Once again the courts have confirmed that commercial tenants must pay their rent, despite arguments about the effect of COVID-19.
In a recent decision, Cherry Lane Shopping Centre Holdings Ltd v. Hudson’s Bay Company ULC, 2021 BCSC 1178, the Supreme Court of British Columbia found that the provisions of the lease requiring Hudson’s Bay to pay rent were “clear, unequivocal and unambiguous.” The court dismissed the tenant’s set-off argument based on the effect of the pandemic.
HBC is a tenant in the Cherry Lane Shopping Centre in Penticton, where it has leased retail space since 1996. In May 2020, HBC wrote to the landlord advising that they would not be paying rent due to the COVID-19 pandemic. Each month that HBC failed to pay rent, the landlord issued a notice of default demanding payment. On November 9, 2020, the landlord issued a notice to quit and a notice to terminate the lease in accordance with the terms of the lease.
Both parties applied to court. The landlord sought a declaration that the lease had been terminated and that HBC was in wrongful possession of the premises. HBC argued that their non-payment of rent was justified because the landlord was in default of the lease for, amongst other things, failing to provide a “high quality” shopping centre (specifically by not providing safety features or marketing to protect tenants from the effects of COVID-19). HBC sought set-off and interlocutory relief prohibiting the landlord from terminating the lease or re-entering the premises and relief from forfeiture.
Accordingly, the case raised issues of how the economic consequences of the pandemic should be allocated between landlords and tenants. Notably, HBC has employed similar tactics in leases across Canada with limited success, as discussed in a previous blog post.
The parties adduced expert evidence with respect to what constituted a “high quality” shopping centre. However, the court found that the landlord’s lease required the tenant to continue to pay rent in any event. Further, the “Unavoidable Delay” clause cited by HBC clearly did not entitle HBC to suspend rent payments. Accordingly, subject to the claim for relief from forfeiture, the court found that the landlord was entitled to a declaration that the lease had been terminated, and an order for possession.
However, the court granted relief from forfeiture on the basis that the loss of the premises would be disproportionate, given the length of the tenancy and HBC’s substantial improvements. The court ordered that the lease continue, conditional on payment of all outstanding and ongoing rent.
The decision is a reassuring one for landlords, emphasizing the high threshold that a tenant must meet in order to demonstrate that they are entitled to a rent abatement or set-off arising from generic effects of COVID-19. The case simultaneously reiterates the importance of well-drafted lease agreements, with a large part of the landlord’s success derived from the court’s interpretation of its lease terms.
If you have any questions about how commercial tenancy is affected by COVID-19, please contact a member of our Real Estate Group.
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