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Bulletin | Covid-19

Preservation of Balance between Landlords and Tenants in Light of COVID-19

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Real Estate Bulletin

The GAP Judgment: this third Superior Court decision clarifies landlord-tenant obligations in the context of the COVID-19 2020 pandemic, the exception for non-performance of an obligation and the preservation of the balance between the parties.

Introduction and Description of the Factual Context

This matter involves Pontegadea Canada Inc. ("Pontegadea" or the Landlord") and GAP (Canada) Inc. ("GAP" or the Tenant"). The parties are bound by a lease for the operation of a "Banana Republic" store in a very strategic and prestigious building located at 777 Ste-Catherine Street West in Montréal. In the specific context of the COVID-19, GAP ceased paying its rent to the Landlord for the months of April and May, and only partially paid its rent for June and July 2020 (12% of rent was paid for these two months). After the discussions between the parties deteriorated and the deadline set forth in the Landlord's formal notice to pay expired (such delay being mid-July with respect to payment of rent for June and July 2020), Pontegadea applied to the Superior Court of Québec for the issuance of a safeguard order. Given that rent amounting to $587,313.98 remained unpaid, Pontegadea alleged urgency and irreparable harm.

For its part, GAP invoked a defence based on the exception of partial non-performance, which defense would be further elaborated on the merits. Citing the Hengyun case[1] among others, GAP emphasized that Pontegadea was unable to provide it with the complete peaceable enjoyment of the premises during the months of June and July 2020. GAP, however, did pay its rent in full as of August 1, 2020.

At the hearing, Pontegadea alleged that this was not a serious defence. Pontegadea stated that all the conditions for the issuance of a safeguard order were indeed satisfied and claimed GAP should be forced to pay the balance of $587,313.98, representing the rent owing for the months of June and July 2020.

Legal Framework

In her very well thought-out judgement on behalf of the Superior Court of Québec, the Honourable Florence Lucas reminds us that a safeguard order constitutes an exceptional and urgent conservatory measure, issued for a limited time. Furthermore, a safeguard order is not the usual means to obtain payment of an overdue debt. Nor  does it generally allow the payment of a contested amount before the hearing on the merits.

A safeguard order for the payment of arrears may only be issued in exceptional circumstances. In support of the foregoing statement, Justice Lucas enumerates certain examples provided by prior case law, such as cases where no serious defence has been offered, cases where the tenant does not contest owing the rent, but rather claims to offset same, cases where the harm caused to the landlord is disproportionate to the harm caused to the tenant, to name a few.

In the GAP case, the Superior Court of Québec concluded that Pontegadea did not demonstrate irreparable harm due to non-payment of the June and July arrears. In addition and more importantly, the fact that GAP resumed paying its full rent as of August 1, 2020, had the effect of maintaining the equilibrium of the  prestations that the lease establishes for the benefit of the parties. Furthermore, a portion of the rent (12%) for June and July 2020 had already been paid prior to the hearing on the safeguard application, and the disputed arrears were entirely secured by the mere fact that they were held in GAP's attorney's trust account.

Also, Pontegadea did not question GAP's solvency, meaning had it been questioned the court may have concluded otherwise.

In addition, the court rejected the Landlord's claim to the effect that the defence based on the exception of non-performance is not a serious defence, and this regardless of the COVID-19 context. The court considered that it would be premature to dismiss GAP's defence on a safeguard application, meaning that at this provisional stage, the court does not know the exact nature and scope of GAP's defense and ruling on it would not be appropriate.

This is one of the first cases following the Hengyun matter which was discussed in our recent bulletin

Lessons to Draw from this Case for Both Tenants and Landlords re: Their Obligations During this Pandemic

For Tenants

a. The tenant's defence based on the exception for partial non-performance of the landlord's obligation to provide peaceable enjoyment of the leased premises is not a frivolous defence at the provisional stage and this notwithstanding the fact that the Québec government authorized reopening of stores. At the provisional stage, this defense suffices so as to prevent the court from summarily ordering immediate payment of arrears.

b. The safeguard order remains an exceptional and urgent measure. Although it may be rendered at the court's discretion, it must nevertheless satisfy arduous criteria.

For Landlords

Regardless of the outcome of this matter, the GAP decision is also favourable for property owners.  It is a very well thought-out judgement that clearly sets out the reasoning behind the court's decision in light of the COVID-19 context. The specific set of facts in this case were central in leading the Superior Court of Québec to conclude that there had not been a breakdown in the balance between the parties, and thus rejecting the safeguard application. In sum:

a. GAP's solvency was not called into question by the landlord; therefore, the landlord was unable to demonstrate to the court that without the issuance a safeguard order, its debt or its financial situation would be threatened.

b. GAP made a partial payment on the two months of disputed rent.

c. The balance of rent being claimed by the landlord was deposited, by GAP, in trust with GAP's attorneys. Therefore, GAP eliminated the perceived risk that landlord may not get paid because the balance was in essence secured by the mere fact that it was being held by GAP's attorneys.

d. The fact that GAP paid the future rents (as of August 2020) completely restored the balance between the parties.

Obviously, these specific distinctive elements will not be present in all cases. Thus, in certain cases a landlord may demand that a tenant fulfill certain requirements (e.g. partial payment of rent, presenting evidence that the disputed rent is held in trust, committing to paying all future rent in full, etc.) in order to avoid a safeguard application by the landlord.

We are noticing a rapid development and quick clarification by the courts of the case law with regard to landlord-tenant obligations in the context of the current pandemic. As such, we will continue to monitor case law and update you on a regular basis.

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

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