Commercial real estate lawyers say courts are quiet now, but expect litigation soon on landlord-tenant disputes
In a post-Covid-19 world, leases on commercial properties will need to change and adapt, with both landlords and tenants looking for adjustments when it comes to force majeure and insurance provisions, say real estate lawyers. They also suggest that while courts may be quiet now, a tsunami of litigation is sure to come to resolve landlord-tenant disputes coming out of the pandemic and provide better clarity on legal obligations.
“Tenants will think there is always room to improve their lease forms, and landlords will always be looking to strengthen documents to their benefit,” says Stikeman Elliott’s Michael Witt, partner with the firm’s real estate group in Calgary. He says that tenants especially will start asking that force majeure clauses in their leases cover pandemics and the mandated shuttering of businesses.
Nick Barton, an associate with the real estate and financial services group of McMillan LLP in Calgary, says he is getting a lot of calls from clients, landlords and tenants, asking about what the leases say, especially in terms of force majeure. “Landlords are asking about how the force majeure clause captures Covid-19, and tenants are asking is there anything that gets them off the hook or what happens if they try to break the lease.”
Witt says, “Some force majeure provisions are more properly drafted than others,” and notes that many don’t specifically mention a pandemic as a trigger to it being successfully invoked. That is despite the SARS pandemic more than 15 years ago, which Witt says should have made both landlords and tenants more aware of the potential financial harm a major virus outbreak could cause.
But Witt adds that, given how most force majeure provisions have generally been written, they generally don’t work in favour of the tenant.
“Whether or not these clauses mention pandemics, most go on to say, essentially, that financial hardship or lack of funds isn’t a reason for a tenant not to perform their obligation to pay any amounts that are due under the lease,” he says. “That’s a pretty watertight phrase.” Witt adds that most tenants have likely flipped through their leases and “not found much of anything there that was helpful.”
A recent Quebec case, one of the first Covid-19-related lawsuits to surface in Canada, gives some indication of how force majeure clauses are being interpreted by the courts.
In Hengyun International Investment Commerce Inc. c. 9368-7614 Québec inc., Quebec Superior Court Justice Peter Kalichman dismissed a fitness centre’s (Quebec Inc.’s) contention that it was prevented by force majeure from an obligation to pay rent because it was unable to generate revenues due to the government shutdown order. Kalichman rejected that line of reasoning, saying to do so would require a subjective approach to the concept of irresistibility, under which an event prevents the performance of an obligation by anyone, not just a debtor.
“In order to qualify as superior force, the event at issue must prevent any tenant in Quebec Inc.’s situation from paying its rent and not just those who lack sufficient funds,” Kalichman wrote.
The landlord HengYun had argued that the gym was not in a situation that could be described as a force majeure, and even if it was, the situation was contemplated by a contract provision in the lease that required Québec Inc. to pay rent even in light of such an event. On top of that, HengYun noted that the fitness centre received a $40,000 emergency government loan because of the pandemic and could, therefore, not argue that it was prevented from superior force from paying the rent.
However, Toronto-based Torkin Manes LLP partner Kenneth Beallor, with the firm’s commercial real estate group, says that, despite the judge rejecting the fitness centre’s argument regarding force majeure, in the end, the gym was not obliged to pay rent because the government’s restrictive shutdown orders had actually breached the landlord’s covenant of allowing the tenant “peaceable enjoyment” of the premises. The court held that the government-mandated shutdown resulted in an obligation of the landlord that could simply not be performed, and while parties to a lease can agree to limit the impact to provide peaceable enjoyment, it can’t be excluded altogether.
Beallor says the Quebec court said, “Forget the force majeure clause, it’s the covenant for peaceable enjoyment that was primary.” He adds that while this is the lower court decision under the Civil Code in Quebec, it could have implications other provinces; Ontario for example, which uses the term “quiet enjoyment.”
James Papadimitriou, regional practice lead of the real estate group at McCarthy Tétrault LLP in Montreal, says that the court in this decision did recognize Covid-19 as a force majeure event and the landlord was relieved from performance, but, as a corollary, so was the tenant.
In this case, he says, “It is not a situation where the landlord is not refusing to perform an obligation, which would relieve the tenant, but a situation where it's impossible for the landlord to perform the obligation as the landlord is compelled by law not to perform.”
He also says the decision is possibly appealable on such grounds and, also, that the landlord had clearly provided a clause in the lease that said in a case of force majeure, the tenant continues to pay rent, although the clause in this case excused for delays, not non-performance, and was poorly drafted.
He notes that the consequences of this decision could be quite significant. “It invites tenants to just not pay rent in any kind of event of this nature,” he says, adding that he feels the decision should be limited to the facts of that case and that the relevant lease clauses were probably poorly drafted. Still, the decision underscores that “judges are humans, too, and they are sympathetic to what small businesses are going through.”
However, while perhaps an outlier, Papadimitriou says this case sheds light on how leases will be negotiated in the future, as both tenants and landlords will be looking at “more fulsome” force majeure clauses, often considered “boilerplate,” to see how they refer to pandemics and catastrophic events of nature that close businesses even when there is no physical damage.
He also feels that there will “likely be a lot of insurance litigation coming out of Covid-19,” a sentiment echoed by other lawyers.
Baellor says that. while things are still in “very early stages,” he has been hearing rumblings of litigation over business interruption cover, especially where parties who have bought coverage are being told that it only covers physical damage, unless it specifically states otherwise.
At the same time, Witt notes that insurance companies “don’t want to be setting precedents around their policies that would require them to pay — that is adverse to them,” he says. “So, there would definitely be motivation on both sides to fight this in the courts.”
Office Vacancy Rates Q2 2020 (Q2 2019)
Vancouver 4.6% (4.2%)
Calgary 24.5% (24.4%)
Edmonton 19.8% (19.4%)
Toronto 6.2% (7.3%)
Montreal 9.3% (11.2%)
Source: CBRE
Available Industrial Space Q2 2020 (Q2 2019)
Vancouver 2.9% (2.1%)
Calgary 9.7% (8.4%)
Edmonton 8.7% (8.2%)
Toronto 2.0% (1.5%)
Montreal 2.6% (3.2%)
Source: CBRE
