Commercial rent during the global pandemic: Judgement to be consulted

The COVID-19 pandemic has disrupted several commercial sectors of activity in Quebec in 2020, including retail, services, and restaurants.

The economic impact caused by the exceptional measure of the pandemic encouraged landlords and tenants to discuss and renegotiate the terms of commercial leases to preserve the business relationships and the contractual bonds that unite them. Real estate brokers may be called upon to advise a client in such a situation and the lessons learned from the Hengyun International Investment Commerce Inc. decision may inspire them.

When the state of public health emergency¹ of March 24, 2020 was declared (Order in Council), some businesses suffered a drop in the number of visitors to their establishments, leading to significant losses of income because of certain restrictions and prohibitions imposed by the Government of Quebec, or simply because of a change in their clients’ behaviour given the need for confinement.

In this exceptional situation, some commercial tenants nterrupted the payment of their rent following a ban on their activities or due to financial problems. Faced with tenants raising the exception of non-performance due to force majeure in the context of negotiations or disputes, the parties to a commercial lease and their representatives could benefit from the findings and outcome of the following case, submitted to the Superior Court in the context of the pandemic.

In the case Hengyun International Investment Commerce Inc. vs. 9368-7614 Québec Inc.² , the tenant, operating a gym under the name of NDG Fitness Center, was sued by his landlord for non-payment of rent from March to June 2020.

The tenant alleged that he was exempted from paying rent for this period because the fitness room he operates was forced to close due to the Order in Council. He claimed that his inability to operate his business and generate income to pay his rent was the result of force majeure.

For his part, the landlord denied his tenant's argument that the government restrictions were a situation of force majeure, specifying that even if that were the case, a clause in the lease providing for payment of rent notwithstanding force majeure confirmed his right to demand payment thereof.

In this case, the court based its judgment on the unpredictable and irresistible nature of force majeure, as set out in its definition in the Civil Code of Quebec³.

First, the court immediately recognized the unpredictability of government restrictions in the context of the COVID-19 pandemic. Indeed, a reasonably prudent and far-sighted person could not have expected, when the lease was signed, that the government would possibly prohibit the operation of gyms for emergency health reasons.

Second, the irresistibility criterion implies an absolute impossibility of fulfilling one’s obligation. This case must objectively prevent any Quebec tenants in the same situation as NDG Fitness Center from paying their rent in order to be qualified as "irresistible" in accordance with the definition of force majeure. The fact that the obligation is difficult or too costly does not meet this criterion. Therefore, the judge dismissed the argument of the loss of income caused by the forced closure of the business, as the tenant’s inability to pay the rent was due to his specific financial situation and not to force majeure. In other words, the tenant could not avoid his obligation to pay the rent because of the Order in Council, since his lack of liquidity did not constitute a force majeure.

Contrary to the claims of the parties, the court concluded that the landlord was the party prevented from fulfilling its obligations due to force majeure. Indeed, the lease specified that the premises can only be used as a gym, the landlord was therefore unable to provide NDG Fitness Center with quiet enjoyment of the premises due to the Order in Council suspending such activities.

However, when an obligation can no longer be performed by one party due to force majeure, the released party may not require the other party to perform the correlative obligation⁴. Since he was prevented from providing the quiet enjoyment of the premises to his tenant in a timely fashion due to force majeure, the landlord may not demand his rent in return.

Under the specific circumstances of this case, the Court concluded that the rent for March to June 2020 was not owed by the tenant.

Read the full decision.