November 11, 2020 | Danny J. McMullen
Since the beginning of the COVID-19 pandemic and the government mandated shut-downs of certain businesses, there has been a lot of discussion relating to two legal concepts which are important in commercial agreements generally and in commercial leases more particularly. The first concept relates to whether a temporary government mandated shutdown of a business could constitute a frustration of that contract and the second concept relates to whether or not a force majeure clause in a contract could relieve a tenant from its obligation to pay rent during the government mandated shut down. These two concepts are explored in more detail below.
The doctrine of frustration is an equitable legal doctrine that will excuse one or both parties to a contract from its performance of the contract in certain conditions when performance of the contract becomes legally or physically impossible without the fault of either party. The Supreme Court of Canada has provided the following description of frustration of contract “when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes ‘a thing radically different from that which was undertaken by the contract’.” (Naylor Group Inc. v Ellis-Don Construction Ltd., 2001 SCC 58 at para 53). This is a very high bar to hit and contracts are very rarely considered frustrated in the normal course of things. Additionally, for this doctrine to apply it cannot be a temporary inability to fulfill the contract but requires that there be a more permanent reason that the contract cannot be fulfilled. In the common law jurisdictions of Canada, as of right now it does not appear that a court has weighed in on the doctrine of frustration as it relates to the requirement to shut down certain businesses as a public health response, but from most analysis available at this point, it does not appear that the doctrine of frustration will apply to commercial leases due to the temporary nature of the shut downs.
A force majeure clause is often included in contracts, this clause describes certain situations that may occur which would prevent a party or both parties from fulfilling their obligations under the contract in the timeframe provided for in the contract. These clauses are not legally required to be included in contracts and will not be read into them by the courts, but if they are included in a contract, including a commercial lease, they should be reviewed to see if any reference is made to a public health emergency or specifically a pandemic to see how this clause might affect a tenant and landlord from fulfilling its responsibilities under the lease.
As an example, many commercial leases have a clause that prevents the tenant from “going dark” meaning shutting down their operations from the leased premises for any length of time. If a lease has a force majeure clause that applies to a tenant that specifically refers to a pandemic or public health emergency, then this provision would likely protect the tenant from any negative consequences related to stopping their operations as required by government mandated shut downs. That being said, the vast majority of force majeure clauses in commercial leases explicitly provide that a tenant is not relieved of its obligation to pay rent due to any force majeure event.
It was only a matter of time until Ontario courts had an opportunity to analyze a force majeure clause in the context of a COVID-19 related shut down, and whether or not such a clause would relieve a tenant from the payment of rent. One such case has now been released, Durham Sports Barn Inc. Bankruptcy Proposal, 2020 ONSC 5938 (Durham). For a great analysis of this case I would recommend following this link to the analysis by Borden Ladner Gervais, LLP. Any court case cannot be overly generalized because each case is decided based on its facts, however for the time being anyways it appears that landlords can breath a sigh of relief. The court reviewed the force majeure clauses in the leases which did not permit the tenant to cease paying rent during a force majeure event but did relieve the Landlord from providing quiet enjoyment of the leased premises to the tenant in a force majeure event. The court ultimately concluded that the tenant was not permitted to cease paying rent during the time of government mandated shut downs and could not rely on the force majeure clause to permit them to do so.
This is the first of what will likely be many court cases over the coming months that will review frustration of contract, force majeure clauses and the tenant’s obligation to pay rent more generally in the context of the COVID-19 pandemic. We will provide updates as they become available on this important matter. For more information please don’t hesitate to reach out to Northview Law to discuss this and any other commercial leasing related issues that you may be experiencing.