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Bulletin | Covid-19

COVID-19: Two Recent Superior Court Decisions Consider the Effects of the Pandemic on Lease Obligations in Québec

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Real Estate and Litigation Bulletin

Two recent decisions rendered by the Superior Court of Québec have considered the impact of the COVID-19 pandemic and the March 24, 2020 Order in Council 223-2020 from the Government of Québec suspending certain non-priority business activities (the "Decree") on tenants' obligations to pay rent. The first case addresses the potential consequences of landlords not mitigating their damages by, notably, participating in the Canada Emergency Commercial Rent Assistance program ("CECRA"). The second relates to a landlord's legal obligation to provide its tenant with peaceable enjoyment of the premises during the effective period of the Decree.

The first decision, Investissements immobiliers G. Lazzara inc. v. 9224-5455 Québec inc.,[1] was rendered in adjudicating a request for a safeguard order and suggests that landlords should carefully consider all means to mitigate their damages before deciding not to apply for CECRA relief.

The second decision, Hengyun International Investment Commerce Inc. v. 9368-7614 Québec Inc.,[2] is a judgment on merits in a dispute over numerous landlord and tenant issues, including claims by the tenant that the Decree constituted a superior force (force majeure) which prevented it from generating revenue and thus relieved it from paying rent.  The Court concluded that the Decree does not constitute a superior force preventing the tenant from paying its rent, but rather concluded that the Decree constitutes a superior force preventing the landlord from fulfilling its obligation to provide peaceful enjoyment.  The Court extended the reasoning to conclude that, under article 1694 CCQ, because the landlord had failed to provide peaceful enjoyment, the landlord could not demand the performance of the tenant's corollary obligation, namely rent payment for this period. The Court goes on to state that the obligation to provide peaceful enjoyment of the premises is an obligation of "result" incumbent upon the landlord.  In doing so, the Court excluded the application of "unavoidable delay" language in the lease, holding that such clauses could not completely relieve a landlord from its obligation to provide peaceful enjoyment.

Landlords Should Consider all Means to Mitigate Their Own Damages Before Seeking Court-mandated Relief

In the Lazzara case, the parties entered into two commercial leases for adjacent premises. The landlord sued the tenant for rent arrears, resiliation of lease and eviction. The landlord requested the issuance of a safeguard order for the payment of arrears representing the totality of rent due from June 2020 onwards. The tenant contested the safeguard application, stating that the criteria for such a remedy were not met. 

In response to the Pandemic, the Canada Mortgage and Housing Corporation has put CECRA in place whereby it funds 50% of the rent for eligible months by way of a forgiveable loan to landlords, with the tenant paying 25% of the rent to its landlord and the remaining outstanding 25% of the rent becoming a loss for landlords. 

The tenant had therefore paid 25% of the rent due for June and July 2020 and undertook to continue to pay 25% of the rent due for each month for which CECRA assistance would continue to be available.

Emphasizing the fact that an application to CECRA remains voluntary and has to be initiated by a landlord, the Court held that a party seeking the issuance of a safeguard order must have "clean hands" and that the landlord had voluntarily chosen to forego 75% of the outstanding rent by not applying to CECRA.

The Court further held that the landlord's demand for the full amount of rent due from June 2020 onwards at the safeguard order stage was unfounded, considering that the landlord had failed to mitigate its own damages by not applying to CECRA and had failed to provide any evidence of inconveniences suffered by it that would outweigh the inconveniences to the tenant caused by a safeguard order.

The Court thus ordered the tenant to pay 25% of the rent due to the landlord as long as CECRA was in effect, and pay 100% of the rent thereafter.  We note that the order is not conditional upon the landlord successfully receiving CECRA relief.

This decision highlights the importance for landlords to carefully consider their legal obligation to mitigate its damages prior to seeking court-mandated relief.

This decision is merely a pre-trial safeguard order and does not adjudicate the merits of the parties' respective claims and the tenant's ultimate obligation to pay rent during the pandemic or the effects of the Decree.  It does mean that any decision on the merits will need to consider the impact on the landlord of receiving rent after applying for CECRA relief, which this interim order does not address.

Landlord's Prevention of its Obligation to Provide Tenant with Peaceable Enjoyment of the Premises During the Pandemic And Its Consequences on Tenant's Correlative Obligations

In the Hengyun case, the landlord and tenant, parties to a lease for a gym, brought several disputes for adjudication before the Court.  The claim that concerns us relates to the tenant's inability to operate its business in the premises starting in March 2020 due to the Decree.

The tenant argued before the Court that its inability to operate and generate revenue was caused by superior force and that it should therefore be relieved of its obligation to pay rent for the period within which the Decree was in force.  The landlord argued that the tenant received a government emergency loan of $40,000 and thus cannot argue that it was prevented by superior force from paying the rent.

The Court laid out the requirements for relief due to superior force under article 1470 CCQ and concluded that the tenant could not rely on the Decree being an irresistible event within the meaning said article, as an irresistible event must be considered from an objective point of view. The Court held that the event at issue must "prevent any tenant in [the tenant's] situation from paying its rent, and not just tenants lacking sufficient funds".[3] [Our emphasis]

The Court rather noted that it is the landlord who was prevented by superior force from fulfilling its obligation to provide the tenant with peaceable enjoyment of the premises. The Court noted that while the tenant still had access to its equipment within the premises, the lease provided that the premises are to be used "solely as a gym", and that such an activity was prohibited by the Decree.[4]

Consequently, the Court relied on article 1694 CCQ whereby "a debtor released by impossibility of performance may not exact performance of the correlative obligation of the creditor" to rule that while the landlord was prevented by superior force from providing peaceable enjoyment of the premises to the tenant, it could not insist that the tenant abide by its own correlative obligation to pay rent.

The Court found that the lease's "unavoidable delay" clause (which did cover superior force) did not constitute a renunciation to or a contractual limitation on the tenant's right to peaceful enjoyment.  In interpreting this provision, the Court found that:

"the clause contemplates obligations, the performance of which is delayed; not obligations that cannot be performed at all.  According to the language of paragraph 13.03, the party unable to perform an obligation is only excused for the period of the delay and is entitled to perform it at a later time."[5] 

In making this finding, the Court appears to overlook language in the said clause providing that it applies where a party is "delayed or hindered in or prevented from the performance of any term, obligation or act…"[6] [Our emphasis]  The Court goes on to state:

"The Landlord's fulfilment of its obligation to provide peaceable enjoyment of the premises from March through June of 2020 has not been delayed; it simply cannot be performed.  Consequently, the Landlord cannot insist on the payment of rent for that period and paragraph 13.03 of the Lease does not apply." [7]

In making this finding, the Court did not address the second part of the "unavoidable delay" clause which read "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."[8]

The Court did comment, however, that "even if the Landlord's interpretation of paragraph 13.03 was correct, it cannot be read in such a way as to fully and completely relieve the Landlord of its principal obligation under the Lease, which is to provide peaceable enjoyment of the Premises.  The parties to a lease can agree to limit the impact of a landlord's failure to provide peaceable enjoyment but cannot agree to exclude it altogether. This view has been expressed in doctrine[51] and has been endorsed by the Court of Appeal of Quebec[52]."[9]

In light of the foregoing, the Court ordered a reduction of the rent due by the tenant for the months of March through June 2020.

Discussion

Both decisions may have important ramifications for landlords and tenants negotiating the impacts of the COVID-19 pandemic on their contractual relationships.

Market observers will have noticed the trend that the obligation to mitigate one's damages is increasingly invoked in creative ways to obtain relief that could be qualified as equitable before the courts.

The rise of COVID-19 related litigation is bound to result in increasing judicial interpretations of the superior force concept, which we have addressed in various preceding bulletins.  Force majeure claims are necessarily circumstance specific and should be carefully considered.

Parties would be well-advised to consult with their legal counsels in crafting carefully considered positions in anticipation of any situation at risk of becoming litigious.  Landlords and tenants should also carefully review current and future lease provisions, notably to ensure that force majeure and exculpatory provisions are appropriately drafted.

Fasken's Real Estate and Litigation experts are available to guide you through the intricate considerations to be balanced when building a case for potential litigation.


 

[1]       Investissements immobiliers G. Lazzara inc. v. 9224-5455 Québec inc., 2020 QCCS 2176 [Lazarra].

[2]       Hengyun International Investment Commerce Inc. v. 9368-7614 Québec inc., 2020 QCCS 2251 [Hengyun].

[3]       Ibid, para 100.

[4]       The Court also noted that the Decree may constitute a nuisance within the meaning of 1858 CCQ, noting however that said argument was not brought up by the parties and would not have changed the Court's analysis in the present case (Hengyun, footnote 48).

[5]       Hengyun, para 105.

[6]       Section 13.03, al. 1 of the lease, quoted in Hengyun, para. 92. 

[7]       Hengyun, para 106.

[8]       Section 13.03, al. 2 of the lease, quoted in Hengyun, para. 92. 

[9]       Hengyun, para 107. The Court cited:

[51] Pierre-Gabriel Jobin, Le louage, 2e éd., Cowansville, Éditions Yvon Blais, 1996, p. 445; Bernard Larochelle, Le louage immobilier non résidentiel, 2e éd., Montréal, Wilson et Lafleur, 2007, p. 22.

and

[52] CNH Canada Ltd. c. Promutuel Lac St-Pierre - Les Forges, société mutuelle d'assurances générales, 2015 QCCA 204, par. 60; Société de gestion Complan (1980) inc. c. Bell Distribution inc., 2011 QCCA 320 (CanLII), footnote 6 referenced at par. 25.

We encourage the reader to review the passages quoted in support of the Court's conclusion.

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