Commercial lease case: CERS, ex turpi causa, RJR test, right of re-entry during eviction moratorium (8443220 Canada Inc. v. VGR Investments, 2021)

 

An interesting new ruling (in commercial tenancy setting) on the right of re-entry during the eviction moratorium and equitable relief: 8443220 Canada Inc. v. V.G.R Investments Ltd., 2021 ONSC 8258 (CanLII), <https://canlii.ca/t/jlc8n>.

The tenant received a subsidy under CERS ("Canada Emergency Rent Subsidy"), but did not pay full rent. The landlord resorted to self-help by utilizing a bailiff to re-enter the premises, despite the fact that "Sections 79 - 85 of the CTA ostensibly prohibit commercial landlords from locking out their tenants who are in receipt of CERS benefits for non-payment of rent during the pandemic moratorium".

The landlord tried ex turpi causa argument (claiming that the tenant did not come to the court with “clean hands”, a precondition for equitable relief) on the grounds that the tenant was not paying full rent despite being a recipient of CERS, but this argument failed and the court granted the tenant a mandatory interlocutory injunction.

The ruling provides a brief overview (in COVID-19 context) of an application of the three-part test for granting an interlocutory injunction, i.e. the well-known “R.J.R. MacDonald test” from RJR-MacDonald Inc. v. Canada (Attorney General), 1994 CanLII 117 (SCC), [1994] 1 SCR 311, <https://canlii.ca/t/1frtw>, which was mentioned previously in this blog (e.g. here):

1) serious issue to be tried;

2) irreparable harm; and

3) balance of convenience.

On ex turpi causa (under the first part of the RJR test):

"[16] 844 points to the clear words of the statute and regulation to state that VGR was not entitled to re-enter its premises. It adds that VGR does not deny that the facts of this case fall under the CTA provisions set out above, other than in regard to its arguments of non-payment and that 844 is wrongly obtaining CERS funds. Those facts alone, 844 argues, raise a strong prima facie case in its favour.

[17] VGR responds that both the CTA and the regulation assume that full payment of rent is made under the CERS. Further it argues that the common law principle of ex turpi causa prevents 844 from obtaining equitable relief from this court when it is misleading the Canadian government about its use of CERS funds. It also states that rent was not paid at all in July 2021.

[18] While VGR has a point in that the forms signed by 844 imply that full rent payment will be made by commercial tenants receiving CERS funds, the terms of the CTA and O.Reg 763/20 do not explicitly set out that requirement.

[19] In Livent Inc. (Special Receiver and Manager of) v. Deloitte & Touche, 2016 ONCA 11, Blair J.A., writing for the Ontario Court of Appeal stated, the term, ex turpi causa non oritur action means "from a dishonourable cause an action does not arise". Blair J.A. referred to :

The statement of Lord Mansfield in Holman v. Johnson (1775), 98 E.R. 1120, at p. 1121, [which] has often been cited as authoritative:

No Court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act. If, from the plaintiff's own stating or otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the Court says he has no right to be assisted. It is upon that ground the Court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff.

[20] Strictly speaking, the doctrine is a defence to a claim by a malefactor, one which seeks to prevent them from profiting from their misconduct. The doctrine is rarely used in Canada, and only in narrow circumstances. As Blair J.A. summarized after reviewing the two key Supreme Court of Canada cases on the doctrine:

The application of the ex turpi causa doctrine has therefore been strictly limited in Canada. It will apply only where allowing a plaintiff's claim would introduce inconsistency into the fabric of the law - by "giving with one hand what it takes away with the other": per McLachlin J. in Hall, 1993 CanLII 141 (SCC), [1993] 2 S.C.R. 159, at p. 178, quoted with approval by Rothstein J. in Zastowny, 2008 SCC 4 (CanLII), [2008] 1 S.C.R. 27, at para. 22.

[21] Here there is, at the very least, a real ambiguity regarding the obligations of a tenant receiving benefits under CERS, that is whether it is prohibited from receiving further benefits when it is unable to pay its full rent. I have been pointed to no authority in that regard.

[22] I also point out that it is not the Canadian Revenue Agency, which is raising this argument, it is the landlord, VGR. To the best of my knowledge, CRA still considers 844 to be eligible for the CERS programme. It has not appointed VGR to act as its agent in enforcing the programme.

[23] I add that when one looks to improper conduct, and the doctrine of ex turpi causa, that VGR’s own conduct violates the clear terms of the CTA. It knew that a moratorium on re-entry was in place, yet it chose to exercise a dubious right of re-entry. It can only be assumed that it felt that the evicted tenant, 844, would not fight back. Or as, the cliché has it, it is better to ask forgiveness than permission. If VGR felt that it had a right to re-entry based upon the arguments it raises in this motion, it could have brought an application to this court, seeking that relief. Instead it resorted to self-help. Having done so, it hardly lies in its mouth to complain about 844’s conduct regarding CERS."

On the RJR test:

1)
Strong Prima Facie Case

"[12] The test for the granting of an interlocutory injunction is the well known “R.J.R. MacDonald test”: 1) serious issue to be tried; 2) irreparable harm; and 3) balance of convenience: R.J.R Macdonald Inc. v. Canada (Attorney General), 1994 CanLII 117 (SCC), [1994] 1 S.C.R. 311, at para. 43. Since the moving party is seeking a mandatory injunction, the first arm of the test is a strong prima facie case rather than a serious issue: Blue Health Consultants v. Blue Health Services Inc. 2021 ONSC 2841 (“Blue Health”), at para. 39 citing R. v. Canadian Broadcasting Corp., 2018 SCC 5, [2018] 1 S.C.R. 196, at para. 15.

[...]

[15] As set out above, O.Reg 763/20 under the CTA provides that the non-enforcement period under s. 79 runs from December 17, 2020 to April 22, 2022.

[16] 844 points to the clear words of the statute and regulation to state that VGR was not entitled to re-enter its premises. It adds that VGR does not deny that the facts of this case fall under the CTA provisions set out above, other than in regard to its arguments of non-payment and that 844 is wrongly obtaining CERS funds. Those facts alone, 844 argues, raise a strong prima facie case in its favour."

Read above on the ex turpi causa argument.

2)
Irreparable Harm

"[24] There is little argument against the notion that 844 would suffer irreparable harm if the requested injunction is not granted. It would be out of business. By way of example, Pattillo J. found a similar result to amount to irreparable harm in Blue Health, above.

3)
Balance of Convenience

"[25] 844 argues that the balance of convenience favours it. First, it argues that it is the victim of its landlord’s improper behaviour in locking it out of the premises. Second, it refers to its irreparable harm argument. Third, it points to the terms to which it is willing to agree, which would substantially close the gap on any unpaid rent, to the benefit of the landlord.

[26] VGR argues that it is the aggrieved party who has been losing unpaid rent each month. If 844 intended to repay outstanding rent, it would have done so already as the issue has been on the table for over a year. It should not have to forebear any more of its tenant’s conduct. It asserts as well that at one point 844 chained some furniture to the front door, violating fire safety rules. But it did not say that that was a long-standing problem.

[27] The CTA pandemic amendments cited above were put into place to protect commercial tenants from the type of unilateral conduct to which VGR resorted during the pandemic. Without being allowed back into the premises, 844 will lose its business. But it is willing to pay an amount far greater than its rent each month to help make up for rental shortfalls.

[28] VGR has offered no evidence that it had re-let the premises since it re-entered them. If 844 were to pay the rent, including payments towards arrears, that it offers, the interests of the landlord, VGR would be substantially met without having to attempt to re-let the premises."

To read the ruling in full:

8443220 Canada Inc. v. V.G.R Investments Ltd., 2021 ONSC 8258 (CanLII), <https://canlii.ca/t/jlc8n>

Disclaimer:

You should not act or rely on any information provided in this blog. It is not legal advice, and the content is provided for general discussion and general information purposes only and to help encourage further research. To ensure your interests are protected, retain or formally seek legal advice from a licensed legal professional.

Never disclose details about your specific legal matters outside of situations when you have established solicitor-client relationship with a qualified legal professional. By using this blog, you acknowledge and accept this warning and agree to waive all liability for use of any information contained in this blog.

Reminder: Administrative Closure of Some Applications

Re-posting it again (since the deadline of December 7, 2021 is very close):

Some applicants who filed with the LTB received emails from "LTB.DROhearing@ontario.ca" titled "Scheduling your Hearing". If this might be you, look in your inbox and junk / spam folders for an email like the one in the attached screenshot:

If you cannot find an email from the LTB but suspect that you might be in the situation above, please contact the LTB and use their Check File Status feature. Save recordings of interactions for your evidence, just in case.

To contact the LTB: https://tribunalsontario.ca/ltb/contact/

To check file status: https://tribunalsontario.ca/ltb/check-file-status/

Additionally, if you are interested in reading reactions to this measure taken by the LTB, here is a press release by Advocacy Centre for Tenants Ontario (ACTO):

https://www.acto.ca/production/wp-content/uploads/2021/11/PressRelease_ACTO_AdminClosure_Nov26.pdf

Disclaimer:

You should not act or rely on any information provided in this blog. It is not legal advice, and the content is provided for general discussion and general information purposes only and to help encourage further research. To ensure your interests are protected, retain or formally seek legal advice from a licensed legal professional.

Never disclose details about your specific legal matters outside of situations when you have established solicitor-client relationship with a qualified legal professional. By using this blog, you acknowledge and accept this warning and agree to waive all liability for use of any information contained in this blog.

A case on rent arrears, force majeure clauses and doctrine of frustration in commercial lease setting (Braebury v. Gap, 2021)

 

This blog focuses on residential tenancies in Ontario, but sometimes we get questions on commercial tenancies, as well.

Braebury Development Corporation v. Gap (Canada) Inc., 2021 ONSC 6210 (CanLII), <https://canlii.ca/t/jj7lv> is an interesting recent decision on the interplay of force majeure clauses and the doctrine of frustration in a case of rent arrears of over $200,000 arising during COVID-19 in commercial lease setting.

1.

In this case, the force majeure clause explicitly stated that it did not relieve the commercial tenant from his obligation to pay rent, while it did contemplate general non-performance due to the "restrictive governmental laws and regulations". See at para. 15:

"... The provisions of the preceding sentence however shall not excuse Tenant from the prompt and timely payment of the Rent as and when the same is due under this Lease except when (i) the Commencement Date of the term is delayed by reason of force majeure, or (ii) such payment is excused pursuant to other provisions of this Lease. ..."

2.

This case highlights the importance of specifying terms of agreements really well, including force majeure clauses:

"[28]           If triggered, the force majeure clause excuses both parties from their obligations under the lease, save that it does “not excuse Tenant from the prompt and timely payment of the Rent as and when the same is due” (except in circumstances that do not apply in the present case).

[29]           Whereas in Windsor-Essex, where the effect of the force majeure clause was to provide the tenants with a rent abatement, the force majeure clause in the subject lease has the precise opposite effect.

[29]           Whereas in Windsor-Essex, where the effect of the force majeure clause was to provide the tenants with a rent abatement, the force majeure clause in the subject lease has the precise opposite effect.

[30]           The force majeure clause having been engaged because of the government’s COVID-19 restrictions, and payment of rent being an “act under the lease”, Gap, while relieved of other obligations under the lease, is expressly not excused from paying rent despite its ability to operate its business being significantly impeded."

3.

The landlord won his case that the force majeure clause applied, and since it did, the doctrine of frustration did not, as those circumstances were already contemplated in the agreement.

"[35]           Braebury counters that because the force majeure clause is applicable, Gap can have no recourse to the doctrine of frustration, since it only applies to situations that were not contemplated by the parties. The existence of an applicable force majeure clause necessarily means that events covered by it were contemplated by the parties at the time the contract was made.

[36]           In Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58 (CanLII), [2001] 2 S.C.R. 943, the Supreme Court stated at para. 53:

Frustration occurs when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes ‘a thing radically different from that which was undertaken by the contract’."

4.

The judge did consider the possibility of applicability of the doctrine of frustration, despite the force majeure clause (which probably contemplated these events anyway), and still ruled against the tenant, because the bar for frustration was not met, partly because the lease did not require that Gap (the tenant) operate a retail store out of the premises (at para. 43) and because the government restrictions on operations for retail stores were only temporary (at para. 45).

"[39]           Setting the force majeure clause to one side, I might agree that government restrictions could be considered a supervening event that was not contemplated or foreseeable, and that occurred through no fault of either party. 

[40]           However, taking the approach articulated in Naylor, the question is whether the COVID-19 restrictions radically altered the terms of the lease. While this event did prohibit Gap from operating its retail store temporarily between March 2020 and May 2020, and then at reduced capacity until September 2020, it is not clear that this would be sufficient to engage the doctrine of frustration.

[41]           Furthermore to radically alter the terms of the lease, the supervening event must not merely increase the burden of satisfying the contractual obligations, but must “affect the nature, meaning, purpose, effect and consequences of the contract so far as concerns either or both parties.” : Wilkie v. Jeong, 2017 BCSC 2131, 6 B.C.L.R. (6th) 119, at para. 17, quoting Folia v. Trelinski (1997), 14 R.P.R. (3d) 5 (B.C.S.C.) at para. 18.

[42]           Gap asserts that the purpose for entering the lease was to operate the premises as a retail store. However, under the terms of the lease, Gap was not required to do so at all times. Clause 3.01 of the lease relates to the use of the premises and states:

The Premises may be used for any retail purpose or purposes. Tenant shall have no obligation to operate any business nor conduct any business nor conduct any use in the premises either initially or at any time during the terms of this lease…

[43]           Given that Gap was not required to operate its retail store under the lease, its inability to do so cannot be said to have radically altered the lease’s terms, turning it into something completely different than what was intended by the parties entering the lease. By contrast, if Gap had been required under the lease to operate the premises as a retail store, its inability to do so by a supervening event may have risen to the level of radical change required to engage the doctrine of frustration.[3]

[44]           In addition, the cases suggest that to frustrate a contract, the supervening event must be a permanent, as opposed to a temporary, setback: see Manufactures Life Insurance Co. v. Huang & Danczkay Properties, [2003] O.T.C. 717 (Ont. S.C.), at paras. 45-46.

[45]           While some COVID-19 restrictions remained in place throughout the remaining lease term, during that time non-essential retail locations were only ordered to shut down between 24 March 2020 and 26 May 2020[4]. At all other times, Gap would have been able to operate its store subject to remaining public health measures. While this was not an insignificant disruption to Gap’s retail operations, it does not appear that those disruptions occurred to the extent that the lease was frustrated.

[46]           In any event, I agree with the plaintiff that the existence of the force majeure clause clearly shows that the parties to the lease contemplated situations in which, due to circumstances beyond the control of the parties, performance of obligations under the lease would be delayed, hindered, or prevented, and made provision in their contract accordingly."

______________________________________

Braebury Development Corporation v. Gap (Canada) Inc., 2021 ONSC 6210 (CanLII), <https://canlii.ca/t/jj7lv>

"... [4]               Gap did not pay rent for April or May 2020, and only made partial rent payments from June 2020 to September 2020. Gap unilaterally closed the store and vacated the lease premises in September 2020.

[5]               The plaintiff landlord now seeks to recover arrears of rent totalling $208,211.85. The defendant says it is relieved of the obligation to pay the arrears of rent because the purpose of the lease was frustrated by the COVID-19 pandemic, and the resulting public health restrictions, which significantly impeded its ability to operate its business to the point where it was no longer reasonable, practical, or commercially viable for it to do so.

[...]

[7]               Although other issues were raised in the parties’ factums[2], oral argument focused on two main issues, namely:

a.      Whether the force majeure clause contained in the lease was engaged in the circumstances and, if so, its effect on the defendant’s obligation to pay rent; and

b.      If the force majeure clause does not apply, whether the doctrine of frustration of contract applies to relieve the defendant of its obligation to pay the rent claimed.

Force Majeure Clause

[8]               The lease contained a force majeure clause. As explained in Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp and Paper Company Limited, 1975 CanLII 170 (SCC), [1976] 1 S.C.R. 580, at p. 583, force majeure clauses are contractual provisions designed to:

…discharge a contracting party when a supervening, sometimes supernatural, event, beyond the control of either party, makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill.

[9]               The force majeure clause in the subject lease excused the parties from performance of certain of their obligations under the lease in the event that the party was prevented from doing so or hindered by “restrictive governmental laws or regulations” or other reason “of a like nature” beyond the party’s control.  However, and, as it will be seen, significantly, the lease also provided that if the force majeure clause was triggered, it did not excuse the tenant from prompt and timely payment of rent.

[10]           Braebury argues that the force majeure clause in the lease demonstrates that the parties contemplated the circumstances such as those arising out of a pandemic. It asserts that government restrictions, including those enacted in response to a pandemic, qualify as “restrictive government laws or regulations”.  Alternatively, the government’s COVID-19 restrictions are “of a like nature” to the list of events in the force majeure clause that would trigger its application.

[11]           Since the force majeure clause applies and explicitly does not excuse Gap from the prompt and timely payment of rent, Braebury asserts that the defendant must satisfy its rent obligations.

[12]           Gap responds that the pandemic and resulting government restrictions were not contemplated by the parties when the lease was entered and, hence, do not trigger the lease’s force majeure clause.

[13]           To determine whether an event has triggered a force majeure clause and, if so, its impact on the parties’ contractual obligations, the court must interpret the particular clause contained in the lease. The lease should “be read as a whole, giving the words used their ordinary and grammatical meaning”: Windsor-Essex Catholic District School Board v. 231846 Ontario Limited, 2021 ONSC 3040, at paras. 19 and 22.

[14]           Three questions need to be addressed when addressing the effect of a force majeure clause: (a) what are the triggering events under the clause; (b) what is the required impact on the party invoking the clause; and (c) what are the consequences of that impact on the invoking party’s contractual obligation: Atcor Ltd. v. Continental Energy Marketing Ltd., 1996 ABCA 40, 178 A.R. 372, at para. 12. 

[15]           The force majeure clause included in the lease provides:

24.01   Force Majeure. In the event that either party hereto shall be delayed or hindered in or prevented from the performance of any act required hereunder by reason of strikes, lock-outs, labour troubles, inability to procure materials, failure of power, restrictive governmental laws or regulations, riots, insurrection, war, military or usurped power, sabotage, unusually severe weather, fire or other casualty or other reason (but excluding inadequacy of insurance proceeds, financial inability or the lack of suitable financing not attributable to any of the foregoing) of a like nature beyond the reasonable control of the party delayed in performing work or doing acts required under the terms of this Lease (herein called "force majeure"), the performance of such act shall be excused for the period of the delay and the period for the performance of any such act shall be extended for a period equivalent to the period of the delay. The provisions of the preceding sentence however shall not excuse Tenant from the prompt and timely payment of the Rent as and when the same is due under this Lease except when (i) the Commencement Date of the term is delayed by reason of force majeure, or (ii) such payment is excused pursuant to other provisions of this Lease.

The Triggering Event

[16]           The trigger in the subject lease is engaged when the reason for a party’s inability to perform its obligations is “restrictive governmental laws or regulations…or other reason…of a like nature beyond the reasonable control of the party delayed in preforming work or doing acts required under the terms of this Lease…”

[17]           Gap argues that the pandemic and government restrictions are not covered by the listed events triggering the force majeure clause and are not of a like nature. Specifically, it argues that the clause does not refer to public health measures, pandemics or epidemics, or health emergencies. Since these types of events are absent from the list, the government’s COVID-19 restrictions are not “of a like nature” either.

[18]       Braebury asserts that the government’s COVID-19 restrictions aimed at reducing the transmission of COVID-19 fall under “restrictive governmental laws or regulations” or are “of a like nature” such that the force majeure clause is triggered.

[19]           The issue of whether the government’s COVID-19 measures, and specifically the shutdown of non-essential facilities in the spring of 2020, falls under the event of “restrictive governmental laws or regulations” in a lease’s force majeure clause was recently addressed by this court in Windsor-Essex.

[20]           In that case, the lessees were two school boards who leased recreational space. Due to COVID-19 restrictions, neither school board was permitted to access the recreational space it had leased. The lessees had identical leases with the landlord, which provided for a rent abatement if the landlord was unable to provide access to the facilities for any of the reasons listed in the force majeure clause. The two school boards applied to the court for a declaration that the force majeure clauses applied and abated the rent owed while they were unable to access the leased space during the shutdown periods.

[21]           The lease in Windsor-Essex included “restrictive government laws or regulations” in its list of triggering events. Munroe J. held that the pandemic itself was not the triggering event, but, rather, it was the government’s laws and regulations that were implemented in response to the pandemic that prevented the lessor from providing access to the recreational space: Windsor-Essex, at paras. 24-25.  As Munroe J. observed at para. 26:

It is uncontroverted that the COVID-19 pandemic-caused government lockdowns happened during the period at issue and that such events were not the fault of the parties to the leases. The school boards could not use their respective leased premises as contracted or intended from March 17, 2020 through August 11, 2020 because of government orders forbidding same in response to the COVID-19 pandemic.

[22]           The terminology contained in the subject lease referring to restrictive governmental laws or regulations is identical to the terminology in the leases at issue in Windsor-Essex. For the same reasons expressed by Munroe J., I find that the force majeure clause in the parties’ lease was triggered by the government’s COVID-19 restrictions.

Required Impact

[23]           The required impact pursuant to lease is:

…that either party hereto shall be delayed or hindered in or prevented from the performance of any act required under the lease by reason of…

[24]           Gap did not pay rent as required under the lease for the months of April and May when it was prohibited by the government’s COVID-19 restrictions from opening its retail space, and only made partial payments thereafter while certain COVID-19 restrictions remained in place.

[25]           Gap argues that while it has not satisfied its rent obligations since March 2020, rent payment is not an “act under the lease” and therefore, the COVID-19 restrictions did not have the required impact of delaying, hindering, or preventing performance of an act under the lease.

[26]           In its written submissions, Gap did not provide any support for the proposition that rent payment is not an “act” under the lease. At the hearing, counsel for Braebury argued that a common sense reading of the lease leads to the inevitable conclusion that payment of rent would be an “act” under the lease. Were it otherwise, it would be redundant for the force majeure clause to explicitly exclude rent payment from being an obligation excused by force majeure.

[27]           I agree with the plaintiff on this point.  Furthermore, a review of any dictionary definition of the noun “act” discloses a range of meanings including “a deed or action”, “perform actions or functions”, “perform or carry out”, and “put into action”. The payment of rent is a central obligation which a tenant under a lease is required to perform or carry out. It is therefore an “act” within the meaning of the subject lease.

The Consequence on Contractual Obligations

[28]           If triggered, the force majeure clause excuses both parties from their obligations under the lease, save that it does “not excuse Tenant from the prompt and timely payment of the Rent as and when the same is due” (except in circumstances that do not apply in the present case).

[29]           Whereas in Windsor-Essex, where the effect of the force majeure clause was to provide the tenants with a rent abatement, the force majeure clause in the subject lease has the precise opposite effect.

[30]           The force majeure clause having been engaged because of the government’s COVID-19 restrictions, and payment of rent being an “act under the lease”, Gap, while relieved of other obligations under the lease, is expressly not excused from paying rent despite its ability to operate its business being significantly impeded.

[31]           This outcome is consistent with the court’s recent decision in Durham Sports Barn Inc. Bankruptcy Proposal, 2020 ONSC 5938. In that case, the plaintiff sought relief from the payment of rent between March 2020 and July 2020 because it was unable to operate its sports and athletic facility due to the government’s lockdown measures.

[32]           Gilmore J. noted that while the force majeure clause in the lease excused the landlord from performance of an obligation under the lease, it did not relieve the tenant from the obligation to pay rent: Durham, at para. 57. As such, the tenant was unable to rely on the force majeure clause to excuse its failure to pay rent during the government-ordered lockdown. Additionally, it could not rely on the landlord’s inability to provide quiet enjoyment of the leased premises during the lockdown because, unlike rent, the force majeure clause relieved the landlord of that obligation.

Frustration of Contract

[33]           The defendant argues that the legal doctrine of frustration of contract applies to excuse it from paying rent while the government restrictions prevented it from operating its store at the leased premises.

[34]           Specifically, Gap asserts that the lease was frustrated because (1) the government’s COVID-19 restrictions “made the Lease radically different from that which was undertaken under the Lease when it was signed”, and (2) performance of the lease, by ordinary operation of Gap’s retail store at the premises pursuant to the lease’s “use” clause became impossible as a result of the government’s COVID-19 restrictions.

[35]           Braebury counters that because the force majeure clause is applicable, Gap can have no recourse to the doctrine of frustration, since it only applies to situations that were not contemplated by the parties. The existence of an applicable force majeure clause necessarily means that events covered by it were contemplated by the parties at the time the contract was made.

[36]           In Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58 (CanLII), [2001] 2 S.C.R. 943, the Supreme Court stated at para. 53:

Frustration occurs when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes ‘a thing radically different from that which was undertaken by the contract’.

[37]           When the doctrine of frustration applies, “the court is asked to intervene … to relieve the parties of their bargain because a supervening event … has occurred without the fault of either party.”: Naylor, at para. 55.

[38]           Gap asserts that the unforeseen supervening event is the government’s COVID-19 restrictions, which prohibited it from operating its store during the government’s shutdown of non-essential retail businesses.

[39]           Setting the force majeure clause to one side, I might agree that government restrictions could be considered a supervening event that was not contemplated or foreseeable, and that occurred through no fault of either party. 

[40]           However, taking the approach articulated in Naylor, the question is whether the COVID-19 restrictions radically altered the terms of the lease. While this event did prohibit Gap from operating its retail store temporarily between March 2020 and May 2020, and then at reduced capacity until September 2020, it is not clear that this would be sufficient to engage the doctrine of frustration.

[41]           Furthermore to radically alter the terms of the lease, the supervening event must not merely increase the burden of satisfying the contractual obligations, but must “affect the nature, meaning, purpose, effect and consequences of the contract so far as concerns either or both parties.” : Wilkie v. Jeong, 2017 BCSC 2131, 6 B.C.L.R. (6th) 119, at para. 17, quoting Folia v. Trelinski (1997), 14 R.P.R. (3d) 5 (B.C.S.C.) at para. 18.

[42]           Gap asserts that the purpose for entering the lease was to operate the premises as a retail store. However, under the terms of the lease, Gap was not required to do so at all times. Clause 3.01 of the lease relates to the use of the premises and states:

The Premises may be used for any retail purpose or purposes. Tenant shall have no obligation to operate any business nor conduct any business nor conduct any use in the premises either initially or at any time during the terms of this lease…

[43]           Given that Gap was not required to operate its retail store under the lease, its inability to do so cannot be said to have radically altered the lease’s terms, turning it into something completely different than what was intended by the parties entering the lease. By contrast, if Gap had been required under the lease to operate the premises as a retail store, its inability to do so by a supervening event may have risen to the level of radical change required to engage the doctrine of frustration.[3]

[44]           In addition, the cases suggest that to frustrate a contract, the supervening event must be a permanent, as opposed to a temporary, setback: see Manufactures Life Insurance Co. v. Huang & Danczkay Properties, [2003] O.T.C. 717 (Ont. S.C.), at paras. 45-46.

[45]           While some COVID-19 restrictions remained in place throughout the remaining lease term, during that time non-essential retail locations were only ordered to shut down between 24 March 2020 and 26 May 2020[4]. At all other times, Gap would have been able to operate its store subject to remaining public health measures. While this was not an insignificant disruption to Gap’s retail operations, it does not appear that those disruptions occurred to the extent that the lease was frustrated.

[46]           In any event, I agree with the plaintiff that the existence of the force majeure clause clearly shows that the parties to the lease contemplated situations in which, due to circumstances beyond the control of the parties, performance of obligations under the lease would be delayed, hindered, or prevented, and made provision in their contract accordingly.

Disposition

[47]           The economic effects of the pandemic and the resulting restrictions have doubtless been felt by both commercial landlords and tenants.  Cases like this ask courts to decide how the burdens of diminished economic activity should be distributed between commercial parties.  Here, the parties turned their mind to what their respective responsibilities would be in the event that a range of circumstances beyond their control delayed, hindered, or prevented them from the performance of any act required by the lease. 

[48]           Summary judgment is, accordingly, granted in favour of the plaintiff for the amount of arrears of rent owing. ..."

Disclaimer:

You should not act or rely on any information provided in this blog. It is not legal advice, and the content is provided for general discussion and general information purposes only and to help encourage further research. To ensure your interests are protected, retain or formally seek legal advice from a licensed legal professional.

Never disclose details about your specific legal matters outside of situations when you have established solicitor-client relationship with a qualified legal professional. By using this blog, you acknowledge and accept this warning and agree to waive all liability for use of any information contained in this blog.