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Commercial lease remedies during the COVID-19 pandemic

Canada Publication October 8, 2020

In a series of recent cases, courts in Quebec have prevented landlords from terminating commercial leases and/or have reduced rent payable during periods where tenants were forced to close due to COVID-19, particularly where landlords did not apply for the Canada Emergency Commercial Rent Assistance program (CECRA). 

In Ontario1, similar measures have temporarily been enacted into law to prevent landlords from terminating leases or exercising distress rights if they are or would otherwise be eligible for CECRA; however, these measures do not relieve tenants of their obligation to pay rent or give the tenant the right to pay reduced rent.2 The expiration of these measures may result in an influx of landlord-tenant disputes and challenge courts to apply existing common law principles to unfamiliar circumstances.

Court cases

Quebec courts have begun to temporarily prevent landlords from terminating commercial leases for rental defaults arising from the forced closure of retail establishments due to COVID-19. In a majority of those decisions, courts have granted tenants temporary injunctive relief pending the determination of the matter on its merits. In other cases, tenants have succeeded at trial and been relieved of the obligation to pay rent during periods of forced closures due to, among other things, the landlord’s inability to provide peaceable enjoyment of the premises for their intended use or the fact that the tenant resumed paying full rent following the forced closures. 

Courts outside Quebec are unlikely to rely on those same principles in pandemic-related lease disputes. However, the decisions canvassed in the early stages of the pandemic signal a willingness by the courts to use their power to protect tenants affected by the impacts of COVID-19. This is particularly true in situations where landlords do not take advantage of CECRA or other government initiatives to mitigate the consequences of the pandemic. As such, commercial tenants outside Quebec may be able to achieve similar results by interlocutory injunctions and/or relief from forfeiture.

Interlocutory injunctions

An interlocutory injunction is a form of temporary relief granted by courts to prevent a party from performing certain acts. In Quebec, courts have used this relief to prevent landlords from terminating leases in situations where the pandemic has caused the forced closure of retail establishments. To obtain such relief, a tenant must establish that its claim has some merit, it will suffer harm that cannot be cured by monetary compensation (such as the loss of its business or customer base) and the harm it may suffer if the injunction is not granted is greater than the harm to the landlord.

The test for interlocutory injunctions is substantially the same throughout Canada, suggesting that similar decisions may be reached at the interim relief stage, particularly when a landlord is eligible but has refused to apply for CECRA. This remedy is likely to be a commercial tenant’s first recourse if a landlord seeks to terminate a lease when and where legislative protections no longer apply.

Relief from forfeiture

A court may grant an interlocutory injunction to a tenant either pending or as part of its discretion to grant relief from forfeiture, a remedy available to commercial tenants in Ontario, British Columbia and Alberta that gives courts the power to reinstate a tenancy as they see fit. At least one reported decision in Ontario has already considered such relief in light of COVID-19 and would have restored the tenancy.3

Generally, courts will consider four criteria when the tenant’s alleged default is the non-payment of rent, including whether or not:

  • the tenant acted honestly and in good faith;
  • the tenant refused to pay rent outright;
  • the landlord suffered a serious loss from the delay in paying rent; and
  • the rental arrears were significant.

The recent Ontario Second Cup decision signals a willingness to look at rental defaults in the context of the pandemic. In that case, the tenant’s rental arrears amounted to 25.5% of rent, which was considered insignificant in light of the “unprecedented pandemic that shut down most of [the tenant’s] operations and the country’s economy.” Tenants may be able to make similar claims either where they ask the landlord to forego 25% of rent as part of the CECRA program or where the tenant can only make partial payments. A tenant’s expressed desire to have a landlord apply for CECRA or enter into a rent abatement or deferral agreement during the pandemic may therefore weigh in its favour as such actions contradict an outright refusal to pay rent.

The courts may also consider a number of other factors, including the length of the tenancy, the history of defaults and the tenant’s ability to bring the lease into good standing. Where special circumstances are at play, those factors may weigh more heavily in favour of the tenant. For example, the Ontario decision involved a unique scenario where the tenant would have lost the benefit of applying for a cannabis retail store licence for the premises and other locations, which was of utmost importance to the company.

Practical impact

The decisions released in the early stages of the pandemic may be a sign of what is to come in the “new normal.” While the statutory protections in Ontario have been extended to October 30, 2020, the courts have signalled a willingness to effect similar results in the absence of those protections by the application of equitable doctrines. This trend may decrease the level of commercial certainty and comfort that landlords have in pursuing lease remedies for pandemic-related defaults.

While each situation must be examined case-by-case, landlords wishing to exercise their rights and remedies under a lease are encouraged to seek legal advice, particularly in circumstances where they were eligible but did not apply for CECRA or believe special circumstances are at play for their tenants. 

A tenant facing eviction for pandemic-related defaults would also be wise to consult its legal advisors in order to identify the full range of available rights and remedies. Further, tenants are encouraged to keep detailed records of COVID-19-related losses suffered and should actively engage with landlords regarding the options available to help militate against the financial impacts of the pandemic on both parties. 

This legal update is provided for informational purposes only and speaks to the state of the law in provinces outside Quebec. For more information on the state of the law in Quebec, please refer to a legal update prepared by our Montreal office, which can be found here.

The authors wish to thank Amélye Paquette, articling student, and Jason McFarlane, summer student, for their help in preparing this legal update.


Footnotes

1   The corresponding protections in Alberta and British Columbia expired on August 31, 2020, and October 1, 2020, respectively, and have not been extended at this time.

3   The Second Cup Ltd. v 2410077 Ontario Ltd., 2020 ONSC 3684.



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