COVID-19 has wreaked havoc on businesses across Canada, and many commercial tenants have faced enormous revenue shortfalls. Some of them are wondering whether COVID and its business destruction are legitimate reasons to not pay rent. Are they?
Well folks, it’s all about contract law. A lease is a contract. Here’s what some tenants are attempting to argue when they fail to pay rent.
Two Reasons that May Change Lease Obligations
“The lease has been frustrated.” Frustration in the legal sense, means a change in circumstance that makes it impossible to carry out the contract through no fault of the parties.
A second tenant argument is that, “force majeure applies.”
Force majeure refers to a clause that is included in contracts to remove liability for natural and unavoidable catastrophes that interrupt the expected course of events and prevent participants from fulfilling obligations.
Canadian Court Decisions on Commercial Leases in COVID Pandemic
I’ve consulted with our talented commercial litigation lawyers Lindsey Miller and Faiz-Ali Virji here at Field Law. As you might expect, the answer is that it depends on how a lease contract is worded. That being said, there have been recent court cases that can provide some guidance through legal precedent.
Here’s what they have to say on this extremely topical and still-evolving subject:
Frustration + Force Majeure in Commercial Leases: Is COVID a Valid Reason to Not Pay Rent?
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.
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.
The decision in Braebury can help folks figure out not only how their lease obligations have changed during COVID-19 pandemic, but also what parts of those obligations have stayed the same.
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