ARTICLE
13 March 2023

Landlords May Rely On The Oppression Remedy For Lease Default

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Dale & Lessmann LLP

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Dale & Lessmann LLP is a full service Canadian business law firm located in Toronto, Ontario. Our legal expertise includes corporate and commercial, mergers and acquisitions, employment, real estate, franchise, cannabis, tax, construction, immigration, infrastructure and renewable energy, intellectual property, bankruptcy and insolvency, wills and estates law and commercial litigation.
Can directors and/or shareholders be personally liable for a corporate tenant's lease obligations?
Canada Real Estate and Construction
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Can directors and/or shareholders be personally liable for a corporate tenant's lease obligations?

It is a pillar of corporate organization that corporations are their own persons, with their own rights, obligations, and legal identity. Typically, a director or shareholder will not be found liable for the obligations of a corporation in the absence of a personal guarantee, indemnity agreement, or other direct agreement entered into by such individual director or shareholder. The oppression remedy is one very powerful exception to this rule.

The Ontario Court of Appeal's recent decision, FNF Enterprises Inc. v. Wag and Train Inc., 2023 ONCA 92 confirms that a director and shareholder may be found personally liable where they are found to have stripped value from a tenant-corporation in light of known and outstanding lease liabilities. In this case, the tenant, Wag and Train Inc. ("Wag and Train") entered into a lease with the landlord, FNF Enterprises Inc. ("FNF"). It was alleged that Wag and Train subsequently abandoned the premises, in breach of the lease, and the sole director, officer, and shareholder, Ms. Linda Ross, then stripped the value out of the tenant-corporation, re-opening the same business at a different location under a new name.

FNF commenced a claim against both Wag and Train and Ms. Ross, bringing forward three causes of action, one of which was the oppression remedy. The motion judge determined that no reasonable cause of action had been argued against Ms. Ross and struck out the claim against her, denying leave to amend. FNF appealed this decision on the basis that the motion judge erred in finding there was no reasonable cause of action under the oppression remedy, and FNF should have the opportunity to amend its pleadings to cure any defects. The Court of Appeal agreed, stating "[t]he claim that value was stripped from Wag and Train by Ms. Ross, with knowledge that the corporation had incurred liabilities by breaching its lease with the appellants, is actionable under the oppression remedy."1

Notably, the Court of Appeal also clarified that this was not a fact scenario which presented reasonable grounds for "piercing the corporate veil," the analysis of which is outside the scope of this article.

What is the oppression remedy?

The oppression remedy is a powerful legal tool available to creditors, such as landlords, under corporate legislation. The remedy is designed to protect the rights and interests of stakeholders who have been unfairly disregarded, prejudiced, or oppressed by certain corporate conduct.

The oppression remedy can be used to protect the interests of creditors when the actions of directors or officers of a corporation have negatively impacted their business. For example, if a landlord has leased property to a corporation, and the corporation has failed to pay rent or has damaged the property, the landlord may use the oppression remedy to seek compensation or other relief in the appropriate circumstances.

In order to determine if a complainant can avail itself of the oppression remedy, a two-part test must be satisfied:

First, the complainant must identify the expectations it claims have been violated by the conduct at issue and show that those expectations were reasonably held. Second, the complainant must show that these reasonable expectations were violated by corporate conduct that was oppressive or unfairly prejudicial to or that unfairly disregarded the interests of any security holder, creditor, director, or officer.2

The oppression remedy provides landlords with a means of holding directors and officers of a corporation accountable for their actions, which is extremely valuable where the corporation no longer holds sufficient assets to satisfy the landlord's damages. Further, this powerful statutory remedy allows creditors to seek redress for harm caused by improper conduct and can help to ensure that corporations operate in accordance with their legal obligations.

When will a director be found to be personally liable?

As was the case in Wag and Train, the complainant-landlord sought relief against Ms. Ross, the sole shareholder, officer and director of the tenant-corporation under the oppression remedy. In such a case, a further two-part test must be satisfied:

(1) the director has the requisite degree of involvement in the oppressive conduct so that it is attributable to them; and

(2) personal liability is fit in the circumstances3.

The question as to whether an order imposing personal liability against a director is "fit" is a measured and contextual question to be answered by the court. The court will assess whether such an order is fair, as well as whether any "other forms of statutory and common law relief is not more fitting in the circumstances. 4" Where a director derives a personal benefit, for example, by stripping the value from the corporation for personal use in priority to unpaid creditors, courts have found that it would be fair to impose personal liability on such director.

What is the impact of Wag and Train for Landlords and Tenants?

Wag and Train is confirmation that where a landlord claims relief under the oppression remedy for damages relating to an early termination of a lease, the conduct of a tenant's director may result in personal liability for that director. This is true notwithstanding that there is no agreement or contract directly with the director or officer.

As the shadow of a looming recession grows, landlords should keep this statutory remedy top of mind. If a landlord believes that a tenant (or the tenant's directors and/or officers) have taken steps, purposefully and knowingly, to defeat the landlord's claim for damages, then further investigation is recommended. On the other hand, this case serves as a reminder that directors must act in accordance with the governing corporate statute, and actions which unfairly prejudice or disregard the interest of creditors, particularly where such actions are for the director's interest, may result in personal liability.

Footnotes

1 FNF Enterprises Inc. v. Wag and Train Inc., 2023 ONCA 92 (CanLII), at para 6, retrieved on 2023-02-24.

2 FNF Enterprises Inc. v. Wag and Train Inc., 2023 ONCA 92 (CanLII), at para 31, retrieved on 2023-02-24.

3 FNF Enterprises Inc. v. Wag and Train Inc., 2023 ONCA 92 (CanLII), at para 33, retrieved on 2023-02-24

4 FNF Enterprises Inc. v. Wag and Train Inc., 2023 ONCA 92 (CanLII), at para 33, retrieved on 2023-02-24.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

ARTICLE
13 March 2023

Landlords May Rely On The Oppression Remedy For Lease Default

Canada Real Estate and Construction

Contributor

Dale & Lessmann LLP is a full service Canadian business law firm located in Toronto, Ontario. Our legal expertise includes corporate and commercial, mergers and acquisitions, employment, real estate, franchise, cannabis, tax, construction, immigration, infrastructure and renewable energy, intellectual property, bankruptcy and insolvency, wills and estates law and commercial litigation.
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