Businesses across the country still feel the impact of the COVID-19 pandemic, and legal disputes related to the fallout of safety measures are still working their way through Canada’s court systems. Given the novel scale and impact of the pandemic on commercial activities and real estate, courts and lawyers are finding themselves applying long-established legal concepts to unprecedented circumstances. As a result, the outcomes of these cases are noteworthy and can guide corporations across the country as we continue to deal with uncertainty, both related to past and future events.
A recent Ontario Court of Appeal decision considered how much relief a commercial tenant was entitled to from forfeiture under the Commercial Tenancies Act. The litigation arose after retailer Hudson’s Bay Company unilaterally decided to stop paying rent when its landlord could not operate under lockdown. In a commercial real estate dispute, how much relief should be granted to a party found to be in breach of contract?
One of Canada’s Oldest Retailers Withheld Rent Over Pandemic Health Regulations
In March 2020, when Canada first underwent widespread lockdowns, most retailers were deemed non-essential and were forced to close for weeks at a time throughout the following year. The closures had a significant financial impact on businesses, many of whom could not operate at all during this time or operated at a significantly reduced capacity. One of the impacted retailers was the Hudson’s Bay Company (HBC), which had several stores shuttered periodically between March 2020 and June 2021 across Ontario.
In the Hillcrest Mall in Richmond Hill, Ontario, HBC made headlines when it began withholding rent payments to its commercial landlord, Oxford Properties, starting in April 2020. HBC cited a breach of the lease agreement as the reason for the non-payment of rent, saying that Oxford Properties had failed to operate in good faith as it ceased to provide “first-class shopping centres” as stated in the lease. HBC said the mall had “changed its character” and failed to make necessary health and safety upgrades in response to the pandemic.
HBC Granted Relief From Forfeiture by Motion Judge
Oxford brought a claim against HBC for rent arrears, and HBC claimed it was entitled to an abatement or reduction in rent for the periods where the mall was closed or operating at a reduced capacity. While the motion judge rejected HBC’s argument, it agreed to grant HBC relief from forfeiture under section 20 of the Commercial Tenancies Act, which states in part:
[A] 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.
While the motion judge stated that the relevant section of the Commercial Tenancies Act did not allow for abatement or reduction of rent, it did provide a court with the discretion to defer payments of rent arrears. In light of this and considering the impact of the pandemic on the retailer, the motion judge ordered a repayment schedule which would see all arrears paid by March 2022, nine months after the decision. Both parties appealed the decision.
Court of Appeal: Commercial Tenancies Act Doesn’t Empower Court to Rewrite a Contract
Both HBC and Oxford Properties appealed the motion judge’s decision, with each stating that the order did not swing far enough in their favour. HBC claimed that the motion judge erred by determining that s. 20 of the Commercial Tenancies Act did not allow for an abatement or reduction of rent when the property was closed or operating at a reduced capacity. On the other hand, Oxford Properties claimed that HBC had been in a position to pay its arrears in full at the time of the decision, and the judge erred in ordering a schedule which allowed repayment over a nine-month period.
The Court of Appeal found that HBC had clearly breached the lease agreement. While the motion judge had the leeway to take the circumstances of the pandemic under consideration in granting relief from forfeiture, to impose an abatement or reduction of rent on Oxford Properties would be to “fundamentally alter” the terms of the original contract. The Court of Appeal held that this was not in the court’s discretion under s. 20. As a result, HBC’s appeal was dismissed.
Motion Judge Erred by Ordering Extended Rent Payment Schedule
Concerning Oxford Properties’ cross-appeal, the Court of Appeal agreed that the motion judge had over-extended her reach in ordering a 9-month payment schedule for the rent arrears, saying:
“The payment schedule fixed by the motion judge was not intended to give HBC time to pay the rent arrears, but was rather intended to mitigate the economic harm suffered by HBC as a result of COVID-19 and the restrictions on the retail sector that followed. The motion judge gave HBC a relatively brief and partial respite from the full weight of its rent obligations, not because HBC could not carry that weight, but because the circumstances surrounding the pandemic made it unfair, in the motion judge’s view, to require HBC to carry that burden without the help of the landlord.”
The Court of Appeal held that the motion judge erred in deferring HBC’s rent obligations for reasons unrelated to HBC’s ability to pay. It found that any deferral should have been limited to the amount of time required for HBC to bring itself into compliance with the lease agreement.
At the time of the decision, the arrears had been paid in full, so the schedule could not be altered. However, the Court of Appeal did increase the interest owing by HBC in favour of the cross-appellant, Oxford Properties.
For Exceptional Representation in Commercial Real Estate Disputes, Contact Milosevic & Associates
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