When the COVID-19 pandemic started, governments worldwide reacted to this unprecedented health crisis with similarly unprecedented public health measures, including orders for non-essential businesses to close their doors to the public.
Many businesses suffered significant revenue losses because of these closures. Without income, many commercial tenants failed to pay their monthly rent payments.
Force Majeure Clauses
Many leases include ‘force majeure’ or ‘Acts of God’ clauses. These clauses typically provide that in the event of an ‘Act of God’ (e.g. flood, fire) or social upheaval (e.g. riot, strikes), the parties are excused from their obligations under the lease.
Do COVID lockdowns qualify as an “Act of God”? If so, does it excuse a tenant from paying rent?
In a recent Ontario case, Braebury Development Corporation v Gap (Canada) Inc. (“Braebury”), the Court held that the lockdowns did trigger the force majeure clause. However, it did not excuse the tenant from paying rent. The clause relieved the parties of other obligations, but rent was expressly still required to be paid.
Doctrine of Frustration
The legal doctrine of frustration applies when a change in circumstance makes it impossible to carry out the contract through no fault of the parties. The change in circumstance must go to the root of the contract, making performance impossible and radically different from what was undertaken by the contract. If the contract is frustrated, the parties are released from their obligations.
Do the COVID lockdowns qualify as something that would frustrate a commercial lease, excusing the tenant from paying rent? In Braebury, the Court held that the lockdowns did not amount to frustration, and the tenant was not excused from paying rent.
Braebury Development Corporation v Gap (Canada) Inc
In Braebury, the Court had to determine whether the force majeure clause in the lease agreement applied, and if so, whether the tenant had to pay rent. If the force majeure clause did not apply, the next question was whether the doctrine of frustration of contract applied, which would relieve the tenant of its obligations to pay rent.
In this case, Gap did not pay rent for the months of April and May when it was unable to open due to the government’s COVID-19 restrictions and only made partial payments later while other restrictions still remained in place.
The landlord sued for the arrears of rent, with Gap defending on the basis that it was relieved from the obligation to pay rent due to the pandemic causing the lease to become frustrated.
The landlord argued that the force majeure clause in the lease was engaged and explicitly did not excuse Gap from paying rent. In this case, the force majeure clause read as follows:
24.01 Force Majeure. In the event that either party hereto shall be delayed or hindered in or prevented from the performance of any act required hereunder by reason of strikes, lock-outs, labour troubles, inability to procure materials, failure of power, restrictive governmental laws or regulations, riots, insurrection, war, military or usurped power, sabotage, unusually severe weather, fire or other casualty or other reason (but excluding inadequacy of insurance proceeds, financial inability or the lack of suitable financing not attributable to any of the foregoing) of a like nature beyond the reasonable control of the party delayed in performing work or doing acts required under the terms of this Lease (herein called “force majeure”), the performance of such act shall be excused for the period of the delay and the period for the performance of any such act shall be extended for a period equivalent to the period of the delay. The provisions of the preceding sentence however shall not excuse tenant from the prompt and timely payment of the rent as and when the same is due under this Lease except when (i) the Commencement Date of the term is delayed by reason of force majeure, or (ii) such payment is excused pursuant to other provisions of this Lease.
The first question the Court had to answer was whether or not the pandemic and the associated government restrictions would be considered “restrictive governmental laws or regulations” or “other reason…of a like nature” that would engage the force majeure clause.
Gap argued that the clause did not apply because it does not refer to public health measures, pandemics, epidemics, or health emergencies. The reference to government restrictions was not wide enough to include health emergencies like COVID.
The Court ruled against Gap, relying on a previous Ontario Superior Court ruling that the government restrictions (lockdown), not the pandemic, were the triggering event for the clause.
If a force majeure clause has been triggered, the next determination is whether the event has delayed, hindered or prevented either party from performing any act required under the lease.
Gap argued that payment of rent was not an “act under the lease”, and therefore the restrictions did not have the required impact for the force majeure clause to be engaged. The landlord argued that if it was not an act under the lease, it would be redundant for the force majeure clause to explicitly exclude rent payments.
The Court agreed with the landlord and looked at the dictionary definition of “act” to determine that the payment of rent was an obligation Gap was required to perform or carry out under the lease. As a result, the Court found that the force majeure clause was engaged and that Gap was expressly not excused from paying rent, notwithstanding that its ability to operate the business was significantly impeded.
Frustration of Contract
Gap further argued that the legal doctrine of frustration should excuse it from paying rent during the lockdown. The Court noted that government restrictions might be considered a supervening event that was not contemplated or foreseeable and that occurred through no fault of either party. However, the Court found that even if that was the case, it was unclear if the restrictions “radically altered the terms” of the lease to a point sufficient to engage frustration. The Court confirmed that for something to radically alter the terms, the supervening event “must not merely increase the burden of satisfying the contractual obligations, but must ‘affect the nature, meaning, purpose, effect and consequences of the contract so far as concerns either or both parties”.
In this case, Gap was restricted from operating for approximately two months and then reduced capacity for a further four months. The Court was not convinced that this temporary change could rise to the level required for frustration.
Interestingly, the lease in this dispute did not require Gap to operate any business on the premises during the terms of the lease. As a result, the restrictions preventing them from doing so could not have radically altered the lease terms. Had Gap been required to operate as a retail store under the lease, then the Court may have found that the restrictions had, in fact, risen to the level of radical change required to engage frustration.
In conclusion, the Court noted that the existence of the force majeure clause clearly shows contemplation by the parties of situations where circumstances beyond the control of the parties whereby performance of obligations would be delayed, hindered or prevented. Therefore, summary judgment was granted in favour of the landlord for the arrears owing.
Commercial Tenancies in Alberta
In Alberta, the government enacted the Commercial Tenancies Protection Act, SA 2020, c C-19 (the “CTPA”), which received royal assent on July 23, 2020, and retroactively took effect as of March 17, 2020, expiring August 31, 2020.
The CTPA was specifically implemented to protect commercial tenants experiencing financial challenges due to the COVID-19 pandemic. It prevented landlords from giving notice of default, distraining for rent, evicting a tenant or otherwise exercising remedies under a tenancy agreement (including termination and charging late fees) due to non-payment of rent and/or rent arrears or breach of any continuous occupancy clause of a tenancy agreement due to circumstances beyond the tenant’s control caused by the pandemic during the period the was in effect.
Of significant note when considering Braebury in Alberta, the CTPA states that a landlord cannot rely on a force majeure clause or frustration of contract resulting from the pandemic to exercise remedies under the lease. However, the CTPA only applied to certain commercial tenancies between March and August 2020. After August 2020, landlords could proceed with any of their normal enforcement remedies. As a result, Braebury would likely still be applicable for any enforcement steps taken after August 2020 by a landlord.
This case will help both landlords and tenants to determine whether and how their obligations under leases have changed as a result of the COVID-19 pandemic.
The first takeaway is that it would appear that force majeure clauses can be engaged as a result of the pandemic restrictions, assuming the clause includes wording regarding government laws or regulations. Including specific language regarding “health” or “public emergencies” is not required. It is imperative that landlords and tenants review their lease agreements to determine if there is a force majeure clause and what events could trigger it.
The second takeaway is that while it would seem that a global pandemic that causes the world to effectively shut down for many months would be sufficient to frustrate a leasing contract, the temporary nature of the pandemic restrictions may negate such an argument.
Finally, even though the Alberta Government did enact legislation to protect commercial tenants during the pandemic, those protections were only intended to offer protection regarding enforcement of remedies during that time period, not to relieve the tenant of eventually fulfilling the obligation to pay rent completely.
Field Law’s commercial tenancy team is well-versed in landlord and tenant remedies. If you have a question about the effect of the pandemic on your rights as a landlord or a tenant, please contact Lindsey Miller or any member of our Litigation Practice Group.