CAN A NON-ANCHOR TENANT BE FORCED TO CONTINUE TO OPERATE IN COMMERCIAL LEASED PREMISES?

In Michael Rossy Ltd. vs. 9190-9309 Quebec Inc.  2017 QCCA 937, the tenant sought leave to appeal from a judgment granting an interlocutory injunction enjoining it to continue to occupy the leased premises and operate its retail business therein.

The appeal judge decided to grant leave to appeal but then had to decide whether the interlocutory injunction should remain in effect pending the final judgment of the Court of Appeal.

The relevant facts can be summarized as follows: 

 
The leased premises are located in a shopping center;

The tenant operated its business at a substantial loss namely, $233,241 for the fiscal year ending January 2017;

The leased premises consist of approximately 25,000ft²representing about 7% of the total leasable area of the shopping center;

There are two (2) anchor tenants who occupy respectively 96,694 ft²and 44,266ft²in the center;

There is one (1) vacant store in the center representing approximately 5% of the total square 
footage;

The tenant undertakes to continue to pay the rent notwithstanding its intention to close its store;

The lease contains no express obligation on the part of the tenant to occupy and continuously use the premises during the lease term.

When granting the interlocutory injunction, the trial judge relied upon article 1856 of the Quebec Civil Code which states as follows:

“Neither the lessor nor the lessee may change the form or destination of the leased property during the term of the lease.”

The appeal judge found, however, that the case law did not support the trial judge’s conclusion that the abandonment of leased premises would constitute a change in destination when the tenant is not a major or anchor tenant.

At the hearing before the appeal judge, a new argument not presented in first instance was submitted:  given the existence of an obligation on the part of the tenant to pay a percentage of gross sales as additional rent, the landlord argued that there was an implicit obligation on the tenant to continue to operate its store in the shopping center during the entire lease term. 

On the basis of the foregoing, the appeal judge concluded that although the right asserted by the landlord was not inexistent, it was, at best, weak. Consequently, the appeal judge proceeded to analyze the balance of inconvenience to determine whether or not the interlocutory injunction should be stayed pending the outcome of the appeal. He found in favor of the tenant and suspended the interlocutory injunction pending the appeal.

Article 1863 of the Quebec Civil Code provides that in the event of a breach of a lease, specific performance can be obtained “…in cases which admit of it”.  The case law generally interprets the quoted words as limiting the availability of the specific performance remedy. 

When a tenant vacates the leased premises prematurely but continues to pay the rent, the landlord arguably would incur no loss or prejudice. Therefore, specific performance might not be the appropriate remedy in the circumstances.

When the tenant is a major or anchor tenant in a retail center for example, a substantial amount of vacant space could adversely affect other tenants by reducing traffic in the center; reducing their revenues and making it more difficult for them to pay their rent. Indeed, some leases have “co-tenancy” clauses providing that in the event of the vacancy by an anchor tenant, other tenants would have the right to substantially reduce their rent or stop operating their businesses prior to the end of the lease term. 

Also, there are often covenants in mortgage deeds that trigger a default in the event that a prescribed percentage of space in the building becomes vacant. The mortgage lender could call the loan or require that the borrower put up additional security.

The vacancy of substantial space in the building could also cause insurance premiums to rise.

One could see why the specific performance remedy would be of extreme importance in such scenarios.

Consequently, it would be prudent for landlords in all cases to include in the lease, an express contractual obligation on the part of the tenant to remain in occupation of the leased premises and continue to operate its business therein during the entire lease term. Furthermore, considering the reluctance of courts to order specific performance in the event of a breach of such an obligation, consideration should be given to requiring the tenant to pay liquidated damages in the event of a breach, equivalent to 200% of the aggregate amount of rent and other amounts payable until the end of the lease term and any renewals thereof.