Long-term commercial leases can pose challenges for both tenants and landlords, particularly when changing circumstances – whether it be financial, operational, or otherwise – render a lease untenable. In such situations, landlords are at risk of tenants defaulting on their obligations by repudiating the lease or abandoning the leased premises, leaving the landlord with an unfulfilled lease and an absence of rental income. These situations raise significant legal implications for both parties, and necessitate a careful examination of the lease terms and potential remedies available to the landlord in the event of tenant default.
There is no legislation governing the relationship between commercial landlords and tenants in Alberta. Thus, when a tenant abandons its leased commercial premises prior to the expiration of their lease, commercial landlords in Alberta cannot turn to any statute or regulation for guidance or recourse. However, that does not mean that Alberta commercial landlords are left without recourse to any legal remedies in this unenviable scenario.
Rather, commercial landlords in Alberta do have recourse to the common law remedies established by the Supreme Court of Canada in Highway Properties Ltd. v Kelly Douglas and Co. Ltd. ("Highway Properties").1 Although this decision was released in 1971, it remains the landmark decision clarifying the rights and responsibilities of commercial landlords and providing essential guidance in navigating the complexities of tenant abandonment.
The Supreme Court in Highway Properties held that there are four remedies available to landlords when a tenant abandons a leased premises. A commercial landlord may:
- Refuse to accept the tenant's repudiation and demand performance of the lease, and commence legal action for rental arrears or damages as the lease remains effective;
- Accept the tenant's repudiation, formally terminate the lease, and commence legal action for rental arrears or damages until the termination date;
- Provide clear notice to the tenant of re-entry into the abandoned premises to re-let the premises on the tenant's behalf, while commencing legal action for rental arrears and damages; or
- Provide clear notice to the tenant that the lease is terminated, repossess the abandoned premises, and reserve the right to commence legal action for unpaid prospective rent and damages.2
The first three remedies enumerated above have the effect of attempting to recover a landlord's accrued losses. However, the fourth remedy provides landlords with the opportunity to recover future losses arising from a tenant's repudiation of a commercial lease.
Prior to Highway Properties, Canadian common law previously classified leases as conveyances in land rather than conventional contracts. This classification meant that leases transferred an interest in property from landlord to tenant. Under the first three Highway Properties remedies, if a landlord accepted a tenant's repudiation and terminated the lease due to abandonment of the premises, that would extinguish the tenant's interest in the property. Consequently, the landlord would be unable to recover prospective losses or damages resulting from the repudiation.
Highway Properties recognized that it is no longer reasonable to classify a commercial lease solely as a conveyance. The Supreme Court determined that denying the full measure of damages in cases of tenant repudiation – simply because the lease was structured as a conveyance – is unjust. Rather, the Supreme Court held that commercial leases should also be regarded as commercial contracts.3 As a result, the fourth contractual remedy was added to the traditional framework of conveyancing remedies, thereby allowing landlords to pursue damages for future losses arising from tenant repudiation. This development had significant implications for the enforcement of commercial leases in Canada.
The first three Highway Properties' remedies do not require a duty to mitigate by the landlord. However, if a landlord elects to pursue the fourth remedy and terminate the lease and pursue prospective damages, it has a duty to mitigate its losses. This duty does not import a standard of perfection but it does require that the landlord take commercially reasonable steps to mitigate its losses by attempting to re-let the leased premises. In these cases, total damages will be calculated based on considerations of the landlord's attempts at mitigation and whether the defaulting tenant's unit has been re-let.4
In summary, the principles from Highway Properties continue to provide essential guidance to commercial landlords in the event a tenant abandons the premises and repudiates the lease.
Several practical takeaways are:
- Affirmation of rights: The traditional conveyancing remedies remain available for landlords seeking rental arrears and damages.
- Confirmation of contractual remedies: Landlords also have the option to recover prospective rent and damages, enhancing their ability to mitigate future losses.
- Clear communication: Landlords must communicate the terms of a commercial lease and the consequences of repudiation clearly to tenants. A proactive approach to lease management may serve to minimize future disputes. In cases of default, any remedy pursued by the landlord necessitates clear communication or notice to the tenant.
- Risk assessment: Landlords should assess and manage risks associated with tenant defaults, potentially leading to more rigorous tenant screening and lease enforcement practices.
- Drafting leases: To preserve the remedies available in Highway Properties, landlords must incorporate specific language in lease agreements and ensure their lease contracts are properly drafted.
Footnotes
1 Highway Properties Ltd. v Kelly, Douglas and Co. Ltd., [1971] S.C.R. 562, [1971] SCJ No 55 [Highway Properties].
2 Ibid at para 14.
3 Ibid at para 13.
4 Ibid at para 19.
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