Can a Tenant Stop Paying Rent as a Result of COVID-19?
When the government ordered the closure of all non-essential businesses, tenants quickly turned to their leases to see if the pandemic would qualify as force majeure and discharge them from their rent obligations. Hengyun International Investment Commerce Inc. v. 9368-7614 Québec Inc., 2020 QCCS 2251, ("Hengyun") was one of the first Canadian cases to consider force majeure in the context of COVID-19 government-mandated shutdowns. It sparked hope for tenants that rent relief was possible.
In Hengyun, the Landlord and the original Tenant, VFC, entered into a five-year lease to operate a gym. VFC soon made an assignment in bankruptcy and 9368-7614 Québec Inc. ("Québec Inc.") began operating on the premises. At issue was whether Québec Inc. had a right to occupy the premises and a right to reduced rent as a result of problems in the premises and the COVID-19 pandemic.
The lease contained a superior force (force majeure) clause, but it provided that it would not operate to excuse the Tenant from the prompt payment of rent. Québec Inc. argued that despite the language in the lease, it should be relieved from its obligation to pay rent because its inability to operate was caused by superior force. The Landlord argued that the pandemic did not qualify as superior force, and even if it did, the superior force clause obligates Québec Inc. to pay rent notwithstanding an event of superior force.
The Court concluded that Québec Inc. did not need to pay rent for March, April, May, and part of June 2020 (the period of the government-ordered closure). The Court relied on Article 1470 of the Civil Code of Québec ("CCQ"), which defines superior force as "an unforeseeable and irresistible event," and found that the COVID-19 pandemic was a superior force because: (i) it could not reasonably have been foreseen at the time the lease was contracted; and (ii) the requirement of irresistibility was satisfied as the government-mandated closure prevented any tenant in Québec Inc.'s situation from paying its rent and not just those who lacked sufficient funds. The Court determined the Landlord was prevented by superior force from fulfilling its obligation to Québec Inc. to provide it with peaceable enjoyment of the premises and, as a result, the Landlord could not insist on the payment of rent for this period in accordance with Article 1694 of the CCQ.
Because this decision was rendered under the civil law in Québec, its application to the common law provinces was uncertain until recently. The case of Durham Sports Barn Inc. Bankruptcy Proposal, 2020 ONSC 5938, ("Durham") has provided some certainty as the Ontario Superior Court considered this very same question.
In Durham, the Tenant operated an elite athletic performance centre. As with all non-essential businesses, the Tenant was forced to shut down from March 19, 2020, to May 25, 2020, and was only allowed limited operations during the later Phase II re-opening. The Tenant sought to rely on Hengyun and argued that because force majeure interfered with its quiet enjoyment, the Landlord could not insist on payment of rent.
The Court refused to apply Hengyun. It found that the doctrine of "superior force" in the CCQ (relied upon in Hengyun) is a doctrine that does not exist in Ontario. In addition, while the force majeure clause did relieve the Landlord from providing quiet enjoyment, it did not relieve the Tenant from paying rent. The Landlord's obligation to provide quiet enjoyment was subject to the payment of rent. Since the Tenant did not pay rent during the stated periods, the Landlord's obligation to provide quiet enjoyment did not arise. As a result, the Court found the Tenant was not entitled to any rent relief during the government-mandated shutdown.
Landlords have welcomed the Durham decision. It has provided some certainty that despite these unusual times, the law is as it should be, at least for now.
Does Resulting Physical Damage Under an Insurance Policy Require Actual Tangible Damage or Can It Include Loss of Use?
Where rent abatement for the COVID-19 pandemic is not available, some tenants have turned to their insurance to see if it covers business interruption caused by COVID-19. This coverage has not traditionally been available where there is no "physical" damage (or loss). However, the recent case of MDS Inc. v. Factory Mutual Insurance Company (FM Global), 2020 ONSC 1924, ("MDS") may have opened the door to the possibility of this coverage for COVID-19 business interruption losses.
MDS purchased radioisotopes from Atomic Energy of Canada Limited's Nuclear Research Universal Reactor (NRU), which it processed and sold for use in medical products. In 2009, there was a leak of radioactive tritium. The reactor was shut down for 15 months. The leak was localized and did not cause any damage to the NRU reactor core. Still, the forced shutdown resulted in a significant loss of profits to MDS.
At the time of the shutdown, MDS had a worldwide all-risks policy with Factory Mutual Insurance Company. It included coverage for losses to MDS, such as loss of profits, flowing from physical damage to a supplier "directly resulting from physical loss or damage of the type insured by this Policy." MDS submitted a claim for loss of profits but was denied coverage on the basis that the loss did not result from any "physical loss or damage." MDS sued for breach of contract.
Since the policy did not define "physical damage," the key issue was whether resulting physical damage required actual tangible damage to the NRU reactor core or whether it included loss of use of the NRU.
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