Pop Quiz!

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Today’s topic is the law of commercial leases and today’s question will focus on a landlord’s rights and remedies in a commercial lease. Here is question number 1: If a tenant abandons its premises and has defaulted in the payment of rent, which one of the following remedies is available to the landlord? Is the answer:

the landlord may elect to do nothing, hold the tenant to the lease and sue the tenant for the outstanding rent and damages, after it becomes due (at the expiry of the lease)

the landlord may elect to terminate the lease and sue the tenant for the arrears of rent and damages, if any, up to the date of termination

the landlord may notify the tenant that the premises will be re-let on the tenant’s behalf, enter into possession on that basis and once the premises are re-let, the landlord may commence an action for the difference between the rent the landlord would have received and the rent the landlord will receive from the new tenant (subject to the landlord’s success in locating a replacement tenant)

the landlord may elect to terminate the lease and notify the tenant that the landlord reserves its right to claim damages against the tenant for the balance of the rent payable under the lease up to and after the date of termination

-all of the above

-none of the above

And the answer is … (can you hear the drumroll?) … (e) all of the above!

Some of you may be wondering ‘how is it possible that a landlord could have all of the above remedies available to it?’ The answer is simple and can be found in a 1971 Supreme Court of Canada case called Highway Properties Ltd. v. Kelly, Douglas & Co. Ltd. ([1971] S.C.R. 562) (“Highway Properties”).

In Highway Properties, a tenant who operated a grocery store (the “Tenant”) in a shopping centre had a lease for a 15 year term. The Tenant opened its business and began operating, but a couple of years into the lease, several units in the shopping centre remained vacant and the Tenant’s business was suffering. The Tenant advised the landlord that it intended to close the grocery store and subsequently did so. The Tenant also advised the landlord that it was attempting to locate a replacement tenant to take over the premises, however it was unsuccessful and the premises remained vacant. The landlord commenced an action against the Tenant and the Tenant advised the landlord that the Tenant had repudiated the lease. In response, the landlord advised the Tenant that it intended to take possession of the premises, would attempt to lease the premises and would hold the Tenant responsible for damages. The landlord then took possession of the premises; however, it was not able to re-let the premises to a new tenant until the landlord subdivided the premises into three units and eventually leased all three units. At trial, the landlord claimed damages against the Tenant for the loss suffered by reason of the rescinded lease and also for the prospective loss of rent suffered as a result of the Tenant’s failure to carry on business for the full term of the lease. The trial judge and the Court of Appeal rejected the landlord’s claim stating, among other reasons, that the lease and its covenants ceased to exist with the Tenant’s surrender and that the landlord could only recover against the Tenant for breaches occurring up to the date of surrender.

The case made its way to the Supreme Court of Canada and in its decision, the court confirmed that all four of the remedies listed in (a), (b), (c) and (d) above are in fact available to a landlord and the court found in favour of the landlord.

Now, some of you more modern readers may be anticipating question number 2 in today’s pop quiz: Can a case from 1971 still apply to commercial landlord and tenant relationships today? Is the answer:

-yes

-no

-maybe

The answer is (a) yes! Highway Properties may be an oldie, but it is still a “goodie”. It is a decision from the highest court in Canada and the principles considered in that case remain good law today. For example, First Consolidated Holdings Corp. v. 607190 Ontario Inc. (36 A.C.W.S. (3d) 128) (“First Consolidated”) is a 1992 Ontario case that considered and applied the principles from Highway Properties. In First Consolidated, the tenant failed to pay rent and abandoned the premises prior to the expiry of the lease term. The landlord did not terminate the lease or re-take possession of the premises and required the tenant to comply with the lease terms. (This position is consistent with option (a) from the pop quiz question number 1, above.)

The tenant’s defence raised the argument that the landlord failed to mitigate and locate a replacement tenant. The landlord argued that pursuant to Highway Properties, it did not have a duty to mitigate since the landlord did not terminate the lease and took the position that the lease was still in full force and effect. The court agreed with the landlord’s position and held that it properly exercised the first remedy in Highway Properties and that particular remedy provides no duty upon the landlord to mitigate and re-let the premises. Rather, the landlord may elect to do nothing, hold the tenant to the terms of the lease, and sue the tenant at the expiry of the lease. The landlord does not have an obligation to mitigate if it elects this remedy.

There are two main points to keep in mind. First, the above-noted remedies are only applicable when the contract at issue concerns real property whereby an estate in land is granted. Second, every case is based on different facts which will weigh heavily on whether the above remedies apply and if so, which remedy the landlord will elect to utilize. For example, if a tenant defaults in year one of a 10 year lease, it may not make good business sense that the landlord do nothing and wait 9 years to sue the tenant. The facts of each case will determine what remedy is best suited to the situation.

Some of you may not have passed today’s pop quiz, but not to worry. Hopefully you have learned a lesson on landlord rights and remedies in a commercial lease and if you are still reading, you have made it to the end of this article, which also makes you a winner!

Congratulations!

The content of this article is intended to provide general information for the reader and is not intended as advice or an opinion to be relied upon in relation to any particular circumstance. For specific applications of the law to a particular set of circumstances, the reader should seek professional advice.
Leanne Fasciano practices commercial litigation with McLean & Kerr LLP, a law firm based in Toronto.

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