Samuel Mosonyi and Amelia Briggs-Morris
In a recent Ontario Superior Court of Justice decision, Durham Sports Barn Inc. Bankruptcy Proposal, 2020 ONSC 5938,Justice Gilmore held that a commercial tenant could not rely on the force majeure clause in its lease to excuse non-payment of rent during Ontario’s shutdown of non-essential businesses in response to the COVID-19 pandemic.
A force majeure clause in a contract excuses a party from performing certain contractual obligations due to circumstances beyond its control rendering the performance of such obligations impossible, for example, due to a natural disaster, an act of terrorism or an epidemic.
In Durham Sports, the commercial tenant operated an athletic performance centre in the landlord’s premises. The tenant, who owed $553,114.80 in rental arrears, filed a Notice of Intention to Make a Proposal pursuant to s. 50.4(1) of the Bankruptcy and Insolvency Act, on January 3, 2020. On the same day, the landlord delivered a Notice of Impending Termination to the tenant and demanded that it pay all rental arrears by January 4, 2020.
The tenant immediately sent the landlord a certified cheque for the prorated rent for January 2020 and a postdated cheque for February 2020. However, the cheques were not received until January 10, 2020, as they had to be replaced. On January 9, 2020, the landlord’s counsel emailed a Notice of Termination to the tenant’s counsel.
The tenant argued that the Notice of Termination should be set aside and that it should be excused from its contractual obligation to pay full rent during the period from March to July 2020 in which it was prevented from operating due to the provincial government’s closure of non-essential businesses including gyms. The lease contained a force majeure clause which relieved the landlord from its obligation to provide the tenant with quiet enjoyment as a result of the shutdown. The tenant argued that it should correspondingly be relieved of its obligation to pay rent.
Notice of Termination
Justice Gilmore decided that the landlord terminated the lease without giving the tenant a reasonable amount of time to deliver the cheques. The tenant made it clear that it intended to comply with the landlord’s demand for rent accrued after the Notice of Intention was filed and it did. The Notice of Termination was therefore set aside.
Force Majeure Clause
The tenant relied onaQuebec Superior Court decision, Hengyun International Investment Commerce Inc. c. 9368-7614 Quebec Inc., 2020 QCCS 2251, in which a tenant operating a fitness centre was excused from its obligation to pay rent during the province-wide pandemic shutdown period in Quebec. In that case, the Quebec court held that the force majeure clause in the lease did not relieve the tenant from paying rent. Instead to justify the non-payment of rent, the Quebec court relied on the doctrine of force majeure under section 1470 of the Quebec Civil Code, which allows a party to be excused from the performance of an obligation when an unforeseeable and irresistible event makes the performance of that obligation impossible.
Justice Gilmore held that Hengyun was inapplicable to Durham Sports as the language of the two force majeure clauses were quite different and that the doctrine of force majeure did not exist in Ontario under statute but rather may only be agreed upon as a contractual term. The force majeure clause in the Durham Sports lease relieved the landlord from providing quiet enjoyment but did not relieve the tenant from paying rent. While the tenant raised the doctrine of frustration (which may exist to excuse both parties from their obligations where performance of a contract becomes impossible), Justice Gilmore made no determination on that point.
Justice Gilmore further noted that government legislation enacted during the shutdown to protect small businesses focused on preventing evictions but did not suspend the payment of rent. In addition, she noted that the tenant did not advise the landlord that it required rent relief during the shutdown until August 2020. This precluded the landlord from applying for federal government assistance which would have provided rental relief for the tenant; this served as a factor in ultimately denying the tenant rent relief. Since the time of this decision, the new Canada Emergency Rent Subsidy allows tenants to apply directly for relief without the requirement to apply through landlords.
This is likely the first of many Ontario cases concerning force majeure clauses in commercial leases in the context of the COVID-19 pandemic. While this case found that the tenant was required to pay rent during the province-wide shutdown of non-essential businesses, this does not mean the same is true for all commercial tenants in Ontario. In each case, the Court will evaluate the particular wording of the force majeure clause in the lease in question in deciding whether it relieves the tenant from paying rent during the pandemic.
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