The Covid-19 pandemic has given rise to rent disputes between landlords and tenants in commercial leases. An interesting illustration can be found in Hengyun International Investment Commerce Inc. v. 9368-7614 Quebec Inc., 2020 QCCS 2251, which is presently in appeal.
A commercial lease with a five-year term was entered into on 2017-11-03 for the operation of gym in the leased premises. The tenant was forced by government decree to close the gym on 2020-03-24 due to the Covid-19 pandemic. Tenant argued that its inability to operate and generate revenue was the result of force majeure and that it should therefore be relieved of its obligation to pay rent during the applicable period of the decree (March 24 to June 30, 2020).
The landlord did not agree that the effects of the decree constituted force majeure. It added that the tenant applied for and received a government emergency loan of $40,000 and cannot therefor properly argue that it was prevented from paying rent due to the pandemic. It appears that the tenant used the loan for purposes other than the payment of rent, such as payment of legal fees.
The Court sided with the tenant but for different reasons. Article 1470 of the Quebec Civil Code ("CCQ") defines force majeure as an unforeseeable and irresistible event. In the context of the pandemic, the Court was satisfied that the pandemic could not have been reasonably foreseen. The Court however did not agree with the tenant's "subjective" interpretation of irresistibility that the pandemic prevented it from paying the rent.
It was the Court's view that the landlord was prevented by force majeure from fulfilling its fundamental obligation to provide the tenant with peaceable enjoyment of the premises. Although the tenant continued to have limited access to the premises to store its equipment, the lease provided that the premises could be used solely as a gym and this activity was prohibited by the decree. As a result, the Court concluded that the tenant did not have peaceable enjoyment of the premises during the applicable period.
Article 1694 CCQ provides a defence commonly referred to as the "exception to inexecution". When a party to a contract does not fulfill its obligation (e.g. provide peaceable enjoyment), it cannot exact from the other contractual party, its corelative obligation (the payment of rent).
Although in commercial leasing, the parties may diminish the extent of the landlord's obligation to provide peaceable enjoyment, they cannot exclude it altogether since to do so would fundamentally change the nature of the contract or neuter it altogether. Under the circumstances, the Court ordered the full reduction of rent for the applicable period.
Another decision was recently rendered in the context of the Companies' Creditors Arrangement Act ("CCAA") and provides a different perspective of the issue. Goupe Dynamite Inc. et al. v. Deloitte Restructuring Inc., 2021 QCCS 3.
Dynamite was forced to close stores pursuant to government decrees. It made an application pursuant to s. 11 of the CCAA which gives the Court discretion to make any order that it considers appropriate, subject to restrictions in the Act. One restriction provides that no order may be made that could preclude a supplier from obtaining immediate payment for the use of leased property. The issue to be decided by the Court was the meaning of “use of leased premises”.
Dynamite argued that it operates retail stores for two broad purposes:
· provide a personal shopping experience in which human interaction is an essential feature;
· marketing through passing foot traffic which nurtures unaided and spontaneous brand awareness.
As a result of the government decrees, Dynamite generates no revenue or brand awareness from closed stores. It asserts that buy online, pick-up orders are unappealing to its customers and represents only .5% of its overall sales.
The landlord argues that as long as the lease has not been disclaimed, the tenant occupying the premises is using them within the meaning of the Act.
The Court sided with the landlord. It found that Dynamite intentionally declined to disclaim the leases because it chose the locations carefully and were important to its restructuring efforts. In making this decision, the Court found that Dynamite was asserting its right to sole possession of the premises and was sufficient to trigger the restriction in s. 11 and preclude the Court from preventing the landlord from claiming the immediate payment of rent. Where leased premises are occupied by a tenant and cannot be leased to anyone else, the landlord cannot be prevented by the provisions of the Act from demanding immediate payment of rent whether or not the tenant is actually carrying on business.
In both the Hengyun and Dynamite cases, the tenants were in possession of the leased premises but the applicable law and the outcomes were different. According to the Quebec Civil Code, the landlord in Hengyuncould not demand payment of rent during the applicable period covered by the government decree because the landlord could not provide peaceable enjoyment of the premises. In Dynamite, the landlord could demand payment of rent under the CCAA while the tenant remained in sole possession of the premises, despite the government decree.
