COURT FILE NO.: CV-20-322 (Kingston)
DATE: 20210920
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Braebury Development Corporation
Plaintiff
– and –
Gap (Canada) Inc.
Defendant
Jennifer Ng and Michael D. Swindley, for the Plaintiff (Moving Party)
Alan B. Dryer and Orly Kahane-Rapport, for the Defendant
HEARD: 25 August 2021, at Kingston (by videoconference)
Mew J.
REASONS FOR DECISION
(Motion for Summary Judgment)
When a business closes suddenly, even if it's temporarily, the tenant cannot produce rent, meaning a landlord may have difficulty paying a mortgage (if there is one). There are no winners in this situation.[^1]
[1] For many years, the defendant operated a retail clothing store from leased premises at 230-234 Princess Street in downtown Kingston. The original lease for the store was entered into in 1994 between the defendant and the plaintiff landlord’s predecessor.
[2] The plaintiff purchased the leased premises in 2013, thereby becoming the landlord in a lease agreement with Gap that incorporated Gap’s leases with the previous owner. The lease term was to end on 31 December 2020.
[3] On 17 March 2020, in response to the COVID-19 pandemic, the Government of Ontario declared a provincial state of emergency. On 24 March, the government ordered all non-essential businesses to close to limit the spread of COVID-19. As a result, Gap was required to shut down its store located at the leased premises and was unable to reopen until the shutdown restrictions were lifted on 19 May 2020.
[4] Gap did not pay rent for April or May 2020, and only made partial rent payments from June 2020 to September 2020. Gap unilaterally closed the store and vacated the lease premises in September 2020.
[5] The plaintiff landlord now seeks to recover arrears of rent totalling $208,211.85. The defendant says it is relieved of the obligation to pay the arrears of rent because the purpose of the lease was frustrated by the COVID-19 pandemic, and the resulting public health restrictions, which significantly impeded its ability to operate its business to the point where it was no longer reasonable, practical, or commercially viable for it to do so.
Issues
[6] Although the defendant initially took the position that the plaintiff’s claim raises triable issues, it did not maintain that stance during oral argument. I find that summary judgment is a suitable process for determining the entire dispute between the parties.
[7] Although other issues were raised in the parties’ factums[^2], oral argument focused on two main issues, namely:
a. Whether the force majeure clause contained in the lease was engaged in the circumstances and, if so, its effect on the defendant’s obligation to pay rent; and
b. If the force majeure clause does not apply, whether the doctrine of frustration of contract applies to relieve the defendant of its obligation to pay the rent claimed.
Force Majeure Clause
[8] The lease contained a force majeure clause. As explained in Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp and Paper Company Limited, 1975 CanLII 170 (SCC), [1976] 1 S.C.R. 580, at p. 583, force majeure clauses are contractual provisions designed to:
…discharge a contracting party when a supervening, sometimes supernatural, event, beyond the control of either party, makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill.
[9] The force majeure clause in the subject lease excused the parties from performance of certain of their obligations under the lease in the event that the party was prevented from doing so or hindered by “restrictive governmental laws or regulations” or other reason “of a like nature” beyond the party’s control. However, and, as it will be seen, significantly, the lease also provided that if the force majeure clause was triggered, it did not excuse the tenant from prompt and timely payment of rent.
[10] Braebury argues that the force majeure clause in the lease demonstrates that the parties contemplated the circumstances such as those arising out of a pandemic. It asserts that government restrictions, including those enacted in response to a pandemic, qualify as “restrictive government laws or regulations”. Alternatively, the government’s COVID-19 restrictions are “of a like nature” to the list of events in the force majeure clause that would trigger its application.
[11] Since the force majeure clause applies and explicitly does not excuse Gap from the prompt and timely payment of rent, Braebury asserts that the defendant must satisfy its rent obligations.
[12] Gap responds that the pandemic and resulting government restrictions were not contemplated by the parties when the lease was entered and, hence, do not trigger the lease’s force majeure clause.
[13] To determine whether an event has triggered a force majeure clause and, if so, its impact on the parties’ contractual obligations, the court must interpret the particular clause contained in the lease. The lease should “be read as a whole, giving the words used their ordinary and grammatical meaning”: Windsor-Essex Catholic District School Board v. 231846 Ontario Limited, 2021 ONSC 3040, at paras. 19 and 22.
[14] Three questions need to be addressed when addressing the effect of a force majeure clause: (a) what are the triggering events under the clause; (b) what is the required impact on the party invoking the clause; and (c) what are the consequences of that impact on the invoking party’s contractual obligation: Atcor Ltd. v. Continental Energy Marketing Ltd., 1996 ABCA 40, 178 A.R. 372, at para. 12.
[15] The force majeure clause included in the lease provides:
24.01 Force Majeure. In the event that either party hereto shall be delayed or hindered in or prevented from the performance of any act required hereunder by reason of strikes, lock-outs, labour troubles, inability to procure materials, failure of power, restrictive governmental laws or regulations, riots, insurrection, war, military or usurped power, sabotage, unusually severe weather, fire or other casualty or other reason (but excluding inadequacy of insurance proceeds, financial inability or the lack of suitable financing not attributable to any of the foregoing) of a like nature beyond the reasonable control of the party delayed in performing work or doing acts required under the terms of this Lease (herein called "force majeure"), the performance of such act shall be excused for the period of the delay and the period for the performance of any such act shall be extended for a period equivalent to the period of the delay. The provisions of the preceding sentence however shall not excuse Tenant from the prompt and timely payment of the Rent as and when the same is due under this Lease except when (i) the Commencement Date of the term is delayed by reason of force majeure, or (ii) such payment is excused pursuant to other provisions of this Lease.
The Triggering Event
[16] The trigger in the subject lease is engaged when the reason for a party’s inability to perform its obligations is “restrictive governmental laws or regulations…or other reason…of a like nature beyond the reasonable control of the party delayed in preforming work or doing acts required under the terms of this Lease…”
[17] Gap argues that the pandemic and government restrictions are not covered by the listed events triggering the force majeure clause and are not of a like nature. Specifically, it argues that the clause does not refer to public health measures, pandemics or epidemics, or health emergencies. Since these types of events are absent from the list, the government’s COVID-19 restrictions are not “of a like nature” either.
[18] Braebury asserts that the government’s COVID-19 restrictions aimed at reducing the transmission of COVID-19 fall under “restrictive governmental laws or regulations” or are “of a like nature” such that the force majeure clause is triggered.
[19] The issue of whether the government’s COVID-19 measures, and specifically the shutdown of non-essential facilities in the spring of 2020, falls under the event of “restrictive governmental laws or regulations” in a lease’s force majeure clause was recently addressed by this court in Windsor-Essex.
[20] In that case, the lessees were two school boards who leased recreational space. Due to COVID-19 restrictions, neither school board was permitted to access the recreational space it had leased. The lessees had identical leases with the landlord, which provided for a rent abatement if the landlord was unable to provide access to the facilities for any of the reasons listed in the force majeure clause. The two school boards applied to the court for a declaration that the force majeure clauses applied and abated the rent owed while they were unable to access the leased space during the shutdown periods.
[21] The lease in Windsor-Essex included “restrictive government laws or regulations” in its list of triggering events. Munroe J. held that the pandemic itself was not the triggering event, but, rather, it was the government’s laws and regulations that were implemented in response to the pandemic that prevented the lessor from providing access to the recreational space: Windsor-Essex, at paras. 24-25. As Munroe J. observed at para. 26:
It is uncontroverted that the COVID-19 pandemic-caused government lockdowns happened during the period at issue and that such events were not the fault of the parties to the leases. The school boards could not use their respective leased premises as contracted or intended from March 17, 2020 through August 11, 2020 because of government orders forbidding same in response to the COVID-19 pandemic.
[22] The terminology contained in the subject lease referring to restrictive governmental laws or regulations is identical to the terminology in the leases at issue in Windsor-Essex. For the same reasons expressed by Munroe J., I find that the force majeure clause in the parties’ lease was triggered by the government’s COVID-19 restrictions.
Required Impact
[23] The required impact pursuant to lease is:
…that either party hereto shall be delayed or hindered in or prevented from the performance of any act required under the lease by reason of…
[24] Gap did not pay rent as required under the lease for the months of April and May when it was prohibited by the government’s COVID-19 restrictions from opening its retail space, and only made partial payments thereafter while certain COVID-19 restrictions remained in place.
[25] Gap argues that while it has not satisfied its rent obligations since March 2020, rent payment is not an “act under the lease” and therefore, the COVID-19 restrictions did not have the required impact of delaying, hindering, or preventing performance of an act under the lease.
[26] In its written submissions, Gap did not provide any support for the proposition that rent payment is not an “act” under the lease. At the hearing, counsel for Braebury argued that a common sense reading of the lease leads to the inevitable conclusion that payment of rent would be an “act” under the lease. Were it otherwise, it would be redundant for the force majeure clause to explicitly exclude rent payment from being an obligation excused by force majeure.
[27] I agree with the plaintiff on this point. Furthermore, a review of any dictionary definition of the noun “act” discloses a range of meanings including “a deed or action”, “perform actions or functions”, “perform or carry out”, and “put into action”. The payment of rent is a central obligation which a tenant under a lease is required to perform or carry out. It is therefore an “act” within the meaning of the subject lease.
The Consequence on Contractual Obligations
[28] If triggered, the force majeure clause excuses both parties from their obligations under the lease, save that it does “not excuse Tenant from the prompt and timely payment of the Rent as and when the same is due” (except in circumstances that do not apply in the present case).
[29] Whereas in Windsor-Essex, where the effect of the force majeure clause was to provide the tenants with a rent abatement, the force majeure clause in the subject lease has the precise opposite effect.
[30] The force majeure clause having been engaged because of the government’s COVID-19 restrictions, and payment of rent being an “act under the lease”, Gap, while relieved of other obligations under the lease, is expressly not excused from paying rent despite its ability to operate its business being significantly impeded.
[31] This outcome is consistent with the court’s recent decision in Durham Sports Barn Inc. Bankruptcy Proposal, 2020 ONSC 5938. In that case, the plaintiff sought relief from the payment of rent between March 2020 and July 2020 because it was unable to operate its sports and athletic facility due to the government’s lockdown measures.
[32] Gilmore J. noted that while the force majeure clause in the lease excused the landlord from performance of an obligation under the lease, it did not relieve the tenant from the obligation to pay rent: Durham, at para. 57. As such, the tenant was unable to rely on the force majeure clause to excuse its failure to pay rent during the government-ordered lockdown. Additionally, it could not rely on the landlord’s inability to provide quiet enjoyment of the leased premises during the lockdown because, unlike rent, the force majeure clause relieved the landlord of that obligation.
Frustration of Contract
[33] The defendant argues that the legal doctrine of frustration of contract applies to excuse it from paying rent while the government restrictions prevented it from operating its store at the leased premises.
[34] Specifically, Gap asserts that the lease was frustrated because (1) the government’s COVID-19 restrictions “made the Lease radically different from that which was undertaken under the Lease when it was signed”, and (2) performance of the lease, by ordinary operation of Gap’s retail store at the premises pursuant to the lease’s “use” clause became impossible as a result of the government’s COVID-19 restrictions.
[35] Braebury counters that because the force majeure clause is applicable, Gap can have no recourse to the doctrine of frustration, since it only applies to situations that were not contemplated by the parties. The existence of an applicable force majeure clause necessarily means that events covered by it were contemplated by the parties at the time the contract was made.
[36] In Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58, [2001] 2 S.C.R. 943, the Supreme Court stated at para. 53:
Frustration occurs 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’.
[37] When the doctrine of frustration applies, “the court is asked to intervene … to relieve the parties of their bargain because a supervening event … has occurred without the fault of either party.”: Naylor, at para. 55.
[38] Gap asserts that the unforeseen supervening event is the government’s COVID-19 restrictions, which prohibited it from operating its store during the government’s shutdown of non-essential retail businesses.
[39] Setting the force majeure clause to one side, I might agree that government restrictions could be considered a supervening event that was not contemplated or foreseeable, and that occurred through no fault of either party.
[40] However, taking the approach articulated in Naylor, the question is whether the COVID-19 restrictions radically altered the terms of the lease. While this event did prohibit Gap from operating its retail store temporarily between March 2020 and May 2020, and then at reduced capacity until September 2020, it is not clear that this would be sufficient to engage the doctrine of frustration.
[41] Furthermore to radically alter the terms of the lease, the supervening event must not merely increase the burden of satisfying the contractual obligations, but must “affect the nature, meaning, purpose, effect and consequences of the contract so far as concerns either or both parties.” : Wilkie v. Jeong, 2017 BCSC 2131, 6 B.C.L.R. (6th) 119, at para. 17, quoting Folia v. Trelinski (1997), 1997 CanLII 469 (BC SC), 14 R.P.R. (3d) 5 (B.C.S.C.) at para. 18.
[42] Gap asserts that the purpose for entering the lease was to operate the premises as a retail store. However, under the terms of the lease, Gap was not required to do so at all times. Clause 3.01 of the lease relates to the use of the premises and states:
The Premises may be used for any retail purpose or purposes. Tenant shall have no obligation to operate any business nor conduct any business nor conduct any use in the premises either initially or at any time during the terms of this lease…
[43] Given that Gap was not required to operate its retail store under the lease, its inability to do so cannot be said to have radically altered the lease’s terms, turning it into something completely different than what was intended by the parties entering the lease. By contrast, if Gap had been required under the lease to operate the premises as a retail store, its inability to do so by a supervening event may have risen to the level of radical change required to engage the doctrine of frustration.[^3]
[44] In addition, the cases suggest that to frustrate a contract, the supervening event must be a permanent, as opposed to a temporary, setback: see Manufactures Life Insurance Co. v. Huang & Danczkay Properties, [2003] O.T.C. 717 (Ont. S.C.), at paras. 45-46.
[45] While some COVID-19 restrictions remained in place throughout the remaining lease term, during that time non-essential retail locations were only ordered to shut down between 24 March 2020 and 26 May 2020[^4]. At all other times, Gap would have been able to operate its store subject to remaining public health measures. While this was not an insignificant disruption to Gap’s retail operations, it does not appear that those disruptions occurred to the extent that the lease was frustrated.
[46] In any event, I agree with the plaintiff that the existence of the force majeure clause clearly shows that the parties to the lease contemplated situations in which, due to circumstances beyond the control of the parties, performance of obligations under the lease would be delayed, hindered, or prevented, and made provision in their contract accordingly.
Disposition
[47] The economic effects of the pandemic and the resulting restrictions have doubtless been felt by both commercial landlords and tenants. Cases like this ask courts to decide how the burdens of diminished economic activity should be distributed between commercial parties. Here, the parties turned their mind to what their respective responsibilities would be in the event that a range of circumstances beyond their control delayed, hindered, or prevented them from the performance of any act required by the lease.
[48] Summary judgment is, accordingly, granted in favour of the plaintiff for the amount of arrears of rent owing.
[49] The parties committed to exchanging costs summaries following the hearing. I am presumptively of the view that the plaintiff should have its costs of the motion and of the action on a partial indemnity scale. If the parties are unable to agree on the issue of costs, I may be spoken to.
Graeme Mew J.
Released: 20 September 2021
COURT FILE NO.: CV-20-322 (Kingston)
DATE: 20210920
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Braebury Development Corporation
Plaintiff
– and –
Gap (Canada) Inc.
Defendant
REASONS FOR JUDGMENT
Mew J.
Released: 20 September 2021
[^1]: CCIM Institute, “Guidance for Rent Relief Requests and Other Commercial Real Estate Tenant/Landlord Issues”, online, https://www.ccim.com/rentrelief/.
[^2]: In its written submissions the defendant also argued that (a) Gap was legally discharged from payment of any rent over the balance of the term of the lease by Braebury’s breach of the covenant of quiet enjoyment resulting from the pandemic and government pandemic restrictions; and (b) Gap was legally discharged from payment of any rent over the balance of the term of the lease by Braebury’s breach of its duties of good faith and fair dealing by insisting on timely payment in full of rent, refusing to negotiate and refusing to make any allowance for the pandemic and government pandemic restrictions. These grounds, although not formally abandoned, were not pursued in oral submissions.
[^3]: The distinction between leases requiring a tenant to operate its business versus those that only allow it seems relevant in the cases on force majeure and COVID-19. While not directly on point as the court was considering the doctrine of superior force under the Québec Civil Code, in Hengyun International Investments Commerce Inc. c. 9368-7614 Québec inc., 2020 QCCS 2251, the court held that the landlord was unable to provide peaceable enjoyment of the leased premises while the tenant was unable to open its gym due to the government’s COVID-19 restrictions because the lease specified the premise was to be operated “solely as a gym”: para. 101. The fact that the tenant had access to the leased premises and was storing its equipment there during the lockdown was insufficient to demonstrate that the tenant had peaceable enjoyment of the property. While this is not in the context of frustration of contract, it shows that the specified purpose in the lease needs to be considered when determining whether the parties were able to satisfy their obligations under the lease.
[^4]: The government’s second lockdown, which started on 26 December 2020, would also have overlapped slightly with the end of the lease term (until 31 December). Gap had, by then, already vacated the premises.