Commercial Leases: Where Do Things Stand Since the Pandemic?

Québec laws governing commercial leases have evolved considerably over the past two years and the Courts have recently had to rule on various cases related to the forced closure of businesses and restaurants during the pandemic.

Here is an update on the current state of the law regarding the measures taken by the Québec government to restrict several Québec businesses’ commercial activities during the pandemic.

Does the Closing of Businesses Qualify as a Force Majeure?

Force majeure, as set out in section 1470 of the Civil Code of Québec (“C.C.Q.”), is not a matter of public order. As a result, the parties to a contract may negotiate and modulate its scope. As explained in our previous article, each contract must therefore be analyzed to determine whether a force majeure clause is provided for and what it covers.

Some contracts also include a limited list of events that qualify as force majeure. For example, “pandemics”, “epidemics” or “government decrees” may be included in such a list.

In this context, the COVID-19 pandemic may, depending on the case, be considered as a force majeure event. Such an analysis is based on the absolute or partial inability of the debtor to fulfill its obligation from which it hopes to be relieved, meaning whether the event is unforeseeable, irresistible and external. Moreover, if the parties made a commitment in the midst of a pandemic, which means with full knowledge of the facts, then the claim that the event was unforeseeable can hardly be made.

The Hengyun International Investment Commerce Inc. Case

Hengyun International Investment Commerce Inc. v. 9368-7614 Québec Inc. is an extremely relevant decision in the specific context of commercial leases and is one of only two decisions rendered on the merits in this regard. For more information, please read our analysis in our article on the subject. This ruling reiterates that the tenant’s ability to pay is not always relevant in determining whether there is force majeure. In fact, it was found that an objective assessment of the irresistibility criterion was necessary to determine whether or not there was force majeure.

In this case, this means determining the landlord’s ability or inability to provide peaceable enjoyment of the leased premises. The Court found that such inability could include government orders to close businesses that were not performing “essential” activities. Therefore, the Court believes that when the landlord is unable to provide such full enjoyment, it cannot insist that the tenant meet its correlative obligations, including paying rent.

In this situation, the lease binding the parties included a force majeure clause. The Court, reiterating a principle stated by the Court of Appeal in other contexts, added that the interpretation of a force majeure clause in a lease cannot result in the landlord completely omitting its obligation to provide full peaceable enjoyment of the leased premises. Such a clause would be ineffective and might, at least, result in a proportionate reduction of the rent to be paid. Though section 1854 of the C.C.Q., which provides for the obligation to ensure peaceable enjoyment of the leased premises, is not of public order, and this obligation can be adjusted to the parties’ satisfaction when covered by a force majeure clause, the wording of the clause cannot nullify the obligation to provide peaceable enjoyment of the premises.

This case was settled out of Court and thus remains relevant.

The Redbourne 4150 Case

On the other hand, in Redbourne 4150 v. Westmount, the Superior Court ruled that there was no force majeure since the tenant did not prove that, due to the pandemic, he was unable to operate his business and generate revenue. It was indeed a case where evidence showed that, even though he had lost income due to the health restrictions, the business was still in operation during the period for which the tenant was refusing to pay rent.

This decision does not really contradict the Henguyn decision, which dealt with the complete closure of the business. It should also be noted that the Redbourne 4150 decision was made at the preliminary stage of the safeguard order. At the time of this decision, several other decisions made at that stage had stated that it is at trial that the Court must address the question of whether the government orders related to COVID-19 constitute force majeure and what their consequences are.

Can the Closure of Businesses Be Considered a Legal Disturbance?

While this issue was not raised by the parties in Hengyun, the Court did mention ex officio that the decrees ordering the pandemic-related closures could constitute a legal disturbance, as per section 1858 C.C.Q., guaranteed by the tenant. However, this is an incidental finding by the Court, which made it clear that such a finding would not change its analysis or its conclusion.

The Recent Lechter (Montreal Professional Building) Decision 

The argument of legal disturbance based on section 1858 C.C.Q. was raised in the Lechter (Montreal Professional Building) v. Keurig Canada Inc. case, in which the final decision rendered on May 9, 2022 is of great interest. This is the first decision on the merits, since Hengyun, dealing with the obligation to pay rent under a commercial lease during the mandatory business closure period due to the pandemic.

The case was about a tenant operating a café in a commercial building who decided to completely shut down his business following the government’s decree ordering the closure of dining rooms in Québec restaurants. The tenant wished to be relieved of its obligation to pay rent for the duration of the decree.

Without defining the government decrees as force majeure, Justice Conte addressed the question of whether these decrees could be considered a legal disturbance within the meaning of section 1858 C.C.Q., which she defined as “the loss of enjoyment that a tenant suffers because of a third party exercising a real or personal right that it has or claims to have in the leased property”. The existence of a legal disturbance would be sufficient to justify the tenant not paying the rent for the duration of his loss of use.

In its arguments, the Court explained that the legal disturbances that have been found in the case law are limited to zoning by-laws or public law standards that are similar to those by-laws. Accordingly, sanitary measures cannot be considered a legal disturbance because they do not specifically affect the leased property as do zoning by-laws which may affect certain properties “by their geographical location or specific attributes”. Instead, sanitary orders restrict specific activities and services. For these reasons, the Court found that these orders did not meet the jurisprudential definition of a legal disturbance and did not allow the tenant to refuse to pay rent for the period during which the business was closed.

Needless to say, the tenant’s activities are directly related to the use of the leased premises. Therefore, even though the sanitary orders are not directly aimed at the leased premises, it appears that if there is a substantial limitation or impediment to carrying on any activity whatsoever, then the regulatory standard set by the government inherently affects the enjoyment of the leased premises, especially if the tenant chose its premises because of the traffic or notoriety of their location. We believe it is appropriate to determine whether the full rent charged by the landlord to the tenant really reflects the full use of the leased premises.

Now, Where Do We Stand?

While the Court’s reasoning in Lechter makes sense from a legal perspective, its coexistence with the Hengyun decision has left commercial tenants in a puzzling position. Quebec courts could reach contradictory conclusions in a similar factual context, strictly based on the path that the commercial tenant will choose to take in its litigation.

The rejection of the “legal disturbance” argument in Lechter brings us back to the “force majeure” argument. As stated above, where there is a force majeure clause in a binding lease, the outcome of that claim will depend on its wording. The clause could include sanitary decrees as part of its application, or it could be declared inoperative if it has the effect of nullifying the landlord’s obligation to ensure peaceable enjoyment of the premises.

The law thus requires the commercial tenant to make far-reaching decisions when making its case. From a commercial standpoint, the Hengyun and Lechter decisions are unfortunate in that they do not, at this time, stand on common ground. However, we can certainly count on the Québec courts to come up with a decision that will be addressing both arguments sooner rather than later and that will give us a complete picture of the case law on the obligation to pay rent on a commercial lease during a mandatory business closure caused by the pandemic.

For any questions regarding commercial leases and the consequences of sanitary restrictions on the parties’ obligations under such a contract, do not hesitate to contact our commercial litigation team, who will gladly advise you.