We wrote about the issues of frustration and force majeure in our previous post called “Force Majeure and Frustration in Contracts Following the COVID-19 Pandemic”
Force majeure clauses are dealt with through the law of contract. Such a clause needs to be an express term and will not be implied. These clauses act as a defence, seeking to relieve one party from their performance obligations should certain circumstances beyond their control occur. The clause will be strictly construed and must speak to the circumstances that actually occurred in a particular set of circumstances.
The doctrine of frustration is a defence at common law. It is a difficult defence to advance because the required elements are difficult to establish. This is often the motivation for a force majeure clause; to escape liability due to frustration of contract when circumstances occur which inherently frustrate the contract for at least one party.
We predicted the use of both defences in cases where the pandemic has resulted in the inability, or reduced ability, of parties to fulfil their various contractual obligations. Many businesses, particularly non-essential businesses, have largely been prevented from operating or forced to operate in a modified way, due to the pandemic.
Should a Business Have to Pay Rent When it is Forbidden From Operating?
A recent Ontario decision has addressed a commercial tenant’s attempt to use force majeure as a basis for escaping rent obligations during a forced shutdown. These cases will largely be dependent on the specific circumstances, as well as the wording of any relevant clauses in an existing contract, so the result cannot be applied as a general rule.
The tenant ran an athletic performance business on leased premises. The tenant and landlord entered into a 10-year lease term in 2015. The tenant had difficulty paying rent and additional expenses to the landlord over the years, owing to cash flow problems, and the landlord’s failure to provide advance notice of additional expenses, which included items such as property taxes. As a result, the tenant was in debt to the landlord in an amount totalling over $530,000 by the end of 2019.
The business was closed from March 18th, 2020 until May 25th, 2020. A phased re-opening began on May 25th, 2020 and continued until July 25th, 2020. The business did not resume full operations until August 2020. This was the result of public health measures ordering the closure and phased re-openings of non-essential businesses due to the COVID-19 virus.
Given the situation, the tenant had even more trouble paying its rent and ceases payments completely after January 2020. The tenant felt that the pandemic was not its fault and certainly prevented it from earning the revenue needed to pay the rent. Therefore its solution was to seek to not pay any rent for the period of the complete shutdown and only pro-rated rent proportionate to the times it was allowed to phase in an opening. The landlord felt otherwise. It wanted to be paid for all the rent that was owed.
Tenant: Shutdown Was Force Majeure Causing Frustration of Contract
As expected the tenant attempted to use the defence of frustration. The closure was due to a “force majeure” or “Act of God”. The lease agreement did contain a force majeure clause, however, in the contract, the clause excused the landlord from its duty to provide the tenant with quiet enjoyment of the premises. The tenant claimed that the force majeure of the pandemic closure prevented it from quiet enjoyment of the property.
Court: Force Majeure Clause Protected Landlord; Not Tenant
The court determined that despite the fact that the shutdown was not the tenant’s fault, this did not mean that the “covenant of quiet enjoyment” had been breached. The court found in favour of the landlord. This was due to the following findings:
- The covenant of quiet enjoyment only arises after payment of the rent and without payment, the obligation is excused until the rent is fully paid;
- The “force majeure” clause in the lease relieved the landlord from the covenant but did not relieve the tenant of the obligation to pay rent
This case highlights the importance of careful review of a commercial real property lease. The force majeure clause in this case exisited solely for the benefit of the landlord and as a result, it offered the tenant no relief with respect to the payment of rent, even in the face of a global pandemic.
If you are involved in litigation resulting from the effects of COVID-19 on your business or expect to be, the exceptionally skilled corporate litigation lawyers at Milosevic & Associates in Toronto can help. Over the years, our team of lawyers has successfully fought for our clients’ rights and our impressive track record speaks for itself. Please contact us by calling 416-916-1387 or connect online for a consultation.