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Bulletin | Covid-19

Force Majeure and COVID-19: Considerations Related to Commercial Leases and Payment of Rent

Fasken
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Litigation and Dispute Resolution Bulletin

While a significant number of companies were forced to close their businesses because of the measures imposed by government authorities to slow the spread of the COVID-19 pandemic (the "Pandemic"), others already considered this to be the appropriate solution under the circumstances, given the substantial reduction of their business revenues.

Then on March 23, 2020, the question of whether or not to continue operating became moot for a great number of companies, as the Québec government ordered the closure of all non-essential businesses by ministerial decree (the "Decree"). [1] As a result, a great number of businesses were forced to cease their operations and consequently lost the anticipated revenues allowing them to pay their rent.

Several questions have since arisen regarding the rights and obligations of tenants and landlords in this unprecedented situation. Multiple companies that can no longer operate their businesses are wondering whether they are still obliged, under the circumstances, to pay rent. The first step for both tenants and landlords is to review the terms and conditions provided for in their lease. In many cases, tenants and landlords will attempt to come to an agreement in order to preserve their business relationship through mutual concessions. In cases where, before the onset of the Pandemic, the tenant has always respected the conditions of its lease, it is obviously in the landlord's best interest to be flexible to the extent possible, particularly in the current context where it would no doubt be difficult, at least in the short term, to find a new tenant. However, it may transpire that an agreement cannot be reached between the parties.

In this article, we will discuss the state of the law on the obligation to pay rent in the context of force majeure and a pandemic. 

Force Majeure In Québec Civil Law

In Québec civil law, the concept of force majeure is defined by article 1470 of the Civil Code of Québec[2] (the "CCQ") as "an unforeseeable and irresistible event, including external causes with the same characteristics." Force majeure (officially translated as "superior force") is understood as an event that the debtor could not anticipate or resist and that has made the performance of his obligation impossible.[3]

However, it is important to note that the concept of force majeure is not of public order. The parties to a commercial lease are thus free to limit its scope and to modify or simply waive its application and effects.[4]

The unforeseeability of an event of force majeure is to be assessed from the standpoint of a reasonably prudent and diligent person[5] and must be evaluated at the time when the obligation was contracted by the debtor, as opposed to when the event actually occurred.[6] In other words, we must step into the shoes of the debtor at the moment the lease was signed in order to determine whether the event was reasonably foreseeable.

As for the requirement of irresistibility, the event must be both insurmountable in terms of its effects and inevitable as to its occurrence.[7] More specifically, the irresistibility of force majeure requires that the event prevents the absolute performance of the obligation by anyone, since the impossibility cannot simply be personal to the debtor.[8] The fact that the performance of the obligation is difficult or excessively onerous does not satisfy this criterion.[9]

If we apply these criteria to the Pandemic in the context of a commercial lease, it goes without saying that the Pandemic was most likely unforeseeable at the time the lease was entered into. However, whether the irresistibility criterion is satisfied seems doubtful, as the tenant remains physically capable of paying the rent within the deadlines provided for in the lease. In other words, the tenant is still physically capable of writing a rent cheque.

In addition, in the context of a commercial lease, the majority of the CCQ articles pertaining to contract of leases are not of public order and the parties are therefore free to derogate from them. Thus, in order to determine whether the Pandemic qualifies as an event of force majeure, a case-by-case analysis must be performed in light of the law, the contract between the parties and the nature of their activities. This qualification in the context of a commercial lease will be explained in more detail herein below.

Effects of Force Majeure on the Obligations Under the Lease

For tenants who experience a reduction in their business revenues such that they can no longer pay the rent

A tenant may be tempted to request a reduction of the rent because of the loss of income caused by the Pandemic and the resulting Decree. The latter could consider arguing that the loss of income is a direct consequence of the Pandemic, which is an event of force majeure justifying the non-payment or the reduction of rent.

Given the definition of force majeure provided for in the CCQ and found in many commercial leases, it would be surprising if a loss of business income could, in itself, constituted an event of force majeure allowing the tenant to temporarily cease to fulfill his most primordial obligation under a lease, namely the payment of rent, all subject to an express contractual provision to the contrary. Loss of income is certainly a very sad reality for many companies in the current context, but the reduction of clientele in commercial establishments because of the Pandemic does not constitute an event that would physically prevent a tenant from paying the rent within the payment terms provided in the lease. In other words, the tenant is still able to issue a rent cheque.

Moreover, requests for a reduction in rent are generally made following a failure by the landlord to perform one or more of its obligations, rather than relying solely on an argument of force majeure or of reduction of business volume.[10] Indeed, for such a claim to succeed, the tenant must prove that the landlord failed to respect one or more of its obligations, such as providing it with a peaceable enjoyment of the leased premises, not changing the form or destination of the leased property or warranting the tenant against legal disturbances to the enjoyment of the leased property.[11] The granting of a reduction in rent is therefore subject to the demonstration by the tenant, on the preponderance of the evidence,[12] of a reduction of the landlord's performance of its obligations.[13]

Of course, a loss of business volume suffered by a tenant may in certain circumstances be due to a failure by the landlord to comply with its obligation to provide the tenant with the peaceable enjoyment of the leased premises.[14] However, doctrinal authorities are of the view that the landlord can only be liable for loss of business volume if the loss is attributable to it.[15] In addition, it appears from the case law that the landlord may be liable to its tenants for operating deficits that result from changes it makes to the commercial building,[16] decisions regarding the management of the building, and the conduct of one or more of its tenants.[17] In the current situation, no fault can be attributed to the landlord pursuant to the lease or the law, as the harm is not attributable to the landlord's conduct but rather to the disastrous repercussions of the Pandemic.

It has already been established in a decision of the Court of Québec[18] that the financial capacity of the tenant cannot justify an action for reduction in rent in the absence of a fault on the part of the landlord. As a result, the landlord does not, in theory, have to assume responsibility for the tenant's precarious financial situation,[19] although the principles of good faith and the obligation to mitigate one's damages have already been interpreted by the Québec Court of Appeal as imposing a certain duty of attentive listening to the landlord when facing a tenant in financial difficulty.[20]

It is thus evident that it will be difficult for companies to successfully invoke their financial difficulties against their landlords as a ground justifying the non-payment of rent.

For tenants that are forced to close their business

First of all, it is important to highlight the landlord's fundamental obligation to provide the peaceable enjoyment of the leased premises, which is the very essence of a contract of lease.[21] This obligation is set out in the first paragraph of article 1854 CCQ, which imposes on the landlord the obligation to provide the tenant with the peaceable enjoyment of the property throughout the term of the lease[22] and it has been established that such an obligation is one of result.[23]

Thus, the only defense that a landlord can successfully raise is to prove that the loss of enjoyment suffered by the tenant was due to force majeure or the act of a third party,[24] or that the tenant validly waived the right to peaceable enjoyment. However, it is important to emphasize that a complete waiver of that right would be unacceptable, as peaceable enjoyment must constitute at least a minimum of value under a lease contract. In other words, while the obligation to provide complete enjoyment can be waived, this obligation cannot be waived in full by the tenant. In the event of failure to comply with this obligation, the landlord could be held responsible.

In case law, the landlord's obligation to provide the tenant with peaceable enjoyment of the leased premises in a situation comparable to force majeure has been interpreted as follows. In the matter of Lareau v. Régie du logement,[25] various tenants sought a reduction in rent after being deprived of the enjoyment of their housing following a power outage caused by the 1998 ice storm. The Superior Court of Québec recognized that this event was akin to an event of force majeure, which therefore exonerated the landlords from their failure to provide the tenants with peaceable enjoyment of the leased premises. Consequently, in accordance with the rule provided for in the first paragraph of article 1694 CCQ,[26] the tenant could not require the performance of the landlord's correlative obligation to pay the rent.[27] It follows that while the landlords were in no way responsible for the power outage, the Régie du logement was correct in allowing the tenants' claim for a reduction in rent. Although this decision was rendered in the context of a residential lease, it remains relevant for commercial leasing in the case of leases that do not contain a clause prohibiting the invocation of force majeure in order to avoid payment of an amount due. Moreover, the first paragraph of article 1854 CCQ, which is at the heart of the reasons for the Court's decision, is found in the general provisions of the section on the rights and obligations resulting from a lease and is thus applicable to any type of rental contract.

The legal principle to be drawn from the above decision is that when considering a request for a reduction in rent, courts will have a tendency to grant it if they conclude that the landlord was unable to ensure the tenant's full enjoyment of the leased premises (subject to a contractual waiver of this right) regardless of the landlord's control over the event that prevented it from fulfilling its obligation. In addition, the exoneration of the landlord's non-performance can be used to justify the fact that the tenant is not obligated to perform its correlative obligation, which is to pay the rent.

It is possible that courts called upon to decide claims for unpaid rent will apply the same reasoning and conclude that landlords who lease commercial spaces to companies that can no longer access those spaces cannot require from their tenants the portion of the rent for the period during which they did not have the benefit of peaceable enjoyment of the leased premises. 

While this outcome seems disadvantageous for landlords, it is important to note that the Superior Court of Québec, still in the same matter, indicated that courts, when calculating the time of the rent reduction, should take into consideration the fact that the leased premises remained at the disposal of the tenants and that they continued to have access to their goods therein.[28]

This would also be in accordance with the intent of the legislator, which has provided in article 1694 CCQ that, in the event of force majeure, a debtor released from its obligation cannot demand the performance of the correlative obligation of its creditor. If the landlord has performed its obligation in part, for example by allowing the tenant to store goods in the leased premises, it can require the tenant to partially perform its obligation to the extent of his enrichment, by paying a part of the rent. 

In cases where the tenant still benefits from full access to the leased premises, the landlord could conceivably argue that it did not deprive the tenant of his enjoyment of the premises. The tenant is only being deprived of the commercial operation of the leased premises because of the Decree. How then do we deal with a situation where the tenant, because of the Decree, can no longer operate its business despite the fact that the landlord is providing it with full access to the premises and to related services and utilities, such as heating and electricity?

A tenant in that situation could argue that the landlord has failed to honour its obligation of guarantee against legal disturbances to the enjoyment of the leased property, which is provided for by article 1858 CCQ.[29] The tenant would, however, have to convince the court that the Decree constitutes a legal disturbance, a characterization that the courts have not yet been called upon to make. It should be pointed out that the landlord's obligation with respect to legal disturbances is one of guarantee which, as opposed to an obligation of result, does not give rise to a defense of force majeure on the part of the landlord. If such an argument is raised and accepted by the courts, the tenant could then, in theory, but subject to a provision to the contrary in the lease, be relieved from paying the rent, as the landlord has failed to honour its obligation of guarantee against legal disturbances.

The most classic example of the application of the warranty against legal disturbances is where a landlord, before signing the lease, failed to inform its tenant of the existence of a zoning bylaw prohibiting the operation of a restaurant in the leased premises, while the object of the lease was the operation of a restaurant.[30] In its decision, the court concluded that given the absence of an express derogation from article 1858 CCQ in the lease, the landlord could not ascribe to the tenant the responsibility to ensure that its contemplated use of the leased premises complies with the applicable zoning bylaw. It should, however, be noted that there is a certain difference between the entry into force, after the signing of the lease, of the Decree temporarily prohibiting certain companies from operating anywhere in the province in order to protect the health and safety of the population, and a zoning bylaw in effect well before the signature of the lease, permanently prohibiting a specific use in specific leased premises, regardless of the company wishing to have the enjoyment of the leased premises. It will, therefore, be necessary to exercise caution and perform a good analysis of the terms and conditions of each lease before being able to invoke with certainty the guarantee against legal disturbances.

When a force majeure clause is provided for in a commercial lease

Since the concept of force majeure provided for in article 1470 CCQ is not of public order, the parties to a commercial lease are free to use contractual provisions to derogate therefrom and to stipulate their own definition of events that correspond an event of force majeure. They can also contractually establish the repercussions of a defense of force majeure on their respective obligations.

In addition to the fact that it will often be difficult for a tenant to argue that an event of force majeure prevented it from paying rent, it is important to verify whether a contractual provision relating to force majeure is provided for by the lease in order to clarify the parties' intention in this regard. Furthermore, in a given situation, the courts will apply the force majeure clause or any other provision of the commercial lease that may be applicable in the circumstances of the file.[31] Each force majeure clause having its own specifics, it is not possible to infer a generality on the conclusions that judges may reach in this regard.[32]

The decision in Pierre Village inc. v. Construction 649 inc.[33] illustrates the application of a commercial lease provision in a force majeure situation. In that matter, the commercial premises suffered considerable damage during the 1998 ice storm in Québec, forcing the tenant to evacuate the premises. The tenant argued that the landlord breached its obligations by not taking the necessary measures to avoid the foreseeable damages and inconveniences following the ice storm. The tenant, therefore, claimed damages for the landlord's failure to provide it with peaceable enjoyment of the leased premises, and sought authorization not to pay the rent. The lease contained a clause whereby the tenant expressly waived any reduction in the rent or payment of any damages by the landlord because of a storm or water seepage from snow or ice on the roof. The Superior Court of Québec dismissed the claim for damages and pointed out that, given the circumstances, the landlord had diligently made the required repairs and could not be accused of late performance. Consequently, the court was of the view that the landlord did not breach its obligations, particularly that of ensuring for its tenants the peaceable enjoyment of the leased premises. As for the claim for unpaid rent, a provision of the commercial lease provided that the tenant only had the right to suspend the payment of the rent if the use of the premises became impossible, which was not the case in that instance. Consequently, the tenant had to continue making rent payments.

Finally, it is also important to emphasize that in matters involving commercial leases and force majeure, we find that the case law predominantly shows cases involving physical damage to the leased premises that justified a reduction or suspension of rent, whereas, in the current situation, the Pandemic does not cause material damage to leased premises.

Conclusion

We anticipate that several tenants and landlords will attempt to amend their commercial leases through mutual concessions in order to maintain a healthy contractual relationship for the remaining term of the lease and mitigate the impact of the Decree resulting from the Pandemic. If such an agreement cannot be reached, the tenant may attempt to assert its rights by raising force majeure and the fact that it has been deprived of the full enjoyment of the leased premises.

Since the concept of force majeure under article 1470 CCQ is not of public order, the tenant will definitely have an interest in examining whether its lease contains a clause to this effect. Generally, landlords' standard-form commercial leases favour them more and will frequently provide that rent remains payable notwithstanding a situation of force majeure, which clarifies the intention of the parties in this regard. In all cases, it must be borne in mind that unless there is an express provision to the contrary in the lease or a fault has been committed by the landlord, a loss of clientele or profitability will likely be insufficient to justify non-payment of the rent.

Finally, it is important to emphasize that before deciding on the impossibility for the parties of performing their respective contractual obligations, the determination of whether the tenant is obliged to continue paying the rent in full despite the repercussions of the Pandemic remains subject to a rigorous examination of the terms and conditions of each lease and a case-by-case analysis of the underlying facts, as courts favour an analysis of all the clauses in the lease rather than the wording of a single clause when trying to determine the common intention of the parties. We, therefore, recommend avoiding the reflex of relying solely on a force majeure clause in determining the impact of the Pandemic on the obligation to pay the rent.

 

The authors thank Elizabeth Gagné-Larose and Kabrina Peron for their contributions as researchers and collaborators.

 


[1]         Decree number 223-2020 on March 24, 2020.

[2]         Civil Code of Québec, L.Q., 1991 c. 64, art. 1470.

[3]         Pierre-Gabriel JOBIN and Nathalie VÉZINA, Les obligations, 7th ed., Cowansville, Éditions Yvon Blais, 2013, par. 844.

[4]         Didier LLUELLES and Benoît MOORE, Droit des obligations, 3rd ed., Cowansville, Éditions Yvon Blais, 2018, par. 2733; Pierre-Gabriel JOBIN and Nathalie VÉZINA, Les obligations, 7th ed., Cowansville, Éditions Yvon Blais, 2013, par. 844 and Vincent KARIM, Les obligations, 4th ed., vol. 1, Montréal, Wilson & Lafleur, 2015, par. 3229.

[5]         Pierre-Gabriel JOBIN and Nathalie VÉZINA, Les obligations, 7th ed., Cowansville, Éditions Yvon Blais, 2013, par. 845.

[6]         Vincent KARIM, Les obligations, 4th ed., vol. 1, Montréal, Wilson & Lafleur, 2015, par. 3249.

[7]         Didier LLUELLES and Benoît MOORE, Droit des obligations, 3rd ed., Cowansville, Éditions Yvon Blais, 2018, par. 2734.

[8]         Didier LLUELLES and Benoît MOORE, Droit des obligations, 3rd ed., Cowansville, Éditions Yvon Blais, 2018, par. 2734 and Pierre-Gabriel JOBIN and Nathalie VÉZINA, Les obligations, 7th ed., Cowansville, Éditions Yvon Blais, 2013, par. 846.

[9]         Pierre-Gabriel JOBIN and Nathalie VÉZINA, Les obligations, 7th ed., Cowansville, Éditions Yvon Blais, 2013, par. 846 and Vincent KARIM, Les obligations, 4th ed., vol. 1, Montréal, Wilson & Lafleur, 2015, par. 3254.

[10]       Civil Code of Québec, L.Q., 1991 c. 64, art. 1863 and Johanne GAGNON, Le bail commercial, Collection Blais, vol. 9, 2011, p. 10 and 11

[11]       Civil Code of Québec, L.Q., 1991 c. 64, art. 1854, 1856, 1858 and 1863 and Johanne GAGNON, Le bail commercial, Collection Blais, vol. 9, 2011, p. 10 and 11.

[12]       Civil Code of Québec, L.Q., 1991 c. 64, art. 2803 and 2804.

[13]        Johanne GAGNON, Le bail commercial, Collection Blais, vol. 9, 2011, p. 11.

[14]        Johanne GAGNON, Le bail commercial, Collection Blais, vol. 9, 2011, p. 1.

[15]        Johanne GAGNON, Le bail commercial, Collection Blais, vol. 9, 2011, p. 1, 6, 7 and 13.

[16]       Civil Code of Québec, L.Q., 1991 c. 64, art. 1856.

[17]       Johanne GAGNON, Le bail commercial, Collection Blais, vol. 9, 2011, p. 6 and 7.

[18]       Loiselle v. Mooijekind, 2013 QCCQ 3786, par. 36.

[19]       Stanislas BRICKA, Commentaires sur le Code civil du Québec (art. 1863 CCQ), Éditions Yvon Blais, 2015, par. 654.

[20]       Investissements Eres ltée v. Louha, 2014 QCCS 5820, par. 55 and 56; Louha v. Investissements Eres ltée, 2016 QCCA 1041, par. 23 to 33.

[21]       Pierre-Gabriel JOBIN, Le louage, Collection traité de droit civil, 2nd edition, Centre de recherche en droit privé et comparé du Québec, 1996, par 169.

[22]       Civil Code of Québec, L.Q., 1991 c. 64, art. 1854 subs. 1.

[23]       Les Immeubles Gabriel Azzouz inc. v. Salon d'optique Fernand Ghobril inc., 2008 QCCA 135, par. 5. Note: It is possible that a tenant contractually waives a certain degree of enjoyment of the leased premises in specific cases, for instance to allow the landlord to make repairs. This loss of enjoyment of the premises by the tenant must however be temporary.

[24]       Civil Code of Québec, L.Q., 1991 c. 64, art. 1693 par. 1.

[25]       Lareau v. Régie du logement, SOQUIJ AZ-99021429, JE (unsuccessful appeal).

[26]       Civil Code of Québec, L.Q., 1991 c. 64, art. 1694.

[27]       Vincent KARIM, Les obligations (art. 1693 CCQ), 4th ed., vol. 2, Montréal, Wilson & Lafleur, par. 3454. See also: 9074-9508 Québec inc. v. Société de gestion Place Laurier inc., 2007 QCCS 3299 (appeal dismissed), par. 114.

[28]       The decision rendered in Appartements Analena enr. v. Bakka, 2006 QCCA 111 is an example of disturbance by the act. The lease was terminated given that after its signing, the contemplated operation of a restaurant was prohibited by a municipal regulation. The lease did not contain a clause derogating from article 1858 CCQ.

[29]       Civil Code of Québec, L.Q., 1991 c. 64, art. 1858.

[30]       Appartements Analena enr. v. Bakka, 2006 QCCA 111.

[31]       Pierre Village Inc. v. Construction 649 Inc., SOQUIJ AZ-99021448, par. 24.

[32]       See: 9111-8299 Québec Inc. v. 9034-1405 Québec Inc., 2016 QCCS 4888; 9193383 Canada Inc. v. Société du Vieux-Port de Montréal Inc., 2020 QCCS 370 and PierreVillage Inc. v. Construction 649 Inc., SOQUIJ AZ-99021448. In these decisions, the claims were accepted or dismissed based on the provisions of the commercial lease.

[33]       Pierre Village Inc. v. Construction 649 Inc., SOQUIJ AZ-99021448.

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