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Executive Summaries Jul 30, 2020

Hengyun International Investment Commerce Inc. Decision: A New Approach to Landlord-Tenant Relationships Arising from the Pandemic

On July 16, 2020, in the matter of Hengyun International Investment Commerce Inc. v. 9368-7614 Québec inc., the Superior Court of Québec presided by the Honourable Justice Peter Kalichman, J.S.C., provided what appears to be a new interpretation of the effects of force majeure clauses in commercial leases. 

Subject to being reviewed on appeal or distinguished, this decision set forth a new approach to the relationship between a landlord and its tenant, in a context where the contract binding them contains provisions exonerating the landlord from its failure to perform certain obligations in the event of force majeure, in particular the peaceable enjoyment of the leased premises, while obliging the tenant to continue paying his rent and related costs without delay.

In its defence, 9368-7614 Québec inc. ("Québec Inc." or the "Tenant") alleged that it was exonerated from paying rent for the period during which it had been prevented from operating its business because of the government decrees closing all non-essential businesses. However, the decision of the Superior Court of Québec (the "Court") was not based on the arguments submitted by the Tenant. The Court provided a new ex officio interpretation of the effects of force majeure in the economics of the contract in the context of a pandemic and government-ordered closures. It also analyzed the scope of the force majeure clause between the parties by indicating how it is inoperative in the specific context of this case.

The Context 

A five-year lease was entered into between Hengyun International Investment Commerce Inc. (the "Lessor") and VitalMaxx Fitness Centre Inc. ("VitalMaxx") on November 3, 2017 (the "Lease"), for the operation of a fitness centre (the "Gym"). Québec Inc. claims that the Lease was transferred to it following VitalMaxx’s bankruptcy.

The Lessor sought the termination of the Lease and the payment of outstanding sums. Québec Inc. claimed that the Lease could not be terminated, that it did not have to pay the rent in full and that the Lessor is indebted for damages it caused to the Tenant over several years resulting from, among other things, water infiltration and air conditioning problems in the rented premises.

Québec Inc. received a government loan in connection with the COVID-19 pandemic of approximately $40,000, but allegedly had not used it to pay the rent.

The Lease contains a force majeure clause that reads as follows:

"13.03 Unavoidable delay

Notwithstanding anything in this Lease to the contrary, if the Landlord or the Tenant is delayed or hindered in or prevented from the performance of any term, obligation or act required hereunder by reason of superior force, strikes, lockouts, labour troubles, riots, accidents, inability to procure materials, restrictive governmental rules, regulations or orders, bankruptcy of contractors, or any other event whether of the foregoing nature or not which is beyond the reasonable control of the Landlord or the Tenant, as the case may be, then the performance of such term or obligation or act is excused for the period of the delay, and the party so delayed shall be entitled to perform such term, obligation or act within the appropriate time period after the expiration of such delay, without being liable in damages to the other.

However, the provisions of this Section 13.03 shall not operate to excuse the Tenant from the prompt payment of the Base Rent or Additional Rent or any other payments required by this Lease.(underlined by the Court)"

We note that under the terms of this clause, the Tenant must pay the base rent, additional rent and any other payment required by the Lease, even if the Lessor is prevented from performing one of its obligations due to force majeure.

10 Key Takeaways from this Decision

Without conducting a full review of all the issues in dispute, the following are the highlights arising from this decision.

1. The Court determined that the COVID-19 pandemic and the government decrees ordering the closure of businesses having activities deemed as "non-essential", including fitness centers, constitute an unforeseeable event within the meaning of article 1470 of the Civil Code of Québec ("C.C.Q.").

2. Québec Inc. pleaded that it could not meet its financial obligations pursuant to the Lease, such as the payment of the rent, because the government decrees prevented it from generating the necessary revenues. The Court held this interpretation too subjective and determined that the Tenant's ability to pay is not relevant for the purposes of qualifying an event as one of force majeure.

3. According to the Court, an objective assessment of the criteria of irresistibility is required in order to determine whether an event of force majeure has occurred. It must therefore be determined whether the Lessor is prevented from providing peaceable enjoyment of the leased premises, in particular with respect to article 1854 C.C.Q., while considering that the Lease specifically limits the use of the leased premises to the operation of the Gym, which is one of the activities prohibited by government decrees.

4. The Court also mentioned in orbiter that government decrees ordering the closure of businesses whose activities are deemed "non-essential" can be considered a disturbance to the full enjoyment of the leased premises guaranteed under article 1858 C.C.Q.

5. The Court concluded that, as a result of said decrees, the Lessor could not perform its principal obligation, namely providing Québec Inc. with peaceable enjoyment of the leased premises. Thus, it could not insist that the Tenant pay the rent pursuant to article 1693 C.C.Q.

6. The Court recognized that article 1854 C.C.Q. is not of public order and that the parties may contravene or vary its effects contractually. Although the Lessor argued that this is precisely what clause 13.03 of the Lease provides for, the Court did not agree. In the Court's view, the clause contemplates obligations the performance of which is delayed; not obligations that cannot be performed at all. According to the wording of clause 13.03, the party unable to perform an obligation is excused only for the delay of its non-performance and has the right to perform it subsequently.

7. In the event that the interpretation of this clause’s application were erroneous, the Court specified that a clause cannot be read in such a way as to fully and completely relieve the Lanlord of its principal obligation under the Lease, which is to provide the peaceful enjoyment of the premises. According to the Court, the parties to a lease can agree to limit the impact of a landlord’s failure to provide peaceful enjoyment but cannot agree to exclude it altogether.

8. In the circumstances and considering that the operation of a fitness centre is prohibited by decree, the Court was of the opinion that the total impossibility of peaceable enjoyment of the premises constituted an event of force majeure, thus reducing proportionally the rent payable for the months of March and April 2020.

9. In the event that the amount of unpaid rent is not equal to or greater than that from which the Tenant may be exonerated, the Tenant shall remain in default for the unpaid corresponding portion.

10. The Lessor has not alleged extrajudicial termination under the Lease and has instead sought judicial termination. The Lessor therefore had to prove, in addition to a default under the Lease, a serious prejudice to terminate the Lease, a burden that it did not meet in this case.

This decision is particularly interesting since, in order to assess whether an unforeseeable and irresistible event constituting force majeure has occurred, the Court based its decision on the obligations of the Lessor, and not those of the Tenant, even though it is the latter who is liable for the rent payment.

According to article 1683(2) C.C.Q., the burden of proving force majeure lies with the debtor of the obligation. However, in this decision, although force majeure was invoked by the Tenant, the Court decided that an objective interpretation of the situation required the Lessor to prove that it could be released from its principal obligation, namely providing peaceable enjoyment of the premises, and that the Tenant was consequently released from its correlative obligation to pay rent. Force majeure is analysed from the point of view of the obligation to provide the Tenant with peaceable enjoyment of the rented premises. Also, despite a specific clause in the Lease, the exercise carried out by the Court appears to be based on an assessment of the contract’s economics and the effects between the parties rather than on an assessment of the burden of proving force majeure that belongs to the party seeking relief from the obligation to pay rent. We understand that the ultimate effect of both the contractual clause and the situation guided the Court in its so-called objective ex officio assessment.

It is also important to note that neither the Tenant’s capacity to pay nor the government assistance was taken into account by the Court in its assessment of force majeure and its effects between the parties.

Furthermore, some comments arising from the decision are worth mentioning:

  • The Court completely exonerated the rent payment during the period of impossibility, without specifying the portion of the rent that would have been payable despite the restricted access to the leased premises.
  • The Court recognized the possibility of an extrajudicial termination if a clause to that effect is provided for in the lease and if there is a default, particularly where the rent was withheld in full although only a portion could be deducted. In such a scenario and if the lease provides for it, the tenant could be in default and the landlord could allege extrajudicial termination of the lease without having to prove serious prejudice.

In conclusion, it should be pointed out that each case remains different and must be analysed in light of the particular circumstances that characterize the relationship between the parties and the wording of the lease. Our Commercial Leases team will closely monitor this decision and remains available to advise and support you.

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