The contractual doctrine of "fundamental breach" is
both doctrinally complex and highly contextual. In Stearman v. Powers, 2013 BCCA 206,
the Court concluded that, on the facts before it, a commercial
tenant had not been justified in repudiating her
lease and walking away from the premises, despite
the fact that the building's HVAC system filled her store
with a foul odour.
While the case ultimately turned on its unique facts, the Court
in Stearman provides useful guidance regarding the
threshold for categorizing a problem with rented premises as a
"fundamental breach" of contract, as well as the scope of
a tenant's right of "quiet enjoyment."
The tenant leased a storefront to
carry on a retail clothing business. With the first arrival
of warm weather, she turned on the building's HVAC system and
the store quickly filled with an unpleasant "creosote-like
odour." The tenant complained to the landlord. She
also brought in a technician who was able to reduce the problem,
but only temporarily. Claiming that the odour made it
impossible for her to carry on her business, the tenant ceased
paying rent, returned her keys, and abandoned the premises.
The parties sued each other. The trial judge sided with the tenant, finding
that the landlord's inability to solve the problem had violated
the covenant of quiet enjoyment and constituted a fundamental
breach justifying the tenant in repudiating the lease.
The BCCA reversed on both points.
Alleged Breach of the Covenant of Quiet
Enjoyment: Addressing the covenant of quiet
enjoyment — which is often explicit but will, in any event,
be implied in every lease — the Court noted that "[s]uch
a covenant protects against a landlord's derogating from his
own grant." It is designed to ensure that the landlord
does nothing to "derogate from his grant [to the tenant] of
exclusive occupancy without interference."
The Court of Appeal found that no such
derogation had occurred because:
there was no evidence that the odour was caused by any act or
omission of the landlord or his agent;
the odour was not necessarily of a "grave and permanent
in any event, the terms of the lease expressly stated that
"the landlord would not be responsible for any defect in or
changes of condition affecting the premises, howsoever
Alleged Fundamental Breach of the Lease:
The phrase "fundamental breach" often creates confusion
because it addresses two distinct legal concepts:
(1) a breach of contract so significant that it goes to "the
very root" of the parties' agreement and justifies its
unilateral termination; and (2) a breach of a type that limits the
efficacy of an exculpatory clause.
The tenant in Stearman v. Powers alleged that there had
been a breach falling into the first category
— i.e., that "the existence of the odour, or
the landlord's failure to correct it, deprived the tenant of
substantially the whole benefit of the lease, thus undermining the
foundation of the contract."
As with the alleged breach of quiet enjoyment, the Court of
Appeal concluded that the tenant had failed to
make out her case for fundamental breach:
The lease required the tenant, rather than the landlord, to
service and repair the HVAC system, and she had taken only minimal
measures in this regard. Thus, it was not clear that the
landlord had been guilty of any breach of
contract, fundamental or otherwise.
Equally importantly, the existence of the odour —
while clearly unpleasant — was not
"fundamental" in nature. It did not "mak[e]
further performance impossible [nor] depriv[e] the tenant of
substantially the whole benefit which it was the intention of the
parties to the lease that the tenant should obtain as consideration
for the rentals it was obliged to pay." The tenant did
not need to shut down her business, and the odour had not been
shown to present a danger to health. Indeed, the tenant was
not even able to establish that she had lost sales or profits as a
result of the odour.
The key lesson for landlords is to ensure that you protect
yourselves with well-drafted lease provisions. The lesson for
tenants is two-fold — i.e., insist, if possible on
better lease terms, and, in any event, fully document your own due
diligence efforts, along with your economic losses,
before attempting to repudiate the lease.
Russell v. Township of Georgian Bay provides a useful reminder of the fact that while municipal officials sometimes appear to hold all of the cards in disputes with home owners, that is not always the case.
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