Commercial Lease Enforcement and Rent Payments in the Age of COVID-19

The need for social distancing in the global response to COVID-19 and the ensuing closure of businesses has permeated the entire economic world.

This blog focuses on the significant impacts that commercial landlords and tenants are facing and explores the difficult considerations that the court may have to make in determining how to allocate losses that both commercial landlords and tenants are inevitably experiencing during this time.

Commercial Leases

On March 17, 2020, Ontario declared a State of Emergency, which required non-essential businesses to close.¹ This government mandated closure of certain businesses has created a significant strain on commercial tenancy relationships across the Province. For example, the Canadian Federation of Independent Business, a non-profit organization that advocates for Canadian small businesses, has recently reported that a quarter of small businesses will be unable to pay their rent or mortgage as the case may be as a result of COVID-19.² That number increases to 44% if the small business is in the hospitality sector.³

Various levels of government and industry leaders are imploring commercial tenants and landlords to be flexible and work together to find practical and amicable solutions during this unprecedented time. RioCan Real Estate Investment Trust (“RioCan”), one of Canada’s largest owners of retail space, serves as an example of such a solution. On April 6, 2020, RioCan announced that they will provide an automatic 60-day, interest-free rental deferral, for independent commercial tenants.⁴  Other jurisdictions, such as the United Kingdom have utilized a more proactive response and have enacted legislation such as the Coronavirus Act,⁵ which bans the forfeiture of commercial leases from March 25, 2020, until June 30,  2020, (or longer if the government deems necessary) for the non-payment of rent.⁶

However, absent legislative intervention, or a creative solution reached between a commercial landlord and tenant, the court may be faced with novel and challenging disputes requiring it to determine how to allocate the losses that both a landlord and tenant will have suffered.

Moreover, even if there is legislative intervention, or some form of deferral agreement reached between the commercial landlord and tenant, what will happen when the landlord is not prepared to defer payments any longer and needs the payments to resume and the tenant is still not in a position to make the landlord whole?

Tenants Obligations

In a previous blog, we looked at the application of force majeure clauses. These clauses can, in certain extraordinary circumstances, excuse a party’s failure to perform certain contractual obligations. Force majeure clauses are commonly contained in commercial leases.  Typically a commercial lease includes a provision that requires a tenant to remain open for and carry on business during regular operating hours throughout the term of the lease. This of course is not currently possible for the numerous businesses that have been deemed non-essential and which have been forced to shutter their doors. However, it is possible that a government mandated closure may fall under the purview of a force majeure clause and thus relieve a tenant of this non-monetary obligation under their lease.

That said, many commercial leases, even if they do contain force majeure clauses, specifically exclude the clause from applying to a tenants’ ongoing obligation to pay rent.⁷ Therefore, as a result of COVID-19, many commercial tenants who are simply unable to pay rent, are clearly in breach of the express language contained in their leases.

Typically, such a breach would legally permit a commercial landlord to terminate the tenancy and replace the existing tenant with a new tenant.

Relief from Forfeiture

When a lease is terminated by the landlord, a tenant may move before the court and seek to avail itself of the equitable remedy of relief from forfeiture.⁸ This remedy allows a court to reinstate the tenancy, notwithstanding the valid termination of the lease.

In Ontario, the court’s authority to grant relief from forfeiture is found in subsection 20 (1) of the Commercial Tenancies Act, which states:

Relief against re-entry or forfeiture

1. 20. (1) Where a lessor is proceeding by action or otherwise to enforce a right of re-entry or forfeiture, whether for non-payment of rent or for other cause, the lessee may, in the lessor’s action, if any, or if there is no such action pending, then in an action or application in the Ontario Court (General Division) brought by the lessee, apply to the court for relief, and the court may grant such relief as, having regard to the proceeding and conduct of the parties under section 19 and to all the other circumstances, the court thinks fit, and on such terms as to payment of rent, costs, expenses, damages, compensation, penalty, or otherwise, including the granting of an injunction to restrain any like breach in the future as the court considers just.

Further, section 98 of the Courts of Justice Act provides that a court “may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just”.⁹

In addition to subsection 20(1) of the Commercial Tenancies Act and section 98 of the Courts of Justice Act, the courts’ general equitable jurisdiction to grant relief from forfeiture is also available.¹⁰

The remedy of relief from forfeiture is purely discretionary, is fact specific, and has been observed to be granted sparingly.¹¹ In exercising its discretion as to whether to grant relief from forfeiture, the court must consider the following three criteria:

1. the conduct of the applicant and the gravity of the breaches;
2. whether the object of the right of forfeiture in the lease was essentially to secure the payment of money; and,
3. the disparity or disproportion between the value of the property forfeited and the damages caused by the breach.¹²

Additionally, and as observed by Justice Perell in Beaver Fuels Management Ltd. v. Baker’s Dozen Holdings Corp.,¹³ other circumstances can and should be examined including: the history of the relationship, the tenant’s good faith or bad faith or want of clean hands.¹⁴

Generally, in situations of non-payment of rent a court will grant relief from forfeiture if the tenant can make full payment of their arrears and continue payment of rent.¹⁵  This approach was noted by Justice Laskin, as he was then, in the case of Rexdale Investment Ltd. v. Gibson, in which His Honour stated:

Assuming power in the Court to relieve against forfeiture for non-payment of rent in the present case, there is no good reason to refuse such relief when the landlord can be made whole by money payments and terms can be imposed, as they were, to require regularity in making payments on the due dates.¹⁶

It has further been noted that relief from forfeiture can be granted in situations where the offending situation can be unraveled and the status quo can be restored, by money or otherwise, or where a monetary dispute might be resolved if the parties were given more time.¹⁷

In a nutshell, when a commercial tenant seeks relief from forfeiture arising from a monetary breach of the lease, it has to pay any and all arrears owing to the landlord before the court will likely consider granting such relief.

But in these unique circumstances, where a tenant has been unable to pay rent because it had to shut down its business either as a result of an express government mandated closure, or alternatively, it has suffered a significant downturn in its business due to a decline in patrons arising from people social-distancing, is a court going to grant relief from forfeiture, without the necessity of repaying all arrears of rent, even though indisputably the lease requires that such payments be made?

Would such a decision be fair to a commercial landlord, who likely relies upon the payment of rent to ensure it is able to make mortgage payments on the property in which the tenant operates?

Will the economic status of the parties involved play a more significant role in how these losses are allocated?

For example, if the tenant is a “mom and pop” store and the landlord is a well-established property developer, is a court more likely in these circumstances to grant relief from forfeiture without the tenant having to repay all rent, versus a situation where the commercial tenant is a national (or international company) and the landlord is in fact the smaller business?

Damages for Arrears of Rent

Even if a lease is terminated and the tenant does not elect to seek relief from forfeiture,  a landlord still has the ability to sue a former tenant for any damages arising from the tenancy (including the failure to pay rent). In this circumstance, a tenant might consider relying upon the Frustrated Contracts Act¹⁸ or the doctrine of frustration to release the parties from their contractual obligations, however economic downturn has historically not been a ground of frustration.¹⁹  Again, we query whether in the unique circumstances of COVID-19 the court may be inclined to determine, at least in some circumstances, that the economic downturn triggered by the necessity of social-distancing (as expressly enforced by the government) should enable the tenant to claim the lease has been frustrated and all its obligations were therefore discharged.

Concluding Thoughts

It appears inevitable that whether a tenant seeks relief from forfeiture, or simply seeks to defend itself from a claim for arrears under its lease, the court may feel compelled to allocate losses as between two innocent parties given the extraordinary economic events surrounding COVID-19.  This may lead the court to exercise its discretion in such a manner that allows for far more “liberal” applications of legal doctrines than have been applied previously in the hopes of achieving a result the court believes to be most equitable in the circumstances of each unique case.