United States: The Limits On Relief From Forfeiture Of A Commercial Lease: Ontario's Highest Court Again Sides With Landlords When Tenancies Are Disrupted By COVID-19

This column was originally published on the Real Estate News Exchange (Renx.ca).

In the latest chapter in the commercial tenancy battles caused by the pandemic, Ontario's highest court has set out the limits on relief from forfeiture of a commercial lease. This time, a major anchor tenant in a shopping mall asked for help after getting pummeled by COVID-19. The courts again sided with the landlord.

The Facts

In Hudson's Bay Company ULC Compagnie de la Baie D'Hudson SRI v. Oxford Properties Retail Holdings II Inc., the Ontario Court of Appeal made an important ruling on the rights of a commercial tenant when a lease is terminated. Specifically, the court ruled on a tenant's rights under section 20 of the Commercial Tenancies Act, which states that when a landlord terminates a lease and takes over the premises, the tenant can apply to the court for "relief from forfeiture" to gain re-entry.

In that case, the tenant, Hudson's Bay Company ("HBC") sought relief from the court following a protracted battle with its landlord during the pandemic.

HBC was the main anchor tenant at Hillcrest Mall in Richmond Hill, Ontario. Like many other shopping mall tenants, HBC's business was greatly affected by COVID-19.

In April 2020, it stopped paying rent and tried to negotiate a deal with Oxford Properties ("Oxford"), the landlord and owner of the shopping mall. The negotiations broke down and in September 2020, HBC accused Oxford of failing to take necessary health and safety measures at the mall which were necessitated by the pandemic.

As a result, in September 2020, HBC accused Oxford of breaching its obligations under the lease by failing to operate the mall in accordance with "first-class shopping centre standards". In response, Oxford served HBC with a notice of intention to forfeit its lease, due to the fact that HBC was in arrears of seven months' rent, which totaled over $13 million.

HBC then commenced a court action against Oxford, seeking an order confirming that Oxford acted in breach of the lease and that it was not required to pay rent until the breach was remedied. Oxford, in turn, sought a court order for unpaid rent and a declaration that it did not breach the lease.

The Motion Judge's Decision

The Ontario Superior Court of Justice decided the matter and held that Oxford did not breach the lease. Even if it did not comply with government-imposed standards from COVID-19, this alone did not amount to a breach of the terms of the lease. However, HBC was granted relief from forfeiture of its lease on the condition that it paid all arrears of rent. The court gave HBC several months to pay its rent arrears on a deferred payment schedule. Also, the interest rate payable on the rent arrears was reduced from the amount of prime plus 4 per cent, as specified in the lease to prime plus 2 per cent, even though HBC didn't ask for this.

HBC and Oxford both appealed the decision. Neither side took issue with the court granting relief from forfeiture, but they both argued that the motion judge did not go far enough in making the order. HBC argued that its rent owing should have been abated indefinitely until the economic consequences of the pandemic subsided.

Oxford, on the other hand, argued that HBC was fully able to pay the arrears, and the judge should therefore have ordered it to pay within 10 days, rather than on a deferred schedule.

The Decision of the Court of Appeal

The Court of Appeal sided with Oxford. It was noted that relief from forfeiture under section 20 of the Commercial Tenancies Act, does not give the courts discretion to alter the terms of a lease. This holds true even in unforeseen situations like a pandemic, where circumstances are unfair to the parties. The court stated that if HBC's position were to be accepted, it would compromise the certainty that exists in commercial leases and "would inevitably encourage litigation as a means of redefining a tenant's obligations under a lease in response to unforeseen changed economic circumstances."

It was therefore held that the motion judge was wrong to allow HBC to pay its rent arrears on a deferred schedule. Not only did the terms of the lease not allow this, but the remedy of relief from forfeiture provides that a tenant must rectify its lease default in a reasonable amount of time, otherwise it should not be granted.

In this case, given that HBC was fully able to pay the arrears, there was no need to allow it to pay on a deferred basis. The circumstances created by COVID-19 may have made it unfair to HBC, but the court held that a deferred payment schedule should only have been granted if HBC needed time to pay arrears, which was not the case.

The Court of Appeal also disagreed with the motion judge reducing the interest rate payable by HBC on its outstanding arrears. It was held that there was no basis to change the terms of the lease in this regard, as reducing the interest rate was really no different from changing the amount of rent payable under the lease.

The Takeaways: Limits on Relief from Forfeiture and the legal effect of the Pandemic on Commercial Tenancies

The key takeaway from this decision is that commercial tenants will be granted relief from forfeiture when it is fair to do so. However, the remedy is limited insofar as it does not give courts free reign to rewrite the terms of a commercial lease.

This case may also be the final word in the tumultuous saga of commercial tenancies in the age of COVID-19. The pandemic has wreaked havoc on commercial tenants and the courts have been merciless in refusing to grant them any recourse, even though the difficulties they faced were from circumstances outside of their control.

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