Can commercial tenants suffering the effects of the pandemic on their business unilaterally stop paying rent?
In a recently reported decision of the B.C. Supreme Court, Hudson’s Bay Company ULC v. Pensionfund Investment Ltd., 2020 BCSC 1959, the court attempted to balance the competing and urgent interests of commercial landlords and tenants during the current pandemic. Its answer is clear: whatever arguments there are, the tenant must still pay its rent.
Madam Justice Fitzpatrick exercised the court’s power to grant injunctive relief and the extraordinary remedy of relief from forfeiture, to allow a tenant to continue operating where it was in arrears, and set terms for the immediate payment of the arrears and rent going forward.
Hudson’s Bay is a tenant at the Coquitlam Centre Mall. Customers arrived to find the doors shuttered and a Notice of Termination posted on the door on November 21. Hudson’s Bay had stopped paying rent in April 2020. Negotiations with the landlord had broken down, and the landlord terminated the lease for non-payment of rent.
Hudson’s Bay sued immediately, alleging that the landlord was itself in breach by failing to maintain the Mall in first class condition by not taking steps to upgrade the Mall to address the pandemic concerns (installing air filters, touchless technology, etc.). Hudson’s Bay also relied on a particularly broad “unavoidable delay” clause in the lease (similar to a force majeure clause) as suspending its obligation to pay rent during the pandemic.
The B.C. Supreme Court granted an interim injunction preventing the landlord from terminating the lease until the dispute can be substantively heard in January 2021, effectively giving Hudson’s Bay a stay of execution over the financially critical holiday period. However, the court also ordered that the tenant pay 50% of all rent and arrears to the landlord, with the remaining amount paid into trust. The payment terms ordered were noted by the judge to mirror orders in two Ontario cases involving Hudson’s Bay.
The court opted to preserve the status quo both in allowing the continued operation of the tenant and securing the unpaid amounts in full. Unless the tenant’s arguments succeed, this will mean that the landlord is paid in full. In practice, the judge fashioned a practical response to an urgent situation, and sent the parties back to the negotiating table or to a further hearing.
In doing so, the court has shown a willingness to weigh in on commercial matters and decide the terms on which sophisticated parties must do business during the pandemic. It may be significant that the judge hearing the matter is very experienced in receivership and foreclosure matters, which involve the court actively managing ongoing commercial enterprises. It remains to be seen whether other courts will take this active approach in similar cases.
For commercial real estate practitioners, the key takeaways are:
(1) broad clauses relating to delay and frustration should be reviewed carefully;
(2) the courts are willing to intervene in the relationships of even sophisticated commercial parties;
(3) the courts have not, as yet, accepted the argument that a landlord must take specific pandemic-related measures in order to meet the standard of a first class shopping centre.
We will continue to monitor this ongoing case.
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