The years 2020-2021 have been unprecedented ones generally with the COVID-19 pandemic ravaging much of the world. Undeniably, they have been unprecedented ones for commercial leasing in Canada, with more government intervention than has been seen in recent memory. Many tenants have sought interpretation of their leases to determine if a quick exit is possible, or if there is a way to ease the burden of making rental payments for space which has often times been left unoccupied due to government-mandated lockdowns and safety concerns. Consequently, force majeure and quiet enjoyment clauses have come under much scrutiny.
A standard force majeure clause in a lease is meant to delay or excuse the performance of an obligation by a landlord or a tenant under a lease due to an event beyond their control, such as a natural disaster, political or civil unrest, government act, work stoppage or health emergency. Potentially at odds with the force majeure clause is that of quiet enjoyment or peaceable enjoyment, seen as one of the most fundamental rights of a tenant, implied at common law and codified in Ontario in s. 24 of the Conveyancing and Law of Property Act.1 Quiet enjoyment requires that a landlord not interfere with its tenant's enjoyment of the premises;2 but what happens when an event of force majeure interferes with such right? Is a landlord to be held accountable or should a landlord be excused?
Given all of the questions raised above, leasing lawyers (and landlords and tenants) around the country waited with bated breath for the courts to chime in on how the pandemic would impact the interpretation of force majeure and quiet enjoyment clauses in a judicial setting.
In Durham Sports Barn Inc. Bankruptcy Proposal,3 an Ontario court considered for the first time the application of a force majeure clause (and to a lesser extent, a quiet enjoyment clause) in a commercial lease in the context of the COVID-19 pandemic. In short, the court ultimately found in favour of the landlord, deciding that the force majeure and quiet enjoyment clauses did not relieve the tenant of its obligation to pay rent even when it was prohibited from operating its business as a result of the COVID-19 lockdown. The decision is currently being appealed, with a court date set for May, 2021.
Durham Sports Barn Inc. ("Durham" or the "Tenant") carries on business as an elite athletic performance centre and leases premises located in Oshawa, Ontario from 1213423 Ontario Inc. (the "Landlord").4 Durham and the Landlord entered into a lease with a term of ten (10) years commencing in 2015. Durham, however, experienced cash flow issues and had difficulty paying its minimum rent and additional rent for the first few years of the term, such that by November 25, 2019, it owed a total of $534,818.88 in rental arrears to the Landlord.5
Following the issuance of a demand letter and discussions between Landlord and Tenant, on November 29, 2019, the Landlord's bailiff delivered a Distress Warrant claiming $538,818.88 in rental arrears, plus costs and seeking to distrain against Durham's goods and chattels.6 Following an unsuccessful proposal by the Tenant, on December 16, 2019, the Landlord entered the premises and had two appraisers conduct an appraisal of Durham's equipment.7
On January 3, 2020, Durham filed a Notice of Intention to Make a Proposal ("NOI") pursuant to section 50.4(1) of the Bankruptcy and Insolvency Act (the "BIA"). On the same day, the Landlord delivered a Notice of Impending Termination dated January 2, 2020, and demanded that Durham pay $553,114.80 in rental arrears by January 4, 2020, or face eviction. The Landlord also informed Durham in this letter that it had completed the distress sale for $88,950.8
On January 7, 2020, the Landlord's counsel acknowledged the NOI and requested that Durham pay rent from January 4, 2020, onwards. Durham did so by sending the Landlord a certified cheque on the same day.9 On January 9, 2020, Landlord's counsel sent a Notice of Termination and Notice of Default to Durham's counsel. Durham discovered that the rent cheque had not been delivered to the Landlord and delivered a replacement cheque on January 10, 2020.10 On January 17, 2020, Justice Hainey ordered that the Landlord not attempt to retake possession of the premises and that the time to cure defaults under the Notice of Default was suspended.11
Due to COVID-19-related mandated closures, Durham was forced to close from March 18, 2020, to May 25, 2020. It commenced limited operations from May 25, 2020, to July 25, 2020, and full operations resumed in August 2020. The Landlord did not apply for any federal government assistance which would have provided rental relief to both itself and Durham. On June 25, 2020, the Trustee delivered a Notice of Meeting to Creditors to inform them that Durham was not paying rent as a result of its restricted operations during the pandemic.12
The court considered the following three issues:
- whether the distraint was lawful or should be set aside,
- whether the lease termination that followed the NOI was lawful or should be set aside, and
- whether Durham should be relieved of paying rent when it was prevented from lawfully operating due to emergency orders issued by the Province of Ontario.13
While the third issue is of most interest to the topic at hand, we will briefly discuss the court's findings on the first two issues, as well.
As to the first issue, Justice Gilmore found that the distraint did not take place before the filing of the NOI and was therefore stayed. Justice Gilmore cited a number of reasons for this finding, including that the second appraisal was improper, that the sale was not an arm's length transaction, and that the sale was not completed, since the goods were still at the premises.14 Justice Gilmore decided that the funds should be returned to the purchaser and the goods remain at the premises.15
As to the second issue, Justice Gilmore agreed with Durham that the lease had been improperly terminated under section 65.1 of the BIA. The Landlord's letter requesting post-NOI rent did not state when it was to be delivered, and the Landlord provided the Notice of Termination without enquiring into the status of the cheques. The Landlord failed to provide a reasonable amount of time in which Durham could deliver the cheques, after Durham had made it clear it intended to comply with the Landlord's request.16
As to the third issue, Durham sought relief from rental payments for the period between March 19 to May 25, 2020, when it was shut down due to the pandemic, and sought to pay proportional rent for the period between May 26 to July 24, 2020, during the Phase II re-opening. Durham argued that such relief was consistent with the remedial provisions under the BIA, since the lease was frustrated during the shutdown, and the shutdown and the pandemic constitute force majeure.17
While the relevant provisions of the lease were not reproduced in the decision, Justice Gilmore indicated that the lease between Durham and the Landlord contained a force majeure clause that excluded the Landlord from its obligation to provide the Tenant with quiet enjoyment in the event of force majeure, such as the shutdown. Durham argued that, for this reason, it should correspondingly be relieved of its obligation to pay rent in such circumstances.18
Durham relied in its argument on the recent Quebec case of Hengyun International Investment Commerce Inc c 9368-7614 Quebec Inc,19 in which a gym tenant was relieved from the obligation to pay rent as a result of the pandemic lockdowns.20 Justice Gilmore, however, found that Hengyun was not applicable, because the language of the force majeure clauses in the two leases were quite different, and because the court in Hengyun ultimately relied on the doctrine of "superior force" in coming to its decision, which doctrine exists in the Civil Code of Quebec ("CCQ"), but not in Ontario.21
Justice Gilmore also rejected Durham's other arguments regarding relief from payment of rent. Justice Gilmore found that, while the force majeure clause in the lease relieved the Landlord from providing quiet enjoyment, it did not relieve the Tenant from the obligation to pay rent. Further, the lease provided that the provision of quiet enjoyment by the Landlord was subject to the payment of rent by the Tenant. Moreover, Durham did not advise the Landlord of its concerns regarding payment of rent until August 2020, so the Landlord did not have an opportunity to assist Durham or mitigate the situation. Justice Gilmore also considered the legislation enacted by the government during the pandemic to help small businesses survive, which legislation prevented eviction by landlords but did not suspend the payment of rent.22
Finally, but notably, Justice Gilmore did not consider the frustration argument advanced by Durham, which suggests that Justice Gilmore did not consider the lease to be frustrated.
As a result of the foregoing analysis, Justice Gilmore ordered that Durham pay all post-NOI rental payments demanded by the Landlord.23
The Ontario court distinguished Durham Barns from the Hengyun case based on the language contained in the two leases and the doctrine of "superior force". The facts of the two cases, however, are fairly similar.
As in Durham Barns, Hengyun concerned an athletic facility, operated by 9368-7614 Quebec Inc. ("Quebec Inc." or the "Tenant"), that had to cease operations due to the COVID-19 pandemic and resulting shutdown. Quebec Inc. argued that superior force rendered it incapable of operating its business and generating revenue and that it should therefore be relieved from paying rent for the period of time in which it was shut down. Hengyun International Investment Commerce Inc. (the "Landlord") disagreed, arguing that the situation did not qualify as superior force and that, even if it did, the lease between the parties explicitly required the Tenant to pay rent notwithstanding an event of superior force. The Landlord also argued that Quebec Inc. had applied for and received a government emergency loan of $40,000 related to the COVID-19 pandemic, and therefore could not argue that it was prevented by superior force from paying rent.24
The relevant portion of the lease between Quebec Inc. and the Landlord states as follows:
13.03 Unavoidable delay
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 Landlord or 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 the 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 this Lease.25
Justice Kalichman agreed with Quebec Inc. that it did not owe rent for the months of March, April, May, and part of June, 2020, but for different reasons.26 Justice Kalichman cited Art. 1470 of the CCQ, which states that:
1470. A person may free himself from his liability for injury caused to another by proving that the injury results from superior force, unless he has undertaken to make reparation for it.
Superior force is an unforeseeable and irresistible event, including external causes with the same characteristics.27
Justice Kalichman found that the COVID-19 pandemic was unforeseeable, as the parties could not have reasonably foreseen such an event at the time the lease was contracted.28 The requirement of irresistibility, however, was not satisfied, since Quebec Inc. failed to show that any tenant in Quebec Inc.'s position would have been prevented from paying its rent in such a situation. The requirement of irresistibility is an objective one, not subjective.29
Justice Kalichman found, however, that since the Landlord was prevented by superior force from providing peaceable enjoyment of the premises to the Tenant, it could not insist that the Tenant pay rent. Justice Kalichman cited Art. 1694 of the CCQ, which states that a "debtor released by impossibility of performance may not exact performance of the correlative obligation of the creditor".30
The Landlord argued that paragraph 13.03 of the lease, reproduced above, should limit the impact of this provision of the CCQ. Justice Kalichman rejected this argument, stating that paragraph 13.03 of the lease contemplated the delay of the performance of obligations, not obligations that cannot be performed at all.i The Landlord was incapable of fulfilling its obligation to provide peaceable enjoyment of the premises to the Tenant from March through June 2020; the obligation was not delayed. For this reason, paragraph 13.03 of the lease did not apply and the Landlord could not insist that the Tenant pay rent for the months in question. Justice Kalichman went on to indicate that, even if the Landlord's interpretation of paragraph 13.03 were correct, Quebec legal doctrine does not allow parties to contract out of a Landlord's obligation to provide peaceable enjoyment altogether.31
Implications for Commercial Leasing in Ontario
It remains to be seen how well the appeal in Durham Barns will be received and whether or not tenants will garner more sympathy after the collective fallout from the COVID-19 pandemic on the economy is determined. The decision in Hengyun ultimately appears to have turned on the interpretation of provisions contained in the CCQ, so its application in the common law provinces is likely limited. Both the Durham Barns and Hengyun cases, however, show that courts will place great importance on the text of the force majeure clause in a commercial lease in determining the obligations of the parties in a situation such as the current COVID-19 pandemic. It is important, therefore, that parties pay close attention to such clauses when drafting agreements. Specifically, landlords will want to include language stating that, regardless of any event of force majeure, be it a pandemic or otherwise, the tenant must continue to pay rent. Further, the right to quiet enjoyment should only be granted to a tenant provided that the tenant fulfills its obligations under the lease, including the payment of rent. Conversely, a tenant with enough clout should argue that (i) rent should abate in the event of another pandemic (or generally any event of force majeure) with a stepdown to the abatement of minimum rent only to placate a landlord who needs to cover expenses related to the property and (ii) the right of quiet enjoyment is so fundamental that it should not be qualified.
See below for sample landlord-friendly force majeure and quiet enjoyment clauses.
In the event that either party hereto shall be delayed or hindered in or prevented from the performance of any act required hereunder by reason of, without limitation, political or civil unrest, riot or public disturbance; strikes, lockouts, work stoppages; an interruption in the supply chain for goods and materials required by the Tenant for its business; unavailability or being unable to obtain: materials, goods, equipment, services, utilities or labour; inclement weather; the existence of a Health Emergency; travel restrictions; an act of God or any other cause beyond its reasonable care and control; but not including insolvency or lack of funds; then performance of such act shall be postponed for a period of time equivalent to the time lost by reason of such delay. Notwithstanding anything herein contained, the provisions of this Section shall not operate to excuse the Tenant from the prompt payment of Minimum Rent, Additional Rent or any other payments required by the terms of this Lease, nor entitle the Tenant to compensation for any inconvenience, nuisance or discomfort thereby occasioned.
"Health Emergency" includes: the existence of a virulent or communicable disease outbreak, declaration of a public health emergency by a medical officer, order, directive, rule, regulation by the City, other surrounding Cities in the Greater Toronto Area, Province or government of Canada; epidemic, quarantine, pandemic; interruption of the supply chain for goods, materials and services required in the Tenant's business caused by a Health Emergency, travel or transportation restrictions caused by a Health Emergency.
If the Tenant duly and punctually pays the Rent and complies with its obligations, the Tenant will be entitled to peaceably possess and enjoy the Leased Premises during the Term without interruption by the Landlord or those lawfully claiming through the Landlord.
1. R.S.O. 1990, c. C.34.
2. London Prestige Ltd v Wellington Harlech Centre Inc, 2019 ONSC 2364.
3. 2020 ONSC 5938 [Durham Barns].
4. Ibid at para 5.
5. Ibid at para 8.
6. Ibid at para 11.
7. Ibid at para 13.
8. Ibid at para 15.
9. Ibid at paras 16-17.
10. Ibid at paras 18-19.
11. Ibid at para 20.
12. Ibid at paras 21-22.
13. Ibid at para 3.
14. Ibid at para 47.
15. Ibid at para 49.
16. Ibid at paras 31-32.
17. Ibid at paras 51-52.
18. Ibid at para 53.
19. 2020 QCCS 2251 [Hengyun].
20. Durham Barns, supra note 1 at para 54.
21. Ibid at para 57.
22. Ibid at para 57.
23. Ibid at para 63.
24. Hengyun, supra note 17 at paras 91-93.
25. Ibid at para 92, emphasis added by the Court.
26. Ibid at paras 94-95.
27. Ibid at para 96, emphasis added by the Court.
28. Ibid at para 97.
29. Ibid at para 100.
30. Ibid at paras 101-102.
31. Ibid at paras 103-107.
i. The writers look forward to comparing the Unavoidable Delay clause in Hengyun with the force majeure clause in Durham Barns to determine if the judgments can be reconciled, notwithstanding the differences between Ontario and Quebec legal doctrine.
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.