2 September 2020

COVID-19 Implications for commercial landlords and tenants

The COVID-19 crisis has had a significant economic impact on commercial landlords and tenants across the province. The federal government’s Canada Emergency Commercial Rent Assistance (CECRA) program, among others, are intended to offer a partial solution to the situation

Despite the said relief programs, commercial landlords and tenants have found themselves in untested waters and the long-term legal impact of COVID-19 on the commercial relationship between the parties is just emerging.

Canada Emergency Commercial Rent Assistance

Through the CECRA program, commercial landlords have the option to undertake a forgivable loan that will cover 50% of the gross rent payable by commercial tenants who have been significantly financially impacted by COVID-19. In participating in CECRA, commercial landlords must agree to waive collection of 25% of the gross rent payable by the affected tenant for certain months. As such, under CECRA, commercial landlords can expect to recover 75% of the gross rent otherwise payable by commercial tenants significantly impacted by the present crisis.

On June 8, 2020, the Government of Quebec announced supplementary aid measures to complement the CECRA program. Thanks to this, landlords who committed to absorbing a 25% loss of gross rent under CECRA may receive an amount equivalent to 12.5% of the gross rent, reducing their loss by half. Official details of the program have yet to be announced but further information can be found on our firm’s recent publication dated August 28, 2020 on LinkedIn.

Participation in the CECRA program has been a source of contention for some landlords who, for a variety of reasons, have opted not to apply for the program.

The following is intended as a brief overview of the position of the Quebec Courts concerning CECRA-related tenancy disputes.

  1. Rocco Taverne italienne inc. c. Fiducie Marcon-campeau inc., 2020 QCCS 1949

In this case, tenant Rocco Taverne italienne requested an interlocutory injunction seeking access to the leased premises following a termination and eviction notice from the landlord. The Court considered that the landlord’s refusal to participate in the governmental relief programs created an increased burden on the tenant. At this interim stage of proceedings, the Court considered the balance of inconvenience to be in favor of the tenant and granted access to the leased premises.

  1. Investissements Immobiliers G. Lazzara inc. c. 9224-5455 Quebec inc., 2020 QCCS 2176

In this case, the landlord, who elected not to participate in the CECRA program, sought a safeguard order for payment of full rent owing by the tenant. In refusing the landlord’s safeguard order, the Court acknowledged the tenant’s undertaking to pay 25% of the gross rent while the CECRA program was in effect. The Court considered that, although participation in the government relief programs is voluntary, the landlord was the author of his own misfortune in refusing to do so. The Court relies on the “clean hands” principle to state that parties seeking emergency relief should not have contributed to their own prejudice, whereas alternative less extraordinary options were possible

  1. 9215-3956 Québec inc. c. 9378-9949 Québec inc. (Shack du pêcheur), 2020 QCCQ 2537

In this case, the landlord sought a safeguard order for non-payment of rent. The order was granted by the Court. The Tenant in this case operated a restaurant whose operations ceased following the COVID-19 related Ministerial decree. The Court considered the fact that the landlord was willing to participate in the CECRA program but the tenant refused to pay 25% of the gross rent for the period affected. The Court, inspiring itself from the CECRA program, ordered a provisional reduction of gross rent by 75% and ordered the tenant to provisionally pay 25% of the gross rent whilst the CECRA program remained in effect.

COVID-19 and Force majeure

There has been much speculation within the legal community about the qualification of COVID-19 as a force majeure event and its impact on the contractual relationships between parties. The Court has also pronounced itself on this issue in the following decision.

  1. Hengyun International Investment Commerce Inc. v. 9368-7614 Quebec inc., 2020 QCCS 2251

 To our knowledge, this is the only decision of the Court on the merits concerning the impact of COVID-19 on the contractual relationship between landlords and tenants. In this case, the tenant (a gym) claimed waiver of rent for the months of April, May, and part of June 2020 due to closure of the premises following COVID‑19 related ministerial decrees. In refusing the landlord’s claim for the aforementioned period, the Court determined that COVID-19 is a force majeure event that releases the landlord from performing its obligation to provide peaceable enjoyment of the leased premises. On the other hand, as the landlord could not offer peaceable enjoyment for the period of time in question, the Court decided that the correlated rent could not be claimed. The Court found that the force majeure clause contained in the lease only concerned obligations whose performance was delayed, not obligations that could not be performed at all. The Court determined that the landlord’s obligation to provide peaceable enjoyment for the period in question was not “delayed” but simply impossible to perform.

Whilst this judgment is rendered on the merits, the conclusions therein remain vulnerable to appeal and can be distinguished on a case-by-case basis. In fact, the Superior Court recently commented on the argument raised in Hengyun in the context of a safeguard order undertaken by a landlord seeking rent arrears.

  1. Pontegadea Canada inc. v. Gap (Canada) inc., August 6, 2020 (*PUBLICATION PENDING)

In this case, by way of safeguard order, the landlord sought payment of rent arrears for the month of June and July 2020. At the time of hearing of the safeguard order, the parties had already concluded a partial settlement agreement that provided for the payment of rent for January – March, and August – December 2020. The Court outlines that such payments for arrears are made in specific circumstances: i) where there is no clear defense to be invoked by the tenant ii) when the payment of rent is not contested but a compensation operation is being invoked by the tenant, or, iii) when the landlord suffers irreparable harm. The Court denied the safeguard order, concluding that the landlord did not demonstrate irreparable harm to justify payment of the arrears at the interim stage of the proceedings. The Court accepted the tenant’s position that it has a serious defence to invoke based on the ruling of Hengyun, notably the argument of exception of non-performance. The Court stated it would be premature at the interim stage to dismiss this defence without knowing the scope of the argument and facts surrounding the case.

Conclusion

In these unprecedented times and considering the recent judicial treatment of CECRA and COVID-19 related commercial rent disputes, it is important for commercial landlords and tenants to err on the side of caution. As the state of the law on this subject is in expedited evolution at this time, Landlords and tenants alike should review their commercial leases and work together to reach mutually satisfactory arrangements, given that the outcome of a dispute will be difficult to predict if and when submitted to Courts

 

Contact our legal team at KRB Lawyers to help you navigate your rights and obligations in this context.

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