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Executive Summaries Apr 6, 2020

COVID-19: A Practical Overview of Commercial Leases in a Pandemic Era

The COVID-19 pandemic, more specifically further to ministerial decrees and orders, could be considered in commercial leasing as a force majeure due to an external, unpredictable and irresistible event.

However, its enforcement remains a particular situation and must be analyzed in light of the circumstances and the contractual provisions governing the parties. Indeed, the notion of force majeure[1] is not a matter of public policy and the parties may therefore contractually contravene such force majeure or ease its rules and effects.

This paper is intended to provide a practical overview of the relationship between landlords and tenants, their respective rights and their application in this exceptional context.

Force Majeure in the Particular Case of Commercial Leases

The concept of force majeure is one of liability exemption which, by its nature, has a restrictive interpretation and an exceptional application. Each case is a specific case to be decided by the Court.

Such concept of liability exemption is not intended to allow an individual to be easily released from its contractual obligations, but rather to provide a legislative framework to deal with an exceptional situation beyond the parties' control which they could not avoid, prevent or foresee upon signing the contract. By definition, in the event of force majeure, the debtor of the obligation has not failed to comply, but is unable to do so.

Article 1470 of the Civil Code of Québec (“C.C.Q.”) defines force majeure as follows : “(...) an unforeseeable and irresistible event, including external causes with the same characteristics”. The unpredictability and irresistibility criteria are cumulative. According to article 1693 C.C.Q., if the debtor proves that there is a case of force majeure, he may be completely exonerated from his obligations in the event of an absolute and definitive inability to comply with the agreed obligation. The event which merely makes it more difficult, more perilous or more expensive for the debtor to execute the obligation, without being impossible, is not considered an event of force majeure. Indeed and as more fully explained herein, since articles 1470 and 1693 C.C.Q. are not of public nature, the parties may provide that the debtor bears the risks arising from a possible event of force majeure or anticipate its effects between them. 

A temporary impossibility however suspends the fulfilment of the obligation and releases the debtor from liability for the delay in fulfilment only but does not release him for the fulfilment of the obligation itself. Once such event comes to an end, the debtor must therefore resume fulfilment of the obligation. In such cases, the effect of force majeure has only a suspensive effect which may justify the delay or even postpone fulfilment of the obligation, with no possibility of claiming damages resulting from the delay.

The particular situation arising from COVID-19 and the ministerial decrees and orders[2] to close nonessential businesses could be considered events causing a temporary impossibility, a partial impossibility or a definitive impossibility to respect the obligations provided in the lease.

For instance, imagine the case where access to leased premises is possible for the purposes or use granted by the lease, but by decree, any gathering of more than two individuals is prohibited, there is not an impossibility to act, but only a limitation of operation for technical reasons that are partially limiting the enjoyment of the leased premises.

In certain situations and since the parties are bound to mitigate their damages, a rent reduction proportional to what the tenant has been unable to mitigate could be a possible solution. Since the obligation of the landlord to provide the enjoyment of the leased premises is partially affected by the impossibility to act, the tenant could pretend to the correlative and proportional exemption of its own obligations.

However, in the absence of a contractual clause in the lease to that effect, the tenant should not withhold payment of rent without the landlord's explicit agreement, because such rent withholding could lead to a default.

The Terms and Conditions of the Lease Prevail

Remember that in order to ensure the stability of contracts and that the parties' intent are preserved, and unless there is a breach of public nature, they are bound by the contract. The law provides clarification or interpretation of what the parties have provided or intended to provide when there is an ambiguity. The courts shall only act with consideration and within the limits of their powers.

Because the provisions of the C.C.Q. concerning commercial leasing are not of public nature, the parties may consequently agree to apply them separately and thus contravene to articles 1854, 1858, 1859, 1861, 1863 C.C.Q. Other than in the event of gross negligence or wilful misconduct, the parties may even exclude, limit and contractually soften the liability relief regime.

Article 1470 C.C.Q. on force majeure is also not of public nature and the parties may therefore contractually contravene or soften the rules between themselves. Moreover, it is common practice for a "net" commercial lease to be a landlord friendly lease and where, unless there is gross or intentional negligence and subject to the obligations that the landlord agrees to bear, the tenant must bear all the costs and risks related to the lease.

In a "net" lease, some of the landlord's and tenant's obligations are regular, due and payable and must be fulfilled on a timely basis notwithstanding a temporary impediment (such as, for example, payment of operating costs (heating, electricity, etc.), real property taxes, insurance, etc.); more importantly, such temporary impediment is not a definitive and permanent impossibility as might be contemplated, for example, in the case where the leased premises are destroyed.

It’s common practice in a commercial lease, in the case of " excusable " delays, to provide a clause to the effect that only the fulfilment of an obligation is postponed for as many days as the number of days of the delay, although the parties (more often the tenant than the landlord) are never, if not rarely, released or discharged from their financial obligations, which they will have to fulfill without delay. The application or not of force majeure, as well as its effects, must be analyzed according to the contract.

Force Majeure is often defined as inevitable/excusable delay or Acts of God. The parties must therefore ascertain whether their lease includes such a clause.

Although each case is unique, the following is an example of what can happen when the parties are in the construction phase of leasehold improvements :

  • it is necessary to determine the deadline that the landlord must meet with respect to the delivery date of the leased premises so that the tenant can complete the work prior to the commencement date of the term and of the payment of rent, as well as the improvement period granted to the tenant to carry out the work;
  • should the landlord be unable to meet the delivery date for taking possession of the leased premises and leasehold improvements by the tenant, the landlord may have anticipated that the date will be delayed and the date of taking possession, the starting date and the date of payment of rent will be delayed accordingly;
  • has the tenant negotiated a way out should the landlord fail to meet an outside date for the delivery or for its own prepossession work?
  • financial obligations due but not directly related to the impossibility to act could remain payable, whether or not the work, date of possession or beginning of the lease is delayed, postponed;
  • should the leasehold improvements be reasonably completed after the end of the quarantine period and before the date initially scheduled for the commencement date of the lease, rent could be due as initially scheduled, notwithstanding that the completion of such work were more expensive.

Careful analysis of the lease clauses and its mechanism must be made to determine whether force majeure applies and the potential impact of same on each party's performance.

Alternatives to Ensure the Stability of Your Contract

Should there be a clause of force majeure in the lease, remember that its interpretation and applicability remain subject to the Court's assessment and discretion. The exceptional circumstances and uncertainties arising from COVID-19 and the ministerial orders must also be considered when assessing the risks and costs before forcing a judicial debate. The contracting parties should, in accordance with the guiding principles of civil procedure, consider the options and alternatives available to them in order to provide for the stability and durability of the contractual relationship once the crisis is over, provided that such a solution is possible and beneficial when compared to the commercial risk of litigation.

As mentioned above, in cases where the COVID-19 pandemic may result in the application of force majeure, in a commercial leasing context, it will a fortiori result in an absolute impossibility, temporary or definitive depending on the nature and scope of the contracting parties' obligations.Faced with the delay, the debtor of the obligation could therefore be exonerated from his responsibility in the performance of his obligation or the performance in itself of the promised service. In the case of a temporary impossibility, once the event of force majeure ceases, the obligations resume.

In any event, the parties should seek advice and make the necessary efforts to consider whether other solutions may be available to compensate for losses arising from the situation caused by the state of health emergency decrees, such as insurance coverage for business interruption (provided hopefully the risks covering the losses will include events resulting from an epidemic, pandemic or government decisions).

Furthermore, the federal and provincial governments have announced economic assistance measures for businesses, including tax relief, salary subsidies, a credit access program including an emergency account, etc. Provided they are applicable and available, these measures could help reduce the economic impacts of both parties, which may include a reduction of their cash flow.

For 25 years, BCF's mission has been to support our local businesses. We understand the issues you face and our Litigation and Commercial Leasing teams are available to help you benefit from the resources at your disposal to minimize the financial impacts of the COVID-19 pandemic. Please do not hesitate to contact us for more information.

[1] Also defined as "Superior Force"; [2] Decree no 177-2020 (March 13, 2020); Decree no 222-2020 (March 20, 2020), also see Order number 2020-008 of the Quebec Minister of Health and Social Services dated March 22, 2020;

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