October 20, 2022 | Danny McMullen and Luke Giffen
Exercising Your Lease Rights – A Look at LA Fitness During the COVID-19 Shutdown
The pandemic has hit us all in different ways and severities. As we continue to move forward into some degree of normalcy, the courts are seeing an influx in cases surrounding the time that many businesses were mandated to be closed. For many of these businesses, they were involved in expensive deals to lease the building and then couldn’t use them as intended. Was the pandemic a situation we could attribute to a force majeure (FM) clause while utilizing a proportional allocation of risk or were the tenants simply out of luck? To help find some clarity on the issue, we can turn to the case of Niagara Falls Shopping Centre Inc v LAF Canada Company and Fitness International, LLC.
This case was heard in the Superior Court of Justice with the decision being delivered April 19, 2022. The plaintiff owned a shopping centre in Niagara Falls where the defendant had leased a building for their fitness gym. As the COVID-19 pandemic spread, the two parties had entered into a rent deferral agreement. Once the agreement ended, the defendant stopped paying rent which prompted the plaintiff to bring a motion for summary judgment for payment of rent and costs.
In its defense, LA Fitness and its indemnitor Fitness International relied upon several different aspects of the lease in question as well as fundamental principles of contract law. First, they asserted that the FM clause in the lease acted as a means of extending the term of the lease while it was frustrated throughout the pandemic. Further, the defendant argued that paying rent during the time it could not utilize the lands that it rented would result in unjust enrichment in favour of the landlord. As we can now see both sides of the coin in this case, the ultimate question is whose cross is it to bear the economic damage caused by the shutdowns brought forth by the pandemic? The tenant could not reasonably use the premises for its intended purpose under the lease. On the other hand, the landlord has a binding contract with the defendant. Clearly something has to give, but which way did the court find?
As it turned out, the court emphatically sided with the plaintiff on all counts. Speaking for the court, Pollak J. expressed a concept that permutates Canadian law: contractual interpretation. In interpreting a contract, it is of the utmost importance to examine the words as they appear while gauging the surrounding circumstances to fully understand their meaning. Indeed, the court refused to adopt the American understanding of using an allocation of risk when interpreting a contract, affirming the 1978 case of Victoria Wood Development Corp. Further in their decision, the court noted the impossibility of a contract being frustrated when a force majeure clause expressly considered the restrictive laws we saw with the pandemic. As such, there was no frustration in the case of the gym lease. LA Fitness went on to argue that the risk of COVID-19 constituted damage that entitled it to a rent abatement under the terms of the lease. Here again the court sided with the plaintiff as in reading the lease, this clause specifically related to physical damage to the building and COVID-19 did not constitute physical damage. Finally, the defendant argued that payment of rent would result in unjust enrichment. For a finding of unjust enrichment, there of course needs to be a juristic reason for an enrichment to be allowed. The lease signed by the defendants is an inherent juristic reason for enrichment as they agreed to the terms.
It seems that as far as cases surrounding the pandemic go, the courts will continue to take a pragmatic approach by utilizing principles of contractual interpretation in order to come to the most sensible decision. Without this approach, we would expect to see cases with unpredictable results based largely on emotion. Fortunately, we can continue to count on Canadian courts to resolve issues in a juristic and understandable way. Unfortunately for LA Fitness, that means that they will be left holding the heavy weight of their rent owed to the plaintiff.
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, please reach out to us and we’ll provide assistance based on your personal situation.