Mandatory Shutdowns And Commercial Leasing: Who Bears The Risk?

A Review of the Legal Position in Canada and Other Common Law Jurisdictions

Irshad Motala, LLB. CEO, LexOutsource – Legal Research, Writing and Analysis for Canadian Lawyers

There is significant uncertainty regarding the tenant’s obligation to pay rent where trade from the leased premises becomes impossible due to the mandatory closure of non-essential businesses in response to the COVID-19 pandemic.

On the one hand, the tenant cannot meaningfully enjoy use of the leased premises and derives no income from the leased premises during a mandatory closure. The tenant may also be deprived of the knock-on benefits associated with consistent foot traffic through a vibrant shopping centre. In such a situation, it could appear inequitable for a tenant to be expected to pay rent. 

However, there are also equitable arguments which favour the landlord:

(a) The landlord has not deprived the tenant of the right to trade. The COVID-19 pandemic is a natural disaster and the ensuing restrictions placed on trade do not stem from the landlord.

(b) The tenant retains possession of the leased premises. For instance, the tenant’s trade fixtures and inventory remain in the leased premises. Therefore, the situation is akin to the tenant temporarily ceasing business for staff training or to take stock, without moving out of the leased premises. Thus, the landlord should not be responsible for non-use of the leased premises by the tenant, where such non-use is caused by events unrelated to the landlord.

(c) The tenant’s continued possession of the leased premises is beneficial to the tenant. For instance, the tenant does not have to pay additional moving and storage costs for its trade fixtures and inventory, and can easily resume trading from the leased premises once legal and practical limitations fall way. For instance, the landlord has no right to re-let the leased premises to a third party during the mandatory closure (such as to a provider of essential services and goods). This is because possession has not reverted to the landlord, who must honour the legal possession the tenant retains over the leased premises. This guarantee ensures that the tenant will also not have to incur costs to re-install modifications and alterations to the leased premises.

(d) The landlord remains liable for carrying costs associated with maintaining the leased premises. This may include (a) maintenance and other costs associated with common areas, (b) utility-related costs, and (c) property taxes.

(e) The continued payment of the carrying costs by the landlord benefit the tenant. For instance:

a. if the landlord pays for security services at a shopping centre, the trade fixtures and inventory of the tenant remain safe, despite the tenant being unable to trade. In fact, the tenant may benefit from a more favourable insurance premium due to added measures of protection.

b. the routine maintenance of a shopping centre ensures that the trade fixtures and inventory of the tenant are not subject to damage, such as from a roof caving-in on the leased premises. Ultimately, this ensures that once the mandatory closure is over, the tenant can simply open up and re-commence operations, without the hassle of having to deal with neglect of the leased premises.

c. the payment of property taxes and mortgage payments on the leased premises helps protect the security of tenure of the tenant. This is important for a tenant who intends to carry on trading from the leased premises after the mandatory closure has ended.

Therefore, a conflict between the interests of the landlord and a tenant arises, as each has competing economic concerns related to a mandatory closure. In addition, the COVID-19 pandemic presents an abnormal situation. For instance, there is often no practical possibility of the tenant removing its trade fixtures and inventory from the leased premises. This is likely because the tenant and the landlord expect the tenant to immediately re-commence trading once the mandatory closure ends. There may also be time, cost and other practical constraints associated with a sudden and temporary move.

The legal interest and rights of both parties may also appear uncertain.

In respect to the above, the common law doctrine of frustration has been considered and applied in somewhat analogous circumstances, to the landlord-tenant relationship. 

The concept of frustration was explained in the following words by the Supreme Court of Canada in Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58 (CanLII) at paras 53 and 55: “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” [and is based on the premise] that to compel performance despite the new and changed circumstances would be to order the appellant to do something radically different from what the parties agreed to under the tendering contract”. 

Historically, the doctrine of frustration has had very limited application to a leasing arrangement. In fact, it was generally accepted that where a tenant is placed in possession of the leased premises by the landlord, outside events which render trade from the leased premises unlawful or impractical, do not impact on the duty of the tenant to pay rent. Under this approach, a lease agreement has been viewed solely as an agreement by the landlord not to interfere tenant’s possession of the leased premises. Therefore, an event which merely rendered the leased premises unsuitable to the tenant, such as where the tenant is unable to use the leased premises for an intended purpose, did not constitute a breach of the lease agreement. Thus, there could be no frustration or impossibility in the landlord fulfilling a non-existent obligation – namely, to ensure the tenant was able to use the leased premises as intended:

(a) Merkur v. H. Shoom & Co., 1953 CarswellOnt 423, [1954] 1 D.L.R. 85, [1954] O.W.N. 55 at para 6: “The weight of judicial authority is that the doctrine of frustration does not apply to leases, particularly where the subject-matter of the lease was in existence at the time the lease was entered into, and the tenant entered into possession thereof.”

(b) Raymond v. Byrapaneni, 2001 NBCA 8 (CanLII) at para 11: “The concept of lease as an estate in land precludes the application of other contractual principles. As a general proposition, the doctrine of “frustration” applies to all contracts, except leasing contracts. It is for this reason that a tenant remains obligated at common law to pay rent even though the leased premises are destroyed by fire through no fault of the tenant. This is true even if the premises are located on the top floor of a 15 story building. The legal rationale invoked to support that conclusion is tied to the understanding that as the tenant retains an estate in land there can never be a “total failure of consideration”. In other words, the tenant is in receipt of what he bargained for – an estate in land.”

(c) Caithness Caledonia Ltd. v. Goss, 1973 CanLII 770 (ON SC): “It has long been the law of landlord and tenant that a tenant must continue to pay rent even though the demised property can no longer be used for the intended purpose, or is destroyed by fire”.

There is an additional principle which converges with the above: Usually, a landlord has no liability for the conduct of a third party which impacts on the tenant’s enjoyment of the leased premises. For instance, as noted in Seward v. MacRae, 2013 ABPC 257 (CanLII) at paras 18-20: “To prove a breach of the landlord’s covenant, the Plaintiff must show not only interference with her enjoyment of the premises but also that interference resulted from some act which may be imputed to him.” Therefore, “The right to quiet enjoyment does not guarantee to a tenant protection from interference by persons who are beyond the control of the landlord.  The right of quiet enjoyment does not oblige a landlord to protect a tenant from such other persons”.

Based on the above principles, courts have usually not entertained the notion that a tenant can cease paying rent or receive a reduction in rent, where, due to outside events, the use of the leased premises in the intended manner, is not possible. This is because the landlord fully performed its obligation by placing the tenant in possession of the leased premises, even if an outside event interrupted functional possession thereafter. There is also specific support for this proposition in the context of temporary inconveniences caused by a governmental regulation.

For instance, a number of decisions have held that rent remains payable in a situation where regulations render the primary purpose for which leased premises is leased unlawful. For instance, the decision in Claude Neon General Advertising Ltd. v. Sing, 1941 CarswellNS 29, [1942] 1 D.L.R. 26, suggested that a temporary and emergency regulatory provision which has a fundamental impact on trade from (or on) the leased premises (or leased item), does not suspend the obligation to pay rent. There, the plaintiff agreed to construct and lease a neon sign to the defendant in return for a monthly rental. The plaintiff was obligated to install the sign and keep it in repair but the defendant was to pay for the electric power. Therefore, the arrangement was fundamentally a lease. However, due to the outbreak of war, the lighting of the sign was prohibited by an emergency regulation. The defendant argued that “the carrying out of the contract has become impossible by a change of the law and in effect that he is relieved from further payment”. The court reiterated “the principle that a lessee or licensee is not released from paying rent because the benefit which they expected is lost by reason of government action.” In the particular circumstances of the matter, the court suggested that “the neon sign was constructed for the purposes of the defendant, it was erected on the defendant’s premises and was. operated for some time. The monthly rental was for the purpose of paying the cost of construction and erection as well as maintenance over a period of 60 months.” Importantly, the court also noted that “I do not think that I should say that the contract is for an illuminated sign.” The court explained that while “The defendant certainly gets very much less benefit from the sign”, it “is not entirely useless as a daylight sign.” The court also pointed out that “The lighting of it, even when legal, is a matter for the defendant.”

The same conclusion was reached in the Australian decision in Scanlan’s New Neon Limited v Tooheys Limited (1943) 67 CLR 169. There, the court considered the contention that a contract for the lease of neon advertising lights had been frustrated by the making of a war-time regulation which prohibited the illumination of the signs. The court concluded that no frustration had taken place. The court noted that the landlord of the signs had incurred expenditure in their manufacture being tailored to the requirements of the particular tenants and that even if the signs could not be illuminated, they did provide a measure of advantage by way of advertisement in daylight hours. Moreover, the court concluded that the hirers must be regarded as having taken the risk of the imposition of restrictions such as were in fact imposed: “Restrictions on illuminating advertisements at night might well be imposed by Government or civic authorities in times of peace, or the lighting might prove to be a nuisance to a neighbour and be restrained by an injunction. The risk is of the same quality in times of war or peace.”

In many ways, a leased premises which cannot be used for trade due to a mandatory closure is analogous to the regulatory restrictions placed on trade from the leased premises in the preceding decisions. For instance, the landlord normally only provides a right of possession of the leased premises, and despite the mandatory closure, the tenant continues to derive a benefit from the leased premises, in the form of storage of its trade fixtures and inventory. The lease agreement does not directly provide a right to trade. Therefore, the landlord has fully performed its obligations by placing the tenant in possession of the leased premises and not disturbing that possession. The fact that an outside element results in a situation where tenant “gets very much less benefit” from the leased premises, does not suspend the obligation to pay rent.

In addition, English case-law has also generally adopted the view that even where governmental action renders the leased premises entirely inaccessible on a temporary basis, this does not frustrate the lease agreement or suspend the obligation to pay rent:

(a) The House of Lords addressed whether a ten-year lease of a warehouse was frustrated where access to it was cut off by a regulatory order for a road closure which would continue for 20 months in National Carriers Ltd v Panalpina (Northern) Ltd, (1982) 43 P. & C.R. 72, and found that the lease agreement was not frustrated. The House of Lords accepted that “even with this limited interruption the appellant’s business will have been severely dislocated. It will have had to move goods from the warehouse before the closure and to acquire alternative accommodation. After reopening the reverse process must take place. But this does not approach the gravity of a frustrating event. Out of 10 years it will have lost under two years of use: there will be nearly three years left after the interruption has ceased.” However, the House of Lords also pointed out that “This is a case, similar to others, where the likely continuance of the term after the interruption makes it impossible for the lessee to contend that the lease has been brought to an end. The obligation to pay rent under the lease is unconditional, with a sole exception for the case of fire, as to which the lease provides for a suspension of the obligation. No provision is made for suspension in any other case: the obligation remains. I am of opinion therefore that the lessee has no defence to the action for rent”.

(b) The same result can be seen in Matthey v. Curling, [1922] 2 A. C. 180. There, the military authorities, acting under regulatory powers, took possession of the leased premises and remained in occupation of the leased premises until after the lease expired. The court held that the doctrine of frustration did not apply, in that the tenant had not been evicted by someone with paramount title, and therefore, was liable for rent, despite not being able to enjoy occupation.

(c) The court reached the same conclusion in Edler v. Auerbach, (1949-51) 1 P. & C.R. 10, where it was demonstrated that the intended use of the leased premises by the tenant would be temporarily unlawful. There, a regulation provided that “no person shall except with the consent of the local housing authority, use for purposes other than residential purposes any housing accommodation which has been used for residential purposes”. However, a lease agreement was entered into to use part of the leased premises for professional purposes. Initially, the local authority denied an exemption from the regulation. The court found that that the lease agreement was not illegal on its face, and so not unenforceable on that ground, since the regulation concerned not the letting of premises but only their use, and the tenant’s covenant to use them for professional purposes did not impose any positive obligation on him to use them at all, but was in substance merely a negative covenant not to use them otherwise than for professional purposes. 

(d) In fact, the decision in London and Northern Estates Company v. Schlesinger, [1916] 1 KB 20, suggested that a lease agreement does not presuppose that occupation will always remain lawful, or that a specific tenant will be able to personally occupy a leased premises for a particular purpose. There, the landlord had leased a residential premises to a tenant. Subsequently, war broke out and the tenant was declared an alien enemy. A regulation prohibited enemy aliens from residing within certain specified areas (including the location of the leased premises). The court found that that it was not the basis of the lease agreement that the tenant should continue to be allowed by law to inhabit the leased premises in person. Therefore, the regulation had did not extinguish the lease agreement and the tenant remained liable for rent. 

While theoretically, the lease agreement itself may provide additional protections to the tenant,  courts have demonstrated reluctance to re-interpret the concept of a lease agreement to impose obligations on a landlord beyond granting possession to the tenant, and have normally required a an explicit term, at least before frustration of such a supposed obligation will be established. For instance, in Merkur v. H. Shoom & Co., 1953 CarswellOnt 423, [1954] 1 D.L.R. 85, [1954] O.W.N. 55 at paras 2-6, the tenant alleged “that the lease was made upon the express condition and warranty that the building” in which the leased premises were located “would be occupied for the season in question by dealers in fruit and produce as a summer market” and “that the remainder of the stalls in the summer market had been leased to certain specific fruit and produce merchants”. Thereafter, “there was a fire in adjoining premises”, due to which “tenants moved out from the plaintiff’s premises which had been used as a summer market for years.” The tenant alleged that this frustrated the lease. The court rejected this argument. The court found that “The subject-matter of the contract never ceased to exist” and that “The weight of judicial authority is that the doctrine of frustration does not apply to leases, particularly where the subject-matter of the lease was in existence at the time the lease was entered into, and the tenant entered into possession thereof.” The court also explained that “It is not enough that the parties should have had in contemplation that the defendant and the plaintiff’s other tenants would use the premises as a summer market”, and pointed out that “So far as the plaintiff was concerned there was nothing to prevent the tenants using their several stalls which they had rented from the plaintiff as a summer market.” The court also suggested that “If the defendant company intended the contract to be dependent upon other tenants or producers being there or in the vicinity, so as to create a summer market, it should have so provided in the contract.”

However, recent developments in case-law on the question of frustration of lease agreements would suggest some recognition that loss of functional possession of the leased premises can amount to frustration (even where the landlord has not interrupted possession directly):

(a) For instance, courts in Canada have suggested that terms will be implied excusing a tenant from paying rent, where, for instance, the leased premises are completely worthless to the tenant (even where this has been caused by events beyond the control of the landlord). Thus, in 224981 Ontario Inc. v Intact Insurance Company, 2016 ONSC 642 (CanLII) at paras 22 and 23, the tenant had an oral lease, whereby rental was paid on a monthly basis. The court concluded that by implication, “the term of the lease was also monthly.” The leased premises were destroyed by a fire. However, “the parties’ obligations under the lease if the [leased premises] was destroyed by fire” was not dealt with in the oral lease. However, and despite the absence of an express term, the court concluded that the tenant “was not obliged under its monthly lease to pay rent to the [landlord] after the fire as its’ manufacturing operations stopped after the [leased premises] was destroyed by fire.” The court reasoned that the fire was a “supervening event” that “had caused performance to become “radically different from the bargain made by the parties”.

(b) The Court of Appeal for Ontario dismissed an appeal in the above matter in 2224981 Ontario Inc. v. Intact Insurance Company, 2016 ONCA 870 (CanLII) at para 17. While the court did not determine the question of frustration, it did describe the notion “that [the tenant] continued to be liable to pay rent for the relevant period, despite the fire”, as “an assumption that may be questionable given the doctrine of frustration”.

In addition, there is also a rational argument: To ignore the functional use of the leased premises, as an aspect of what is being leased, is inconsistent with the practical realty that some commercial leases, such as where space in a shopping centre is leased, impose a package of rights and obligations, over and above mere possession. For instance, shopping mall leases often contain numerous other covenants, such as mandatory trading hours which apply to all tenants in a shopping centre and a guarantee that anchor tenants and other forms of trading will continue taking place. These are designed to encourage consistent foot traffic, and ensure consistent and regular trade activity, which in turn, will benefit all the tenants. This is inconsistent with a lease agreement being a mere conveyance of a bare right of possession. Therefore, to suggest otherwise would be artificial and would ignore the reality on the ground.

Importantly, a broader approach to the obligations of a landlord, and thus, the scope of what may constitute frustration of a lease agreement, has been recognized over time, such that courts have solely moved away from the notion that a lease agreement is simply a conveyance of rights over land. For instance, the possibility of frustration applying to a commercial lease in a situation where there is a frustration of a broader purpose behind the lease agreement, was accepted by the House of Lords in National Carriers Ltd v Panalpina (Northern) Ltd, (1982) 43 P. & C.R. 72 (referred to above). The House of Lords rejected an absolute notion “that frustration of leases cannot occur because in any event the tenant will have that which he bargained for, namely, the leasehold estate”. The House of Lords explained that “A man may desire possession and use of land or buildings for, and only for, some purpose in view and mutually contemplated. Why is it an answer, when he claims that this purpose is “frustrated,” to say that he has an estate if that estate is unusable and unsaleable? In such a case the lease, or the conferring of an estate, is a subsidiary means to an end, not an aim or end of itself.” The House of Lords also noted that there is no automatic rule that the risk of loss due to inability to use the leased premises must always fall on the tenant: “Whether the risk—or any risk—passes to the lessee depends on the terms of the lease: it is not uncommon, indeed, for some risks—of fire or destruction—to be specifically allocated. So in the case of unspecified risks, which may be thought to have been mutually contemplated, or capable of being contemplated by reasonable men, why should not the court decide on whom the risks are to lie? And if it can do this and find that a particular risk falls upon the lessor, the consequence may follow that upon the risk eventuating the lessee is released from his obligation.” Thus, the House of Lords concluded: “In my opinion, therefore, though such cases may be rare, the doctrine of frustration is capable of application to leases of land. It must be so applied with proper regard to the fact that a lease, that is, a grant of a legal estate, is involved. The court must consider whether any term is to be implied which would determine the lease in the event which has happened and/or ascertain the foundation of the agreement and decide whether this still exists in the light of the terms of the lease, the surrounding circumstances and any special rules which apply to leases or to the particular lease in question.”

Therefore, there is no longer an absolute rule that:

(a) a lease agreement only grants a bare right of possession.

(b) the risk of unforeseen events which affect the ability to trade must fall solely on a tenant in possession of the leased premises.

The above has also found support in Canadian case-law:

(a) The first proposition was accepted by the Supreme Court of Canada in Highway Properties Ltd. v. Kelly, Douglas and Co. Ltd., 1971 CanLII 123 (SCC). There, the court explained that “It is no longer sensible to pretend that a commercial lease, such as the one before this Court, is simply a conveyance and not also a contract.”

(b) The second proposition is supported by the decision of the Court of Appeal for Ontario in George Wimpey Canada Ltd. v. Focal Properties Ltd., 1975 CanLII 49 (ON CA). There, the court stated: “Is it reasonable to place the risk of non-performance in the events which have happened on one party or the other, or neither?” If it is not reasonable to place the risk on either party, the contract is frustrated. If, however, it is reasonable to place the risk on a particular party, that party must perform, and if he fails to do so, he will be liable in damages.”

Consequently, the predominant purpose of the lease agreement may not be limited to a bare right of possession. This is important to determining whether frustration has occurred. For instance, in Canada (Attorney General) v. Chomcy, 2002 CarswellOnt 302, [2002] O.J. No. 355 at para 18, the court stated that a clause dealing with termination due to specific events, must be interpreted in the light of the primary purpose of the lease agreement, albeit in that case, the predominant purpose was found to be to provide residential accommodation. In the case of a lease of space within a shopping centre, the predominant purpose probably would be broader (as suggested above).

In fact, a purposive approach may reveal that the lease agreement is not a mere conveyance of a bare right of possession, but a guarantee of a “package of goods and services”. For instance, American case of Javins v. First National Realty Corporation, 428 F.2d 1071 (D.C. Cir. 1970) noted that treating a lease agreement as simply a conveyance of a right over land is outdated, and that in fact, it guarantees a “package of goods and services”: “The assumption of landlord-tenant law, derived from feudal property law, that a lease primarily conveyed to the tenant an interest in land may have been reasonable in a rural, agrarian society; it may continue to be reasonable in some leases involving farming or commercial land. In these cases, the value of the lease to the tenant is the land itself. But in the case of the modern apartment dweller, the value of the lease is that it gives him a place to live. The city dweller who seeks to lease an apartment on the third floor of a tenement has little interest in the land 30 or 40 feet below, or even in the bare right to possession within the four walls of his apartment. When American city dwellers, both rich and poor, seek “shelter” today, they seek a well-known package of goods and services — a package which includes not merely walls and ceilings, but also adequate heat, light and ventilation, serviceable plumbing facilities, secure windows and doors, proper sanitation, and proper maintenance.”

The description of a lease agreement as a “package of goods and services” is particularly apt for a shopping mall lease, which cannot reasonably be stated to confer only a bare right of possession. For example, in Nickel Developments Ltd. v. Canada Safeway Ltd., 2001 MBCA 79 (CanLII) at para 17, the Court of Appeal for Manitoba noted in the context of a shopping mall lease, that “if the lease is read as a whole while keeping in mind its undisputed commercial purpose, one is bound to find an intention that there be continuous operation.” The court accepted the proposition at paras 21 and 22, that “that a major reason [that the tenant] entered the lease was the ability of [another tenant], as the anchor tenant, to draw customers to the shopping center as a whole.  The use of one or more anchor tenants to bring customers to the smaller shops in a shopping centre is a common practice. If the anchor tenant were permitted to leave the premises vacant, the landlord’s purpose for signing the lease would be defeated.” The court explained at para 26, that “The [shopping centre] has provided significant and intended advantages to [the anchor tenant]. These include the construction in accordance with its specifications and non-competition protection during its term. For these and other benefits received, [the anchor tenant] assumed obligations including the undertaking to continue to operate a supermarket in the shopping centre that would attract clientele to the premises as a whole.  That theme is central to the lease”. Therefore, the court concluded at para 27, that “the anchor tenant, has obligations to the owner and to other merchants in the shopping centre”, and “A [tenant] which effectively shuts down half of a shopping centre and fundamentally alters the original concept cannot, absent very unequivocal language, unilaterally alter the arrangement between the landlord and the tenant which had been followed through the entire term of the lease”.

In fact, to argue that the guarantee of a viable shopping centre is not implicit in a lease agreement may be to place form over substance. The following case-law demonstrates the importance of a viable shopping centre to a tenant:

(a) Old Navy (Canada) Inc. v. The Eglinton Town Centre Inc., 2019 ONSC 3740 (CanLII) at para 75: “Retail tenants in shopping centres rely not only on their own brand to attract customers but also on spin-off traffic generated by other occupants of the shopping centre, particularly so-called anchor tenants.

(b) Re Aeropostale Canada Corp. (Notice of Intention), 2018 ONSC 1468 (CanLII) at para 11: “a vacant anchor tenant means reduced traffic coming to the mall and thus potentially lower sales.”

Therefore, a landlord may theoretically have an express or implied obligation to ensure the leased premises remains fit for a particular purpose. For instance, where the leased premises is located within a shopping centre, the landlord and the tenants may have reciprocal duties to ensure a viable shopping centre. This may require the landlord to guarantee the presence of anchor tenants and mandatory hours of operation for other tenants. This benefits the tenant through increased foot traffic.

Unfortunately, there is no body of precedent to directly address the above. For instance, the following decisions were identified, which addressed whether a landlord has a duty to a tenant to ensure a viable shopping centre with consistent trade:

(a) There are decisions which have refused to imply such a term into a lease agreement. For instance, in Dentrix Inc. v. Prudential Assurance Co., 1999 CarswellMan 361, 26 R.P.R. (3d) 314 at paras 8 and 10, the tenant argued that “by not renewing the surrounding tenants’ leases, the [landlords] have fundamentally breached the lease, as the [tenant’s] land is not part of a shopping centre in any real sense of the words”. The tenant contended an implied term to this affect should be recognized, noting that “the [landlords] covenanted in the lease to provide space in a shopping centre” and that “the term “Shopping Centre” is used to imply a viable, vibrant entity as opposed to a hollow shell with few tenants”. The court rejected the proposed implied term, and noted the lack of “a specific undertaking by the lessors to use their best efforts to find tenants” and the fact that “there is no evidence that the [landlords] have allowed the premises to become rundown, even though the mall may not be as full as anticipate”.

(b) However, an explicit agreement by the landlord related to the viability of a shopping centre will be enforced. For instance, in Gateway Realty Ltd. v. Arton Holdings Ltd., 1992 CarswellNS 518, 1992 NSCA 70, [1992] N.S.J. No. 175, 112 N.S.R. (2d) 180, 307 A.P.R. 180, 32 A.C.W.S. (3d) 1161 the court accepted that “the failure [of the party] to exercise their “best efforts” to find a suitable tenant or tenants had the effect of literally destroying the viability of Gateway’s Plaza Shopping Centre, contrary to any expectation in the original lease” and that “the deteriorating situation at the Plaza Shopping Centre became intolerable.”

(c) In addition, the lease agreement may specifically confer rights on a tenant, where the bulk of business in the shopping centre has come to a halt. Thus, as noted in Target Canada Co. (Re), 2015 ONSC 303 (CanLII) at para 44: “Many retail leases of non-anchored tenants provide that tenants have certain rights against their landlords if the anchor tenant in a particular shopping mall or centre becomes insolvent or ceases operations.” 

(d) However, converting the expectations of the tenant into a binding obligation on the part of the landlord, may require explicit language. For instance, the court stated in Old Navy (Canada) Inc. v. The Eglinton Town Centre Inc., 2019 ONSC 3740 (CanLII) at para 75: “Retail tenants in shopping centres rely not only on their own brand to attract customers but also on spin-off traffic generated by other occupants of the shopping centre, particularly so-called anchor tenants. Tenants may seek remedies against landlords if the traffic is too low for any number of reasons, including shopping centre vacancy rates being too high, or where part of the shopping centre is incapable of being rented because the landlord has undertaken renovations or failed to complete construction on a timely basis. However, in the absence of language specifically addressing such tenant concerns, courts have dismissed claims for such remedies and instead have suggested that the tenant should have required a specific clause in the lease to deal with those specific issues.” 

The fact that the interpretation of the substance of a lease agreement has continued to evolve, demonstrates that a clear conclusion on whether and when a landlord will have obligations to a tenant beyond granting bare possession, particularly in the context of a shopping mall lease, cannot be reached.

However, it is arguable that a contextual and equitable approach to frustration in light of the unique circumstances of the COVID-19 pandemic and the corresponding mandatory closures, may be adopted, consistent with overall developments in the law surrounding frustration of lease agreements. For instance, developments may include recognition of express or implied covenants related to anchor tenants and trading hours in a commercial lease agreement.

The consequence of recognition of express or implied covenants related to anchor tenants and trading hours would be a corresponding recognition that a mandatory closure would frustrate such a covenant. In particular, during a mandatory closure, the landlord will not be able to fulfil a guarantee of continuous operations by other tenants. In fact, over and above legal considerations related to the mandatory closure, the law will not expect anyone to perform in a manner which will endanger their health in the midst of a pandemic. This is clear from the early English case in Lawrence v Twentiman, (1611) 1 Roll Abr 450 pl 10, 2 D’Anvers Abr 84 pl 10. There, it was explained that “If a man covenants to build a house before a certain day and the plague breaks out and continues till after the fixed day, the breach is excusable as to time, because the law will not compel the builder to risk his life, but he must complete as soon as may be after.” Therefore, the doctrine of frustration would arise because the lease agreement imposed an express or implied covenant on the landlord to guarantee trading by other tenants, and placed a reciprocal obligation on the tenant to remain open, and these covenants cannot be fulfilled due to the mandatory closure.

The question of whether the courts will take such a drastic leap to recognize the lease agreement is frustrated is uncertain. However, overall, the notion that a lease agreement may be frustrated due to the inability of the landlord to fulfil an ancillary covenant has found support in case-law:

(a) The English case in Denny Mott & Dickson Ltd v James B Fraser & Co Ltd, (1944] A.C. 265 is one example. There, the landlord had agreed to purchase wood from the landlord. Importantly, and solely to facilitate this trading, the landlord agreed to lease land to the tenant, with an option to purchase under certain circumstances. However, war regulations rendered trading impossible and unlawful. The primary issue was whether the rights under the lease and option to purchase remained available to the tenant.  Lord Wright stated that “It was not difficult to conclude that this letting was to be concurrent with the trading operations which it was intended to enable and would fall with them when they were frustrated.”

(b) There is also precedent in Canadian case-law for the view that where possession of a leased premises is provided, together with other services, and where performance of the services has become wholly frustrated, the doctrine of frustration may apply. For instance, in 630393 Saskatchewan Ltd. v. Antonishen, 2003 CarswellSask 387, 2003 SKPC 94 at para 11, the court found that a contract for accommodation at a personal care home was frustrated by the hospitalization of the client. The court noted that “the “basic objective” of the written contract between the plaintiff and the defendant was to provide personal care home services”. However, “Less than 48 hours after the defendant’s mother was admitted to the plaintiff’s personal care home, the “object” of the contract, namely, the defendant’s mother, had to be taken by ambulance to the hospital and never returned to the plaintiff’s personal care home.” Notably, “this transfer was initiated by the plaintiff’s staff”. Thus, because “the plaintiff could no longer perform its’ obligations to provide accommodation, meals, and other services pursuant to the written contract, the defendant was no longer obligated to pay compensation for those services.”

Nonetheless, there are still situations where it would be unrealistic to treat the lease agreement as granting more than a bare right of possession. For instance, where the tenant rents a stand-alone store on a public road, ancillary obligations, such as a vibrant shopping centre with anchor tenants can have no practical application. Consequently, the landlord would have fully performed by granting the tenant a bare right of possession. In fact, the distinction between a stand-alone store on a public road, and a leased premises located within a shopping centre, was alluded to in Nickel Developments Ltd. v. Canada Safeway Ltd., 2001 MBCA 79 (CanLII) at para 27. There, the Court of Appeal for Manitoba while noting that the anchor tenant acted improperly in “deliberately keeping its premises vacant to prevent competition”, also confirmed that “If it were doing so in a freestanding building, perhaps we would have a different situation.”

There are also a number of policy and equitable reasons not to require the landlord to forgo rent, where it cannot be demonstrated that the landlord has been unable to fulfil an express or implied covenant, and where in simple terms, the tenant has been a victim of unfortunate circumstances, wholly unrelated to the landlord:

(a) Where the landlord cannot rationally be assumed to have any additional obligations to the tenant, a tenant in possession of the leased premises at the commencement of the mandatory closure, should not be able to convert the landlord into an insurer for the risk caused by an external event. For example, the decision in Smith v. Ontario and Minnesota Power Co. Ltd., 1918 CanLII 440 (ON CA) explained: “It is elementary that in our law all loss caused by the act of God must lie where it falls, and be borne by the person on whom the loss or damage has been inflicted.” 

(b) The financial adversity suffered by the tenant is not normally the concern of the landlord. For example, the decision in The Corporation of Delta v. Boundary Bay Airport Corporation, 2003 BCSC 1938 (CanLII) at para 25, rejected an “interpretation of the lease would visit the adversity associated with the lessee’s impecuniosity upon the lessor and defeat the very purpose of permitting termination, namely, to free the lessor of a relationship with a lessee who cannot, does not, and will not, honour the covenants in the lease.” 

(c) The above may be a sensible conclusion, in that the tenant can be expected to insure against business interruptions and losses caused entirely by circumstances beyond the control of the landlord, and which are not caused or contributed to by an inability by the landlord to fulfil its obligations to the tenant. Indeed, as noted in Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc., 2016 ONCA 246 (CanLII) at para 88: “having assumed the risk of fire loss or damage to its own property, the Tenant bears the risk of underinsuring for such loss or damage.”

(d) There is also no rational basis to hold a landlord liable for a tenant’s inability to trade, or for that matter to impose an obligation on a landlord in that respect, where the entire course of events is caused by a third party (without the additional aspect of the landlord to fulfil its own obligations). Indeed, Canadian courts have already noted that regulations imposing a mandatory evacuation, will not constitute a breach by the landlord of any of its obligations to a tenant. This is clear from Seward v. MacRae, 2013 ABPC 257 (CanLII) at para 20: “it is clear that the mandatory evacuation order due to the flooding was neither an act of commission or omission of the landlord or of any person under the landlord.  The extent and the duration of the evacuation order was determined by the Minister of the Executive Council and the Local Authorities. Section 16(b) provides that the landlord will not disturb the tenant’s possession or peaceful enjoyment.  Therefore, there must be some act of commission or omission of the landlord. Clearly, this was not the case here. Further, there was no evidence that the landlord had any control to remedy the situation, that is, the landlord had no control over lifting the mandatory evacuation order.”

(e) The nature of the relationship between landlord and tenant would also suggest no such liability. For instance, in 962789 Ontario Ltd. v. Newmarket Plaza Ltd., 2006 CarswellOnt 5086 at para 25, the court stated: “A landlord has no control over the day-to-day operation of a tenant’s business and a lease is a typical commercial bargain between two parties considered to have equal bargaining power. There is no ‘good faith’ duty that requires a landlord to consider the interests of a tenant other than those expressly bargained for in a lease agreement.”

(f) A lease agreement should also not be treated as akin to a joint venture. For example, in Durling v. Sunrise Propane Energy Group Inc., 2013 ONSC 5830 at para 24, the court noted that “The imposition of strict liability into the landlord/tenant relationship would, in the situations to which it applied, profoundly impact its nature” and that a landlord cannot “be required to maintain a considerable measure of control over the activities being carried out on its property” and this would mean “It would have a say in a business in which it had no direct investment and, possibly, no expertise. In a fashion, the landlord would become part of a joint venture, with its tenant.”

In any event, where the lease agreement is found to be frustrated, the appropriate remedy will need to be determined. For instance, where the landlord is unable to fulfil an ancillary obligation to the tenant during the mandatory closure, it is arguable that the obligation to pay rent may only be partially suspended, together with the corresponding obligation of the landlord to provide a viable shopping centre with continuous trade. For instance, as noted in DVB Bank SE v Shere Shipping Co Ltd, High Court of Justice, Queen’s Bench Division, Commercial Court, July 31, 2013, 2013 WL 3878818, with reference to Chitty on Contracts, 31st Edition at §23–025: “Temporary war-time restrictions may not frustrate a long-term lease, which will continue in force for many years after the restrictions are lifted; so long as it exists, the restrictions will however, provide an excuse for not complying with the covenant in the lease.” This is essentially a form of abatement of rent.

The calculation of the new “rent” payable by the tenant during a mandatory closure, could potentially be completed in accordance with the following:

(a) There is support for the view that after a frustrating event, a party who takes reasonable steps to protect the interests of the other party, may be entitled to remuneration on a quantum meruit basis. This would arguably include a claim by the landlord for compensation for retaining the goods of the tenant. For instance, in Société Franco Tunisienne D’Armement v Sidermar, [1960] 2 All ER 529, the court found that an agreement to transport freight via a particular route was frustrated by the closure of the Suez Canal. The transporter therefore took a longer route via Southern Africa to transport the freight. The court accepted that a new agreement for the carriage of the cargo via Southern Africa at a particular rate could not be implied from the conduct of the parties as there was no mutual intention to make a new agreement. However, since there was no breach of contract or other wrongful act by the transporter and they had carried the freight via Southern Africa for the benefit and consent of their client and with their consent, they were still entitled to be paid a reasonable amount, based on a quantum meruit calculation.

(b) In addition, in a case where goods of the tenant are left in the possession of the landlord after the suspension or termination of the lease agreement, the landlord would probably be akin to an involuntary bailee in respect to the tenant’s property. Therefore, the court could apply normal principles of restitution to compensate the landlord in this respect. For instance, in R. v. Howson, 1966 CarswellOnt 3, [1966] 2 O.R. 63 at para 37, the court referred to “the expansion of the law of quasi-contract or restitution to support recognition of a legal obligation to reimburse a person who has thus taken care of another’s goods which have been thrust upon him”. 

In conclusion, it is unclear how courts will deal with the loss of the ability to trade due to the COVID-19 pandemic, and in particular, whether a tenant is entitled to any relief from paying rent. The law has been developing over time, to recognize different types of commercial leases, (a) with nuanced determinations on the overall obligations of the landlord towards a tenant, and (b) overall uncertainty over when the obligation to pay rent can be suspended or terminated. Unfortunately, the application of unsettled and developing legal concepts to a unique and extraordinary situation, whereby the bulk of trade has been shuttered across the world through a combination of nature and regulation, will probably only be resolved after protracted litigation.

Due to the legal uncertainty, a fair, negotiated solution of these disputes is preferable. Consequently, landlords and tenants will be well-advised to negotiate and mutually resolve disputes of interest surrounding rent during a mandatory closure using sound common sense and with regard to not only their own immediate interests, but also (a) the overall interests of the other party, and (b) the ultimate goal of both parties, namely, to get back on their feet and commence profitable operations as soon as possible. There are also practical considerations which warrant steering clear of litigation, where possible:

(a) On the one hand, a landlord who demands full rent may force the tenant into bankruptcy, with the result that the landlord will not only have lost a long-term tenant, but also, may end up without any means to enforce any remedy against the tenant, due to the other debtors of the tenant making claims in bankruptcy which will need to be considered together with the claims or unpaid rent. Ultimately, the landlord may be throwing good money after bad money, by pursuing endless litigation and in the process, incurring exorbitant legal costs, with no guarantee of ultimate recovery. In addition, in the face of the overall economic crisis caused by the COVID-19 pandemic, the landlord may have difficulty attracting new tenants to fill vacant space, if the tenant is evicted or moves out. Thus, a landlord will need to consider being left with unleased space and no rent whatsoever if an aggressive approach to rent collection is adopted against an existing tenant. There is little point winning the battle over unpaid rent, where in the long-run, the landlord loses the ultimate goal of maintaining a viable and profitable shopping centre, leased to capacity with fully paying tenants.

(b) On the other hand, a tenant who refuses to pay any rent, may render the landlord financially vulnerable, such that it may be unable to make payments of utilities, taxes, and mortgages. This will affect the security of tenure which the tenant would otherwise enjoy in the leased premises. There may also be additional consequences, because the landlord may downscale or cut-back on other amenities within the shopping centre, including security and overall maintenance and improvements. This will also diminish the attractiveness of the leased premises itself and have a lingering affect on the ability of the tenant to attract business to the leased premises. Ultimately, the tenant will need to consider the fact that deciding to withhold rent entirely, rather than negotiating, will probably leave the already financially vulnerable landlord with no option but to commence litigation to recover outstanding rent and evict the tenant. This will cause the tenant to incur legal costs, and moving costs and loss of goodwill, if the landlord is ultimately successful. The tenant may also loose the value of its improvements to the leased premises, following a successful eviction. This may result in the demise of the business of the tenant as a whole.

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