COVID-19 - BUSINESS FORCED TO CLOSE? CANNOT OPERATE? CAN'T PAY RENT? WHAT CAN THE LANDLORD DO? WHAT ARE COMMERCIAL TENANTS' RIGHTS? Q & A FOR COMMERCIAL LANDLORDS AND TENANTS IN THE CKL

Commercial tenancy relationships in Ontario are governed by Ontario’s Commercial Tenancies Act (the “CTA”) and the lease agreement itself.

They are largely a matter of contract, in terms of rights and obligations, rather than statutory rules.

Non-essential workplaces have been ordered closed by emergency order.

Other workplaces have been forced to discontinue operations, in whole or in part, due to the pandemic.

Governments and industry leaders are encouraging landlords to be flexible and work with their commercial tenants to find practical solutions to bridge the gap through this difficult time.

Some may not choose to do so.

WHAT CAN A COMMERCIAL LANDLORD DO?

In Ontario, if commercial rent is not paid under the terms of the lease, and subject to the terms of the lease, a commercial owner/landlord could:

(a) affirm the lease and sue for rent or for performance of an obligation (not available when rent distress is in progress) and commence an action in the Superior Court of Justice;

(b) affirm the lease and re-enter and re-let the commercial premises (only if the landlord has reserved a right of re-entry in the lease or has received a court order to the same effect);

(c) affirm the lease and exercise rent distress rights (seizure of property assets); or

(d) accept the repudiation of the lease, terminate and re-enter, and sue for the rent that would otherwise have been payable for the balance of the lease term.

WHAT LIMITATIONS ON LANDLORD’S TERMINATION AND LAWSUIT STEPS NOW APPLY DUE TO THE PANDEMIC?

Due to the pandemic, the owner’s ability to terminate, re-enter and sue for damages is currently hindered. 

Ontario has ordered that the Landlord and Tenant Board (“LTB”) may neither consider nor issue eviction orders in relation to residential tenancies and that sheriffs must postpone all scheduled eviction enforcements until further notice.

However, commercial tenancies are subject to the CTA, not governed by the LTB. Therefore, disputes about commercial tenancies are determined by the Superior Court of Justice.

The CTA provides that a commercial landlord may repossess a leased premises fifteen days after the tenant fails to both: (a) pay rent; and (b) remedy the failure in the interim. Notably, repossession by reason of the tenant’s non-payment of rent does not require judicial intervention or approval. However, it is usually recommended that such steps by a commercial landlord be sanctioned by the Court, ideally in advance. The resolution of all other disputes is in the Superior Court of Justice of Ontario (“ONSC”), rather than the LTB.

Moreover, the Superior Court currently limits operations to only urgent matters and, therefore, the ability for commercial landlords to effect lease terminations will be greatly constrained legally, practically and by reason of public policy considerations and perceptions.

Urgent matters” are defined by the Superior Court of Justice as:

  • urgent and time-sensitive motions and applications in civil matters, where immediate and significant financial repercussions may result if there is no judicial hearing; and
  • outstanding warrants issued in relation to Small Claims Court or Superior Court civil proceedings.

If a commercial landlord’s proceeding does not qualify, it is likely to be adjourned.

Even if an action could be brought in the Superior Court, enabling the landlord could obtain an order for possession of the premises, the Sheriff has been instructed not to enforce the order until further notice.

LIMITATION PERIODS ARE SUSPENDED:

By an Order in Council, under sub-section 7.1 of Ontario’s Emergency Management and Civil Protection Act, limitation and procedural time periods are suspended in Ontario for the duration of this emergency. The suspension is retroactive to March 16, 2020. Therefore, for potential claims by commercial landlords that have already arisen, but for which the limitation period has not expired, and for claims that may arise after March 16, 2020, the limitation period is suspended until further notice.  

STEPS TO TAKE IF YOU ARE A COMMERCIAL TENANT:

[1]      Review your lease:

Firstly, carefully review your lease agreement and check for:

[a] dates to meet an obligation, such as rent due date, completion of landlords’ or tenants’ work, expiry dates, damage and destruction time periods;

[b]  any clause obligating you to stay open for business, given the Ontario government issued an order to close all non-essential businesses – you may be forced to close, or the landlord may have to close its building; and

[c] any clause requiring you to comply with all laws – with orders and legislation being issued by all levels of government, you and the landlord need to be aware of the ongoing changes, respectively.

[2]      Review your lease for any “Force Majeure”/Unavoidable Delay Clause:

A “force majeure” event is an unforeseeable circumstance that prevents a person from performing an otherwise valid agreement or contract. If a person is unable to perform his or her contractual obligation due to unforeseen events, beyond his or her control, a force majeure clause may be triggered to validate the non-performance. Force majeure clauses can suspend the timeliness of obligations and are a matter of negotiation.

It is important to review your lease for timelines and deadlines that are, or will be, affected by the pandemic.

Most commercial leases contain a force majeure clause. Generally, the clause will provide that if any of the described events occur, which significantly affects a tenant’s ability to perform the lease obligations, the tenant will not be required to perform the obligation, either for as long as the event continues or permanently. However, in commercial leases, this virtually always excludes the payment of rent and the surrender date from the suspension.

Force majeure clauses are narrowly interpreted, which means the words used to identify the triggering event are narrowly construed. To be relied upon successfully, a force majeure clause must both: (a) be in the lease itself; and (b) expressly describe the event causing the inability to perform, or the delay in performance. If there is no express force majeure clause, it will not be implied into the agreement by the Court.

For an event to be considered a force majeure event, it must: (a) be unforeseen; (b) render performance of the obligation “impossible” (not merely more costly or difficult, unless cost or difficulty are expressly referenced); and (c) be the actual and direct cause of your inability to meet your obligation, as distinct from merely being incidental.

Note that many force majeure clauses require a tenant or landlord to give notice to the other and other affected parties that the “event” is, or will, result in a failure to meet one or more obligations under the agreement. For example, maintenance and repair obligations. Such notice allows the other party or parties to take steps to mitigate, if possible. There may be specific requirements for the notice in the lease agreement. A party failing to perform a contract must also consider what, if any, steps are available to mitigate the damages that may be caused due to the non-performance.

For more information from us about force majeure, go here: http://wardlegal.ca/the-virus---does-it-cancel-contracts-rental-agreements-separation-and-parenting-agreements-maybe---read-on

[3]      Review your lease for Health Emergency” Clauses and Operation of Building and Control of Common Areas:

“Health emergency” clauses allow a landlord to limit or control access to the building, if required or recommended by the authorities. Similar to a force majeure clause, a health emergency clause provides that where there is a triggering event (which is typically described with a non-exhaustive list of “epidemic”, “pandemic”, “disease”, “contagion”, etc.), the landlord will have increased control over the common areas and will be permitted to create new rules and regulations regarding the operation of the building.

These clauses may permit a landlord to close the building (or parts of the building), control the individuals who are permitted to access the building and permit a landlord to draft and deliver a set of health related regulations which the tenant and its employees and invitees must follow.

These clauses may also provide for how additional services for the building are to be paid. we are seeing increased cleaning services by virtually all landlords or property managers that have responded to the pandemic. The cost of these cleaning services may already be passed on to tenants through additional rent or operating cost provisions; however, if they are not, a health emergency clause may permit the landlord to charge back these costs to the tenants.

Finally, these provisions may have a force majeure element in that, if the health emergency exists, the landlord will not be in default if it does not comply with its maintenance and repair obligations until after the health emergency.

[4]      Business Interruption (and other available) insurance:

Speak to your insurance broker about your commercial policy and the availability of business interruption (or other available) insurance coverage.

Currently most insurers are denying this coverage, but there is already a class action commenced in Ontario claiming damages for the denial against many insurers.

For more information from us about business interruption coverage, go here: http://wardlegal.ca/31585663827877

There may be other potential coverage under your tenant’s policy, such as:

1.Civil Authority Insurance - covers losses arising from a government order preventing access to the insured property. Of course, for this coverage to come into effect there must be a governmental order. Neither governmental recommendations, nor private party decisions (i.e. closing office space), will meet this threshold. However, they can be addressed in a force majeure clause; and

2.Liability Insurancecovers losses arising from “third-party” claims. In the insurance context, a “third-party” is anyone not insured under the policy and could include the landlord or the tenant. It is unclear whether any liability will arise from third-parties contracting COVID-19 from or while on an occupier’s premises. However, these policies will come into effect for defending such claims as they arise.

In addition to business interruption insurance coverage, some insurance policies may also include sufficiently broadly-worded ‘loss of attraction’ or even ‘pollution’ provisions (mostly applying only to industrial businesses), which could also potentially trigger insurance coverage and, if so, financial assistance with paying rent and utilities during the pandemic.

[5]      Consider the doctrine of frustration of contract:

If there is no force majeure clause in the lease, a party is not necessarily without a remedy for an unforeseen event that causes a party to be unable to perform its obligations under the lease.

The doctrine of frustration provides that where the occurrence of an event results in a contract becoming fundamentally different in character from what the parties originally intended, the contract may be terminated without liability. However, a higher threshold must be met for the doctrine to apply, and its application means that the contract will be terminated (and not merely suspended for the duration of the event). Frustration will only apply where the event or circumstance was unforeseeable and not the fault of either party.

In Ontario, the relevant legislation is the Frustrated Contracts Act (the “FCA”). The FCA deals with the adjustment of rights and liabilities between the parties when a contract has been frustrated.   


Thank you for reading this - Jason Ward of WARDS LAWYERS PC.

If you would like to read more, please go to wardlegal.ca/posts.

This WARDS LAWYERS PC blog is for general information only. It is not legal advice, or intended to be. Specific or more information may be necessary before advice could be provided for your circumstances.

More information? We're here to help - jason@wardlegal.ca | www.wardlegal.ca