On July 16, 2020, the Superior Court of Quebec (Court) issued a noteworthy judgment in the matter of Hengyun International Investment Commerce Inc. v. 9368-7614 Québec inc. In this judgment, Justice Kalichman interpreted the force majeure clause in a commercial lease in the context of the COVID-19 pandemic and granted rent relief to the tenant.
9368-7614 Québec Inc. (Tenant) entered into a lease with Hengyun International Investment Commerce Inc. (Landlord) on November 3, 2017 (Lease) to operate a gym in the premises located in a building on Cavendish Boulevard in Montréal (Premises).
By way of its court application, the Tenant sought a notable reduction in rent due to various problems it experienced, including its inability to operate due to the COVID-19 pandemic. The arguments raised by the Tenant in support of its claim are based upon the notion of peaceable enjoyment. This notion is set out in Article 1854 of the Civil Code of Quebec (CCQ):
1854. The lessor is bound to deliver the leased property to the lessee in a good state of repair in all respects and to provide him with peaceable enjoyment of the property throughout the term of the lease.
He is also bound to warrant the lessee that the property may be used for the purpose for which it was leased and to maintain the property for that purpose throughout the term of the lease.
As the Court points out, a lessor’s obligation to provide peaceable enjoyment is an obligation of result and, therefore, can only be relieved of this obligation in the event of a force majeure. In the event a lessor fails to perform an obligation under the lease, including the obligation to provide peaceable enjoyment, a tenant can claim a reduction in rent.
By virtue of a provincial government decree, the Tenant was forced to close the gym as of March 24, 2020, due to the COVID-19 pandemic (Decree). It remained closed for the remainder of the month of March, as well as throughout April, May and June 2020. The Tenant argued that its inability to operate and, consequently, generate revenue was caused by a force majeure and, therefore, it should be relieved of its obligation to pay rent for this period.
On the other hand, the Landlord argued that the situation described by the Tenant is specifically contemplated at Section 13.03 of the Lease, which requires the Tenant to pay rent notwithstanding an event of force majeure:
13.03 Unavoidable delay
Notwithstanding anything in this Lease to the contrary, if the Landlord or the Tenant is delayed or hindered in or prevented from the performance of any term, obligation or act required hereunder by reason of superior force, strikes, lockouts, labour troubles, riots, accidents, inability to procure materials, restrictive governmental rules, regulations or orders, bankruptcy of contractors, or any other event whether of the foregoing nature or not which is beyond the reasonable control of the Landlord or the Tenant, as the case may be, then the performance of such term or obligation or act is excused for the period of the delay, and the party so delayed shall be entitled to perform such term, obligation or act within the appropriate time period after the expiration of such delay, without being liable in damages to the other.
However, the provisions of this Section 13.03 shall not operate to excuse the Tenant from the prompt payment of the Base Rent or Additional Rent or any other payments required by this Lease.
Moreover, the Landlord pointed out that the Tenant applied for and received a government emergency loan of C$40,000 in the context of the COVID-19 pandemic and, therefore, cannot argue that it was prevented by superior force from paying the rent.
Considering all the facts set out above, the Court concluded that no rent can be claimed from the Tenant for the months of March, April, May and part of June 2020. However, in reaching this conclusion, the Court relied upon different reasoning than what was submitted by the Tenant.
First, the Court reiterated the concept of force majeure, as defined at Article 1470 of the CCQ:
1470. A person may free himself from his liability for injury caused to another by proving that the injury results from superior force, unless he has undertaken to make reparation for it.
Superior force is an unforeseeable and irresistible event, including external causes with the same characteristics.
While the Tenant argued that it was unable to operate and generate revenues because of an event of force majeure, the Court rejected this assertion and concluded that it was, in fact, the Landlord that was prevented by an event of force majeure from fulfilling its obligation to provide the Tenant with peaceable enjoyment of the Premises.
Indeed, even though the Court agreed that the Tenant fulfilled the requirement to establish unforeseeability, it concluded that the Tenant failed to satisfy the criteria of irresistibility. Indeed, in order to meet the legal test for force majeure, the event being relied upon must prevent any tenant from paying its rent and not just this particular tenant or those who lack sufficient funds.
The Court added that even though the Tenant still had access to the Premises, continued to store its equipment there and benefited, to some extent, from services, the Lease provided that the Premises are to be used “solely as a gym,” and this activity was prohibited by virtue of the Decree. As a result, the Court found that the Tenant did not have peaceable enjoyment of the Premises during this period.
The Court then relied on Article 1694 CCQ, which reads as follows:
1694. A debtor released by impossibility of performance may not exact performance of the correlative obligation of the creditor; if the performance has already been rendered, restitution is owed.
Where the debtor has performed part of his obligation, the creditor remains bound to perform his own obligation to the extent of his enrichment.
Consequently, while the Landlord was prevented by a force majeure from providing peaceable enjoyment, it could not insist that the Tenant pay rent."
That being said, the Court agreed with the Landlord that, in commercial leasing, the provisions of the CCQ, including the obligation to provide peaceable enjoyment, are not of public order, and the parties are, therefore, free to limit their impact. In this particular case, however, the Court concluded that Section 13.03 of the Lease did not effectively do so. In the Court’s view, the clause affects only such obligations whose performance is delayed as a result of a force majeure event and not those obligations that cannot be performed at all. Indeed, according to the language of Section 13.03, the party unable to perform an obligation is only excused for the period of the delay and must, therefore, perform it at a later time.
In the Court’s opinion, the Landlord’s fulfilment of its obligation to provide peaceable enjoyment of the Premises from March through June of 2020 has not been delayed ― it simply cannot be fulfilled. Consequently, the Landlord cannot insist on the payment of rent for that period, and Section 13.03 of the Lease does not apply.
Finally, after reaching the above conclusion, the Court stated that even if the Landlord’s interpretation of Section 13.03 was correct, it cannot be read in such a way as to fully and completely relieve the Landlord of its principal obligation under the Lease, which is to provide peaceable enjoyment of the Premises. The parties to a lease can agree to limit the impact of a landlord’s failure to provide peaceable enjoyment but cannot agree to exclude it altogether. This view has been expressed in doctrine and has been endorsed by the Court of Appeal in CNH Canada Ltd. v. Promutuel Lac St-Pierre – Les Forges, société mutuelle d'assurances générales.
Since the earliest days of COVID-19, landlords and tenants have sought to determine how their respective obligations are affected by the pandemic and associated government orders. With the assistance of legal counsel, parties have sought to position themselves in such a way as to achieve optimal results based on the clauses of their commercial leases. However, until now, there has been little guidance as to how Quebec courts would address the issue.
This decision, for which there is no record of an appeal at the moment, provides an initial interpretation on the matter, but we have yet to see how it will be applied by the various parties in commercial real estate. It is likely to be heavily relied upon by tenants seeking rent relief, and as a result, landlords will focus on how their leases (and the facts relied upon by the Court) may be distinguished.
Going forward, Landlords will undoubtedly wish to adjust the text of their commercial leases in order to avoid or mitigate this situation. As a result, the Court’s analysis of the legal and contractual provisions in question will probably establish parameters for lease negotiations in the coming months and years.
For further information, please contact:
Géraldine Côté-Hébert +1-514-982-5042
Pierre-Denis Leroux +1-514-982-4121
Matthew Liben +1-514-982-5091
or any member of the Commercial Real Estate group.