COURT FILE NO.: CV-20-00652384-00CL
DATE: 20210624
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Hudson’s Bay Company ULC Compagnie de la Baie d’Hudson SRI, Plaintiff
AND:
Oxford Properties Retail Holdings II Inc., CPPIB Upper Canada Mall Inc., OMERS Realty Management Corporation, Montez Hillcrest Inc., Hillcrest Holdings Inc., Yorkdale Shopping Centre Holdings Inc., Square One Property Corporation, Scarborough Tow Centre Holdings Inc., Oxford Properties Retail Holdings Inc., and Kingsway Garden Holdings Inc., Defendants
BEFORE: C. Gilmore, J.
COUNSEL: Jonathan C. Lisus, James Renihan and Carter Liebzeit, Counsel for the Moving Party Plaintiff
Deborah Palter and Alexander Soutter, Counsel for the Responding Party Defendants
HEARD: June 8, 2021
ruling on motion
OVERVIEW
[1] This case, along with many that are likely to follow, deals with the question of the effects of the COVID-19 pandemic on commercial tenancies where government-mandated closures have resulted in severe restrictions on retail operations. This motion raises the question of whether the Court should intervene and essentially vary the lease between the parties to allow relief from forfeiture and/or rental payments in the face of this public health crisis, or whether the Court should uphold the strict terms of the lease which, like most commercial leases, do not allow for any abatement or reduction in rent.
[2] As will be set out below, the Court declines to rewrite private contracts between the parties even in the face of unforeseen and disastrous circumstances. This does not, however, prevent the Court from exercising its powers under applicable laws to provide interim relief that reflects some deferral of payments (with interest) to allow the Plaintiff (“HBC”) time to allow sales to catch up as phased re-opening begins in Ontario and the economy recovers from the effects of the pandemic.[^1]
BACKGROUND FACTS
[3] HBC was founded in 1670 and is Canada’s oldest company. It employs over 30,000 people in 120 retail stores across Canada. HBC sells a wide range of apparel, cosmetics and housewares.
[4] The Defendants are affiliates of Oxford Properties Group (“Oxford”), a major property developer and manager with over 100 million square feet of office, industrial, warehouse, logistics and retail properties.
[5] The Defendants Montez Hillcrest Inc. and Hillcrest Holdings Inc. (“the Landlord”) own Hillcrest Mall (“Hillcrest”) located at 9350 Yonge Street in Richmond Hill. Hillcrest is the mall location in issue on this motion.
[6] HBC leases the seven department store properties in this Action, as well as two others in Quebec, from Oxford and its affiliates. HBC carefully selects its retail spaces and looks for locations with high foot traffic and a food court to ensure maximum customer “dwell” time.
[7] The HBC store at Hillcrest is governed by a lease executed on May 30, 1973. The current term of the lease expires in 2024. Prior to April 2020 and the pandemic closure of all non-essential businesses on March 23, 2020, HBC had paid its rent on time each month for 42 years.
[8] The initial lockdown forced HBC to close the doors to its Hillcrest location from March 23, 2020 until May 22, 2020. Even when HBC was able to re-open the Hillcrest location on May 22, foot traffic was substantially reduced because customers could only use exterior entrances. Restrictions were further lifted on June 15, 2020, but the mall was very different from before. The food court was restricted to takeout only, and the foot traffic was severely diminished due to capacity restrictions in all stores. Seating became available again in the food court in July 2020, but only 30% of the seating was available for use. On October 10, 2020, further restrictions were put in place that prohibited seating.
[9] Between November 16, 2020 and December 14, 2020 Hillcrest remained open with capacity restrictions. Only 10 people were permitted in the food court.
[10] On December 14, 2020 and in response to the second wave of COVID-19, a further lockdown was imposed such that HBC, as a non-essential retailer, was restricted to curbside pickup only. HBC brought an application for judicial review for exemption from the restrictions asking that it be defined as a big box store. The Divisional Court refused to intervene.
[11] The December 14, 2020 lockdown came at a time of year when HBC traditionally made most of its sales and profits.
[12] The December lockdown was followed by a second state of emergency and stay-at-home order, which was issued in January 2021. Sales plummeted as customers were told not to leave their homes. Hillcrest was permitted to reopen for in-store shopping on February 22, 2021 only to be shut down and restricted to curbside pick up again on April 8, 2021 due to the third wave of the pandemic and a renewed stay-at-home order.
[13] Hillcrest remained subject to those restrictions until June 11, 2021, when the first phase of the re-opening permitted 15% capacity for in store shopping. Given the significant vaccination uptake and a substantial reduction of COVID-19 numbers and hospitalizations, the move to the next phases of re-opening appears positive.
[14] There is no doubt that the pandemic closures have had a dramatic effect on non-essential retailers at Hillcrest. According to Mr. Putnam, the President and CEO of HBC Properties and Investments, there are currently 16 vacancies at Hillcrest, 10 of which occurred during the pandemic. HBC’s sales at Hillcrest experienced a significant decline between March 2020 and April 2021. On average sales at the Hillcrest HBC declined by 69%.
[15] HBC ceased paying rent on April 1, 2020, taking the position that the Landlord was in breach of the Lease by failing to provide a first-class shopping centre. Oxford insisted that HBC pay 100% of its rent.
[16] HBC and Oxford communicated over several months about the rent issue, but HBC remained steadfast in its position that it would not pay rent so long as the Landlord was in breach of the Lease.
[17] On October 4, 2020, HBC gave Oxford notice of its defaults at Hillcrest and other Oxford-run malls. Oxford maintained its position that 100% of rent was payable by HBC and that HBC was in default of its Lease because of its deliberate non-payment of rent.
[18] On October 27, 2020, HBC commenced this action. On October 28, 2020, less than 24 hours after the issuance of HBC’s claim, Oxford gave notice of its intention to terminate HBC’s lease at Hillcrest and to lock HBC out of the premises as of 7:00 p.m. that evening. On October 29, 2020, HBC brought an emergency injunction motion to enjoin Oxford from terminating its lease with HBC.
[19] On October 29, 2020, Justice Hainey ordered on an interim and without-prejudice basis that HBC pay 50% of rent going forward and 50% of the arrears owed between April and October 2020.
[20] On November 25, 2020, Justice Hainey ordered a similar injunction when Morguard, a different landlord, attempted to lock HBC out of its store at the Centerpoint Mall in Toronto. HBC was ordered to pay 50% of rent going forward and 50% of arrears.
THE LEGAL ISSUES
[21] HBC seeks relief from forfeiture, resolute in its position that the Landlord has failed to provide a first class shopping centre as required by the Lease and that section 20 of the Commercial Tenancies Act (“the CTA”) provides jurisdiction for this Court to continue with a reduction of HBC’s rent, as per Justice Hainey’s October 29, 2020 Order, with regard to the devastating consequences of the pandemic. HBC agrees to recommence payment of regular rent once the pandemic restrictions have ended.
[22] The Landlord’s position is that HBC is in default of the Lease given its deliberate refusal to pay rent between April and October 2020 and its continuing default. The October 29, 2020 Order does not bind this Court given its without-prejudice nature and the fact that this hearing is intended to determine the issue of relief from forfeiture on its merits.
[23] The Landlord further submits that it cannot be in breach of the terms of its Lease for complying with provincial laws. The Landlord had no choice but to either limit capacity or completely close Hillcrest depending on the restrictions at the time. The Landlord argues that those actions cannot be equated to a breach of the Lease for failing to provide a first-class shopping centre.
[24] The relevant provisions of the Lease are set out below (my emphasis):
3.03 Save as herein otherwise specifically provided the TENANT hereby waives and renounces the right to set off any and all existing or future claims against any RENT or other amounts due hereunder and agrees to pay such RENT and other amounts regardless of any claim or set-off which may be asserted by the TENANT or on its behalf.
5.07 The TENANT covenants with the LANDLORD: (1) to pay the annual RENT and all other sums from time to time due to the LANDLORD from the TENANT under this LEASE; and (2) to observe and perform all covenants and obligations of the TENANT under this LEASE.
5.08 The LANDLORD covenants with the TENANT: (1) for quiet enjoyment; and (2) to observe and perform all the covenants and obligations of the LANDLORD under this LEASE.
10.02 The LANDLORD shall operate or cause the SHOPPING CENTRE to be operated in accordance with first class shopping centre standards.
14.01 The LANDLORD agrees to maintain or cause to be maintained the LANDLORD’S IMPROVEMENTS, in a manner consistent with the best standards of shopping centre management and as a prudent owner would do…
17.03 Notwithstanding the provisions of any law to the contrary, if during the TERM, the LEASED PREMISES or any improvements, equipment, machinery or other facilities thereon or therein are totally or partially destroyed by any cause whatsoever, there shall be no abatement of rent hereunder.
[25] Section 20 of the CTA provides as follows:
Relief against re-entry or forfeiture
20(1) Where a lessor is proceeding by action or otherwise to enforce a right of re-entry or forfeiture, whether for non-payment of rent or for other cause, the lessee may, in the lessor’s action, if any, or if there is no such action pending, then in an action or application in the Superior Court of Justice brought by the lessee, apply to the court for relief, and the court may grant such relief as, having regard to the proceeding and conduct of the parties under section 19 and to all the other circumstances, the court thinks fit, and on such terms as to payment of rent, costs, expenses, damages, compensation, penalty, or otherwise, including the granting of an injunction to restrain any like breach in the future as the court considers just.
[26] The issues for determination may be stated as follows:
a. Is HBC in breach of the Lease for non-payment of rent?
b. Is the Landlord in breach of the Lease for failing to provide a first-class shopping centre?
c. Is HBC entitled to a reduction or abatement or deferral of rent as a result of any breach of the Lease by the Landlord or pursuant to section 20 of the CTA?
d. If HBC is in breach of the Lease should it be granted relief from forfeiture?
Is HBC in Breach of the Lease?
[27] HBC submits it is not required to pay 100% of its rent for two reasons:
a. The Landlord is in breach of section 10.02 of the Lease by failing to provide a mall with first-class shopping standards, and;
b. Section 20 of the CTA provides this Court with jurisdiction to grant relief “having regard to the proceeding and the conduct of the parties under section 19 and to all other circumstances, the Court thinks fit, and on such terms as to the payment of rent…”
[28] HBC is a non-essential retailer which does not qualify for Federal rental subsidy programs such as the Canada Emergency Commercial Rent Assistance Program (“CECRA”) or the Canada Emergency Rent Subsidy (“CERS”) as its revenue and rent exceeds the threshold for those programs. It has received a federal wage subsidy through the Canada Emergency Wage Subsidy (“CEWS”) but there was no evidence as to the exact amount received by HBC for this subsidy.
[29] HBC submits that its online sales provide negligible revenue and do not relate to its brick and mortar sales from Hillcrest. Online sales turn HBC into a form of depot where product is shipped from the store that has the item in stock and/or is closest to the customer. The Landlord submits that HBC holds significant real estate and cash assets and has failed to provide to the Court an adequate picture of its actual financial picture during COVID including total sales (including online sales) and government subsidies.
[30] HBC submits that it is entitled to an abatement of rent pursuant to the terms of section 20 of the CTA. Given the wording of section 20, the Court can take into account the conduct of the parties including HBC’s unblemished record of rental payments prior to April 2020. The fact that they paid no rent for seven months between April and October 2020 does not mean that this Court cannot consider HBC’s past conduct as a model tenant.
[31] HBC relies on Bosak v. 39390441 Canada Inc., 2014 ONSC 1138. In that case, the Court ordered an abatement of rent on the basis that the Landlord had failed to remedy the deficiencies in the leased premises in a manner that was consistent with the terms of the lease. The Court considered the parties’ conduct, the gravity of the breach, and the disparity between the value of the property and the damage caused by the breach (para. 72).
[32] The Landlord submits that Bosak does not apply to the facts here because in that case the Court granted an abatement based on a breach of the right of the tenant to quiet enjoyment. The Court did not consider section 20 of the CTA.
[33] I agree with the Landlord that in order to grant an abatement based on a breach of the tenant’s right to quiet enjoyment, there must be a specific act by the Landlord (see Stearman v. Powers, 2014 BCCA 206, 373 D.L.R. (4th) 539). In this case, the Landlord did not do anything that caused the closure of the mall or the restrictions related to capacity. The actions of the Landlord in this case were taken in order to comply with provincial law. As such, HBC is not entitled to an abatement of rent.
[34] HBC argues that Justice Hainey exercised his discretion under section 20 of the CTA in granting his Order of October 29, 2020, in which he required HBC to pay to the Landlord $659,394.83 representing 50% of the arrears owing for the period of April 1 – October 1, 2020. HBC was ordered to pay 50% of rent going forward. HBC paid the outstanding rent as ordered on October 30, 2020. HBC points out that the motion for an injunction before Justice Hainey on October 29, 2020 was fully briefed and all materials regarding the application of section 20 of the CTA were before him.
[35] Justice Hainey similarly exercised his discretion under section 20 on November 25, 2020 using the same approach with HBC as a tenant at Centrepoint Mall. He ordered that HBC pay 50% of outstanding arrears and 50% of rent going forward.
[36] The Landlord argues that Justice Hainey’s endorsements have nothing to do with section 20 of the CTA, and were carefully worded to ensure that the Landlord could fully argue its the merits of its position on this motion. The Landlord relies on paragraph 5 of the October 29, 2020 Order which sets out as follows:
- THIS COURT ORDERS that the payments ordered to be made by the Plaintiff to the Hillcrest Defendants in paragraphs 3 and 4 of this Order are: (i) without prejudice to the Plaintiff’s right to argue that no rent (whether in respect of arrears, or on a monthly basis hereafter) is due and payable; and (ii) without prejudice to the Hillcrest Defendants right to argue that the Plaintiff remains liable for payment of 100% of the arrears of rent, 100% of the monthly rent due and payable after the date hereof, and all other amounts pursuant to the terms of the Lease for the Premises.
[37] The Landlord submits, and I agree, that this term of the October 29, 2020 Order makes it clear that Justice Hainey did not intend to rely on section 20 of the CTA or vary the terms of the Lease. The Order was intended to create a temporary without-prejudice arrangement pending a hearing on the merits. I therefore do not rely on the October 29, 2020 Order as permitting this Court to vary the terms of the Lease based on section 20 of the CTA.
[38] HBC argues that its conduct must be taken into account as a model tenant as well as the fact that the pandemic is an unprecedented event over which neither party had control. These are factors which can form part of the Court’s consideration with respect to the “proceeding” and the “conduct of the parties” as the Court sees fit with respect to section 20 of the CTA.
[39] HBC referred the Court to the affidavit of Ian Putnam where he deposed at paragraph 10 of his affidavit sworn October 28, 2020 that:
HBC has been trying to reach a resolution with Oxford for months, without success. As detailed below, discussions were occurring between the parties at the highest levels of both organizations when, without any warning, Oxford commenced urgent proceedings in Quebec in respect of two shopping centres in that province. This caused talks to break down and forced HBC to focus on litigation instead.
[40] HBC submits that it engaged in responsible dialogue with the Landlord in attempting to reach a compromise, only to be given less than 24 hours to leave Hillcrest after serving its Statement of Claim. HBC further submits that it is offended by Hillcrest’s characterization of it as a form of “rogue” tenant. HBC has tried to do the right thing given the undeniable effects of the pandemic on the retail sector.
[41] In his endorsement of November 25, 2021 in relation to the HBC store at Centrepoint Mall, Justice Hainey noted that the sharing of arrears and future rent constituted a fair sharing of the effects of the pandemic between landlord and tenant. HBC relies on this as a basis for continuing the sharing of rent until the restrictions on non-essential retail are fully lifted. Further, any Order that is made by the Court in this regard can be revisited and revised based on a graduated lifting of restrictions. HBC insists it is not avoiding its obligations, and told the Court during the course of this hearing that it would agree to an increase in rent based on a percentage of re-opening capacity limits.
[42] In Hunt’s Transport Limited v. Eagle Street Industrial GP Inc., 2020 ONSC 5768, the tenant disputed the Landlord’s charges for additional rent and withheld payment, claiming the Landlord had failed to provide adequate corroborating documentation of the amounts owed. The lease did not permit deduction, set-off or abatement from basic or additional rent.
[43] D.A. Broad J. relied on Michele’s Italian Ristorante Inc. v. 1272259 Ontario Ltd., 2016 ONSC 4888 for the proposition that even where there is a breach of the lease by the Landlord, the tenant is still required to pay basic and additional rent without deduction, abatement or set-off (para. 40 of Michele’s). D.A. Broad J. found that the tenant was in breach of the lease by withholding rent, and that such withholding of rent amounted to self-help on the part of the tenant (at para. 60).
[44] Further, with respect to the tenant’s request for relief from forfeiture, the tenant argued that the impact of the pandemic should be taken into account, and that where businesses were not eligible for government assistance, relief should be granted in the form of equitable solutions by the court (at para. 68). D.A. Broad J. rejected this argument, stating at para. 76 that the effect of the COVID-19 pandemic was not a relevant consideration in the circumstances of the case.
[45] In making this ruling, D.A. Broad J. noted that The Second Cup v. 2410077 Ontario Ltd., 2020 ONSC 3648 did not support the “broad policy proposition” advanced by the tenant. In that case, the Landlord terminated the lease the day after the rent was due when the tenant failed to pay 25.5% of one month’s rent. The Court granted temporary relief from forfeiture by allowing the tenant 20 days to cure its default inclusive of any interest owed. While the Court took the effect of COVID-19 pandemic into account in making this ruling, it did not suggest that the courts ought to step in and grant equitable relief where government assistance failed to do so.
[46] HBC argues that these cases do not apply as they turn on their own specific facts. Hunt’s Transport related to a failure to pay additional rent. Michele’s Italian Ristorante dealt with a tenant who was chronically in arrears. Second Cup dealt with a franchise operation.
[47] I do not agree with HBC that these cases are without relevance. The Hunt’s Transport case in particular emphasizes the fact that tenants cannot take matters into their own hands by withholding the payment of rent. They may have other remedies either under statutory or common law, but simply withholding rent is not one of them unless the lease says otherwise. I agree with D.A. Broad J. that courts must be cautious about situations in which equitable relief is sought for what are otherwise policy responsibilities of the Legislature. Until such policy dictates that the consequences of the pandemic must be equally shared as between landlord and tenant, the terms of the lease must prevail.
[48] As well, section 20 of the CTA cannot be expanded in meaning such that external circumstances (such as pandemics) will permit courts to override private contracts where one of the parties is no longer satisfied with the terms of the contract. Whether or not Oxford is better able to “weather the storm” than its retailers is irrelevant in the context of such considerations.
Is the Landlord in Breach of the Lease?
[49] HBC argues that the Landlord is in breach of the Lease by failing to provide a first-class shopping mall. Failing to provide adequate premises is a fundamental breach of the Lease because it destroys the very thing that HBC pays rent for. This argument is based on three points:
a. Changes to Hillcrest have rendered it materially different than it was before the pandemic, making it less than a first-class shopping centre. Since the beginning of the first lockdown Hillcrest has been operating as a shopping mall for only 40% of the time.
b. Hillcrest has refused to make upgrades or improvements to address the real and perceived safety risks at the mall including an upgrade to their HVAC system.
c. The mall has changed in its character. Shoppers are deterred from lingering in stores and there is either no or minimal seating at the food court.
[50] The Landlord argues that it cannot ignore the law. If the law requires it to restrict or shut down operations such that foot traffic is substantially reduced, this cannot be a breach of the Lease. The Landlord submits, and I agree, that the Landlord cannot be somehow made responsible to deliver a certain level of sales. HBC’s rent was a fixed amount. There is no evidence that it offered to pay more rent when it exceeded its sales targets.
[51] Interpretation of what is the operating standard of a first-class mall can be found in T. Eaton Co. Re, 1999 CanLII 15008 (ON SC), [1999] 12 C.B.R. (4th) 130 (Ont. S.C.J.). In that case, the various landlords of the T. Eaton Company argued that the leases held with Eaton’s did not envisage liquidation sales. The Court held that “Eaton’s operating to effect a liquidation sale is not incompatible with it so functioning as a first class department store.” Part of Farley J.’s reasoning to permit the liquidation sale was that it was not permanent. Similarly, with the phased re-opening already in effect, it is hoped that eventually Hillcrest will return to its former levels of foot traffic.
[52] I find that the Landlord is not in breach of the Lease for failing to meet operating standards. Making such a finding would lead to a commercial absurdity in that the Landlord would be put in a position of having to ignore provincial laws and public health guidelines in order to maintain what HBC determined was a first-class mall.
Is HBC Entitled to Relief from Forfeiture?
[53] While HBC is not entitled to an abatement, reduction or set-off from rent, it is this Court’s view that it should be relieved from forfeiture. Relief from forfeiture is an equitable remedy which is discretionary.
[54] In determining whether to exercise that discretion, the Court must consider a) HBC’s conduct and whether such conduct is wilful; b) the gravity of HBC’s breaches; and c) the disparity between the value of the property forfeited and the damage caused by the breach (see paras. 62-63 of Hunt’s Transport).
[55] The Landlord insists that HBC lacks clean hands and that its conduct must be questioned with respect to its deliberate refusal to pay rent, failure to disclose on-line sales, and its admission that in withholding rent it was trying to preserve cash.
[56] I do not agree. HBC was a model tenant until the pandemic hit. It attempted to negotiate with the Landlord and even attempted to have itself characterized as an essential retailer. When ordered to pay 50% of arrears, it did so the next day. Like all retailers, it was attempting to navigate an unprecedented public health crisis.
[57] In terms of the gravity of the breach, I have already found that HBC is not entitled to any abatement or reduction of rent. Therefore, the relief from forfeiture will be pursuant to terms that allow some deferral of rent by HBC, but in the end the Landlord will receive all of its rent. Ultimately, the impact on the Landlord’s rights will be minimal and therefore the gravity of the breach is minimal.
[58] With respect to the third consideration, it does not benefit either HBC or the Landlord to disallow re-entry. HBC is an anchor tenant which necessarily draws crowds to Hillcrest. During this period of gradual re-opening, Hillcrest needs model tenants, not more vacancies.
ORDERS
[59] Given all of the above, I make the following Orders:
a. The October 29, 2020 Order of Justice Hainey is hereby vacated.
b. HBC is hereby granted relief from forfeiture on the following terms:
i. HBC will forthwith pay the 50% of arrears of rent owed from April to October 2020 with interest calculated at the TD prime rate plus 2%.
ii. HBC will pay the 50% of arrears of rent owed from November 2020 to June 2021 with interest calculated at the TD prime rate plus 2% by January 31, 2022.
iii. Commencing on July 1, 2021 and on a go-forward basis, HBC will pay rent on a scale that generally reflects the intended Ontario government phased re-opening as follows:
On July 1, 2021 HBC will pay 50% plus 15% rent or 65% of rent owing.
On August 1, 2021 HBC will pay 50% plus 20% of rent or 70% of rent owing.
On September 1, 2021 HBC will pay 50% plus 25% of rent or 75% of rent owing.
On October 1, 2021 HBC will pay 90% of rent owing.
On November 1, 2021 HBC will resume full payment of rent.
Arrears of rent of 35% for July 2021, 30% for August 2021, 25% for September 2021 and 10% for October 2021 shall be repaid on March 31, 2022 with interest at the prime TD rate plus 2%.
[60] If the parties cannot agree on costs, they may provide written submissions of no more than four pages (double-spaced) exclusive of any Bill of Costs or Offer to Settle. References to caselaw and other materials must be hyperlinked. Costs are due on a seven-day turnaround, seven days from the date of this ruling, starting with the Defendants. Costs submissions are to be e-mailed directly to my assistant at therese.navrotski@ontario.ca. If no costs submissions are received within 35 days, costs will be deemed to be settled.
C. Gilmore, J.
Date: June 24, 2021
[^1]: While this decision was on reserve, counsel brought the recent decision Cherry Lane Shopping Centre Holdings Ltd. v. Hudson’s Bay Company ULC Compagnie De La Baie D’Hudson Sri, 2021 BCSC 1178 to my attention. In that decision, the British Columbia Supreme Court similarly held that the realities of the COVID-19 pandemic did not alter the commercial agreement between the parties. The court also granted relief from forfeiture, albeit on repayment terms that are less generous than those ordered in the within motion. Given that Ontario has had lengthier and stricter restrictions in place as a result of the pandemic, I consider the repayment terms ordered to be fair to both parties.