GAP in the Contract? COVID-19 Does Not Excuse a Tenant from Paying Rent
By now, we have become all too familiar with the hardships that businesses in Ontario have had to endure in the face of the ongoing COVID-19 pandemic. In a recent decision, Braebury Development Corp v. Gap (Canada) Inc., 2021 ONSC 6210 the Ontario Superior Court of Justice ruled that neither a force majeure clause nor the doctrine of frustration excused a tenant from its obligation to pay rent.
Background
The defendant tenant operated a Gap clothing store in downtown Kingston, Ontario, and had entered into a lease agreement for the premises that was set to end on December 31, 2020. But, COVID-19 had other plans.
On March 26, 2020, the Government of Ontario declared a provincial state of emergency and ordered that all non-essential businesses, such as the defendant’s, be shut down. The defendant was unable to reopen its Gap store until May 19, 2020, when those restrictions were lifted. In the meantime, it failed to pay rent for the leased premises for both April and May 2020, and only made partial payments from June to September 2020, when it eventually closed the store and vacated the premises.
The plaintiff landlord brought this application for summary judgment to recover arrears of rent upwards of $200,000. The defendant claimed that it was relieved of its obligation to pay rent due to the operation of the doctrine of frustration of contract.
The Ruling
The main issues before the court were two-fold:
- Whether the force majeure clause in the lease agreement was engaged, and if so, its effect on the defendant’s obligation to pay rent; and
- If the force majeure clause did not apply, whether the doctrine of frustration of contract relieved the defendant of its obligation to pay rent.
Force majeure
Force majeure clauses are designed to relieve contracting parties from their contractual obligations when a supervening event that is outside of the parties’ control makes contract performance impossible. In this case, the force majeure clause in the lease agreement excused the parties from performance of their contractual obligations in the event that one party was delayed or hindered in performance by “restrictive governmental laws or regulations”, among a slew of other reasons. However, and importantly, the lease also provided that if the force majeure clause was triggered, it did not excuse the tenant from its obligation to provide prompt and timely payment of rent.
The plaintiff claimed that the inclusion of the force majeure clause was proof that the parties had specifically contemplated circumstances such as those arising out of a pandemic, and nonetheless agreed to explicitly disallow the defendant to be excused from paying rent in such circumstances. The defendant argued that the force majeure clause did not make any reference to public health measures, pandemics, or health emergencies, and as such, these were not circumstances that were contemplated by the parties when they entered the contract. Therefore, the force majeure clause was not triggered, and the rent exclusion did not apply.
The Superior Court found that the COVID-19 restrictions, specifically the shutdown of non-essential businesses, were captured by the “restrictive governmental laws or regulations” language in the lease, thereby triggering the force majeure clause and excusing the parties from their contractual obligations. However, while the clause released both parties from their obligations under the contract, it specifically did not excuse the tenant from its obligation to make prompt and timely payment of rent.
Frustration of Contract
Frustration of contract occurs when a situation arises for which the parties have made no provision in the contract, and as a result, performance of the contract becomes radically different from that which was originally undertaken when the contract was entered into.
The defendant claimed that the legal doctrine of frustration of contract was engaged and excused it from its obligation to pay rent. The pandemic restrictions were an unforeseen event that prevented the defendant from operating its store on the leased promises, which was the defendant’s main purpose of entering into the lease. Given that the defendant could no longer operate its store, performance of the contract became impossible, and it did not have to pay rent.
The plaintiff countered that the applicability of the force majeure clause necessarily meant that the events covered by it, such as governmental restrictions and regulations, were contemplated by the parties when they entered into the contract. The doctrine of frustration did not apply, as it was explicitly overridden by the contractual terms.
The Court reasoned that the question to be answered in a frustration of contract dispute is whether the unforeseen event, i.e., the governmental restrictions, radically altered the terms of the lease. A supervening event of this degree must not merely increase the burden of satisfying contractual obligations, but it must go so far as to affect the nature, meaning, purpose, effect, and consequences of the contract. In this case, it was not clear that frustration was engaged. Although the defendant argued that its purpose for entering the lease was to operate the premises as a retail store, there was a provision in the lease which provided the leased premises could be used for any retail purpose. There was no obligation for the tenant to operate any specific business.
Given that the defendant was not required to operate a retail store under the lease, its inability to operate the retail store could not be said to have radically altered the lease’s terms.
In any event, the Court agreed with the plaintiff that the existence and applicability of the force majeure clause was clear proof that the parties did contemplate situations in which the performance of obligations under the lease would prevented. As such, the doctrine of frustration of contract was not engaged.
Summary judgment was granted in favour of the landlord plaintiff for the amount of arrears of rent owing.
