The COVID-19 pandemic continues to have a broad range of effects on the commercial real estate market, particularly for commercial renters. Some leases include a “force majeure” clause, and depending on its specific wording, the clause can have ramifications for the parties’ obligations.
The Court of Appeal for Ontario recently considered a situation between a landlord and a commercial tenant where the clause had a significant impact on the operability of the lease as a result of mandated lockdowns.
A force majeure clause is a contractual provision that appropriates the risk of unforeseen events that may prevent or delay the performance of a contract. In essence, the clause can relieve one or both parties from the performance of the contract and the consequence that flows from the breach as long as the breach results from unforeseen events that are outside the parties’ control. It can also delay the performance of the contract.
The critical decision, which is often cited on the applicability and operation of force majeure clauses, is Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp and Paper Company Limited. In this case, the Supreme Court of Canada established the fundamental principle that for a force majeure clause to apply, the event in question must be explicitly mentioned in the clause.
In Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp and Paper Company Limited, the plaintiff, Atlantic Paper Stock, had entered into a contract with the defendant, St. Anne-Nackawic Pulp & Paper, to supply waste paper. However, the defendant could not fulfil its obligations due to unforeseen circumstances. The defendant argued that the force majeure clause, which referred to “an act of God, the Queen’s or public enemies, war, the authority of the law, labour unrest or strikes, the destruction of or damage to production facilities, or the non-availability of markets for pulp or corrugating medium” excused its non-performance. The key consideration on appeal from the Court of Appeal was whether the non-availability of markets for pulp or corrugating medium had discharged the defendant from their obligations.
The Supreme Court of Canada rejected the defendant’s argument, emphasizing that the force majeure clause discharges a party’s obligations when “a supervening, sometimes supernatural, event, beyond the control of either party, making performance impossible.” The event preventing performance must be outside the control of both parties, otherwise it cannot be invoked to excuse non-performance. Allowing the defendant to rely on this clause would enable it to prevent performance if it could not profit. This decision established that parties cannot rely on general catch-all language in force majeure clauses.
In the recent case of Niagara Falls Shopping Centre Inc. v. LAF Canada Company, the operability of force majeure clauses were considered in the context of commercial lease agreements. The case involved the consideration of the rights and obligations of LAF Canada Company (the “Tenant”) to Niagara Falls Shopping Centre Inc. (the “Landlord”) in light of the mandatory closures of their fitness centres during the COVID-19 pandemic.
The Tenant had entered into a lease with a prior owner of the premises, and upon purchase in 2019, the lease was assigned to the Landlord. The lease included a force majeure clause, which stated:
“If either party is delayed or hindered in or prevented from the performance of any act required hereunder because of… restrictive laws… or other reason of a similar or dissimilar nature beyond the reasonable control of the party delayed, financial inability excepted (each, a “Force Majeure Event”), subject to any limitations expressly set forth elsewhere in this Lease, performance of such act shall be excused for the period of delay caused by the Force Majeure Event and the period for the performance of such act shall be extended for an equivalent period (including delays caused by damage and destruction caused by such Force Majeure Event). Delays or failures to perform resulting from lack of funds or which can be cured by the payment of money shall not be Force Majeure Events.”
Not long after, the COVID-19 pandemic began and the government mandated the closure of all non-essential workplaces, including the fitness centre run by the Tenant. Eventually, the Tenant refused to continue paying rent, after which the Landlord brought an action for all unpaid rent. The Tenant counterclaimed.
Both parties sought to rely on the force majeure clause. The Tenant claimed that the Landlord breached the lease by failing to provide the Tenant with the quiet enjoyment of the premises, while the Landlord claimed breach for failure to pay the rent under the lease. The Tenant also submitted that the force majeure clause could extend the lease for a period equivalent to the mandatory closures.
The motion judge held that the force majeure clause excused the Landlord from providing the premises to the Tenant, but not that the Tenant was excused from their obligation to pay rent. The judge noted that the force majeure clause contained a curative provision and that, in this case, the failure to pay rent could be cured by the payment of monies. She also did not accept the argument that the lease term would be extended, reasoning that such a result would be “commercially absurd.”
The Tenants appealed, claiming the motion judge erred in her interpretation of the force majeure clause, asking the Court to clarify the obligations owed by both parties.
The Court found that the motion judge erred in her interpretation of the force majeure clause as it related to the Landlord’s obligations to provide the Tenant with the premises. The Court noted that the wording of the clause included the stipulation that “the period for the performance of such act shall be extended for an equivalent period.” On this strict interpretation, the lease was allowed to be extended for the duration equivalent to the duration of the mandatory closures.
Concerning the Tenant’s obligations, the Court agreed that the Tenant was still required to pay rent during the closures. Considering the wording of the clause, it noted the Tenant was hindered in its ability to pay rent, but not because of the “Force Majeure Event.” Instead, the Tenant chose not to charge membership fees.
As such, the Tenant could not rely on the clause to exclude its obligations to pay rent. However, the Court held that since it had already paid rent during the closures and the lease was to be extended, the Tenant was not required to pay rent during the extension.
At Bader Law, we have an extensively experienced business law team and regularly represent our corporate clients in various real estate matters in Mississauga and throughout the Greater Toronto Area. Our skilled real estate lawyers work with our clients to provide comprehensive advice and strategic representation on all commercial real estate transactions, including commercial leasing issues affecting landlords and tenants.
Bader Law prides itself on tending to real estate disputes in a timely and professional manner. To schedule a consultation with one of our lawyers, contact us online or call us at 289-652-9092.