of contractors or any other event whether of the foregoing nature or not which is beyond the reasonable control of the Tenant as the case may be, then the performance of such term or obligation or act is excused for the period of the delay and that party so delayed shall be entitled to perform such term, obligation or act within the appropriate time period after the expiration of such delay without being liable in damages to the other.

However the provisions of this Section 13.03 shall not operate to excuse the Tenant from the prompt payment of the Base Rent or Additional Rent or any other payments required by the Lease.

Kalichman, J decided that despite the language of the clause, the Tenant was not obliged to pay rent for March, April, May and part of June 2020.

He reasoned that regardless of the Tenant’s financial capacity to pay rent, the Landlord was prevented by superior force from fulfilling its obligations to the Tenant to provide peaceable enjoyment of the premises because the Tenant could not operate its gym, even though the Tenant did continue to store all of its equipment in the leased premises throughout the period.

Regarding the lease clause referenced above, Kalichman J decided that the clause was contemplating only obligations that were delayed, not obligations that cannot be performed at all. He also added that in his view, parties to a lease can agree to limit the impact of a landlord’s failure to provide peaceable enjoyment but cannot exclude it altogether. In support of this proposition, Kalichman J said that this view has been endorsed by the Court of Appeal of Quebec in the cases of CNH Canada[2] and Société de Gestion Complan[3].

Justice Kalichman did not consider any argument based on the notion that the lease was a contract of adhesion and that therefore the clause was abusive, null and void.

With great respect for Justice Kalichman, my own view is that he misinterpreted the plain language of the clause, which clearly deals not only with obligations of Landlord or Tenant that have been delayed or hindered, but also with obligations that Landlord or Tenant is prevented from performing. Furthermore, the language of the last paragraph is also clear and unequivocal. Where a superior force has intervened, one of the parties to any contract will inevitably incur a loss. Allocating that risk of loss by contract seems to be the product of a rational decision-making process. The clause in question clearly allocates that risk to the Tenant.

In CNH, the object of the dispute was a tractor that had been leased and then was destroyed by a fire caused by a latent defect in the electrical wiring of the tractor. The landlord owed the Tenant  peaceable enjoyment of the tractor and a warranty against latent defects. Because a latent defect had caused the destruction of the tractor, the Tenant no longer had peaceable enjoyment  or indeed any enjoyment of the tractor and therefore the Tenant could plead inexecution of the Landlord`s obligation.

Complan repeated the same idea; In this case a leased premises suffered from very nauseating odors and the Court held that these odors reduced the Tenant’s peaceful enjoyment of the leased premises. The Court stated that while parties to a lease could modify the Landlord`s obligation to provide peaceable enjoyment, a clause that removed the obligation entirely could not have any legal effect.

On the surface of things, these Court of Appeal cases do support Justice Kalichman’s statement that parties to a lease cannot exclude altogether the Landlord’s obligation to provide peaceable enjoyment. But on another level, do these cases really support that view?

I am not certain that the Court of Appeal addressed its mind to the issue of the validity of a clause allocating financial risk between Landlord and Tenant where Landlord is not at fault at all. Also, I am not certain that the decree prohibited the Landlord from providing peaceable enjoyment to the Tenant. Rather the Decree prohibited the Tenant from operating its business in the premises.

In short, and again with the greatest respect for Justice Kalichman, I do not think the last chapter of the story has been written.

In another decision rendered on July 13, 2020 in the case of Les investissements Immobiliers Lazzara Inc. et al v. 9224-5455 Quebec Inc et al, Justice Guylaine Beaugé refused a safeguard order to a Landlord in the context of a commercial lease dispute. Landlord had sued Tenant for rent owing for the months of June and July 2020. Tenant had paid 25% of the rent. As is customary in such cases, Landlord applied for a safeguard order, that is an order that the Tenant pay its full rent on an on-going basis pending a full court hearing on the merits of the case.

The Tenant argued that it had been forced to suspend its activities in the leased premises by government decree. Furthermore, the Tenant made reference to the Federal government  emergency relief plan whereby the Government would finance 50% of the rent, the Tenant would pay 25% and the balance of 25% would remain unpaid. Landlord had refused to participate in the plan alleging that it could not afford to renounce to receive 25% of the rent adding that the parameters of the plan itself were unclear.

Essentially Justice Beaugé stated quite correctly that safeguard orders were exceptional and that certain criteria had to be satisfied. She then stated:

[25]  Considering that Plaintiffs did not reply to Defendant’s allegations that Plaintiffs could mitigate their damages by adhering to the Canadian government aid program;

[26] Considering that Plaintiffs chose to deprive themselves of receiving 75% of the rent, which puts them in an unfavourable position to ask the Court to exercise its discretion to issue a safeguard order. A party who seeks a safeguard order must have clean hands. 

(My translation).

With respect for Justice Beaugé, I would not have said that a Landlord has an obligation to renounce to receive 25% of the rent owing under a commercial lease as a pre-condition to requesting a safeguard order and that Landlords who do not want to participate in the Federal government relief program do not come to court with clean hands.

In this case, from a technical point of view,  the Landlord had not filed any affidavit material explaining how the Federal government’s rental relief program actually worked, or why it was unreasonable to ask the Landlord to accept a 25% rent reduction, so in making applications for safeguard orders going forward, landlords may wish to be more careful about the drafting of their legal proceedings.

However, what remains to be seen is whether this decision is the commencement of a trend, or merely a case limited to its own facts.

[1] CSM 500-17-103037-183

[2] 2015 QCCA 204

[3] 2011 QCCA 320