Safeguarding the rights of commercial landlords during the pandemic: The Hudson's Bay case

Following the article Commercial rent during the global pandemic: Judgment to be consulted, a legal saga has caused a stir by shedding light on the obligations of commercial tenants to pay rent in the context of the COVID-19 pandemic.       

Parties to a commercial lease in such a situation should carefully review the wording of their lease to determine whether stopping rent payments is prohibited, notwithstanding the impact of the COVID-19 pandemic, including the landlord’s inability to provide quiet enjoyment of the premises or to operate a first-class shopping centre.

As of April 1, 2020, the Hudson's Bay Company (hereinafter referred to as HBC) stopped paying rent in six shopping centres. To prevent large arrears from accumulating, the landlords urgently filed an action with the courts for a safeguard order to force full payment of the rent until the dispute is resolved in a trial or out-of-court settlement.

In the six similar cases that were the subject of the same judgment¹, HBC justifies the suspension of rent payments by giving the following two reasons:
 

1. The landlord could not be released from his obligations regarding the quiet enjoyment of the leased premises, which was disrupted by the pandemic and government health measures.       
2. The lessor had not fulfilled his duties relating to the operation of first-class shopping centres, notably through increased marketing efforts to restore goodwill following a drop in traffic caused by the declaration of a state of public health emergency.²

Judgement on the safeguard request 

Without ruling on the merits of HBC's arguments on its right to a rent reduction at this stage of the proceedings, the Court considered HBC's right to withhold all of its rent and the imbalance created between the parties, considering the serious damage to the lessors which had to be urgently remedied.

In this case, the judge pointed out that HBC could not obtain justice for itself by unilaterally withholding its rent as it did. These well-informed and experienced parties had freely negotiated a clause of the lease requiring the payment of the rent "monthly and without any abatement, compensation or deduction." Therefore, HBC had knowingly waived the right to avail itself of the exception of non-performance, i.e. to refuse to pay rent if its lessors did not provide quiet enjoyment of the leased premises and the first-class shopping centres. HBC should have gone to court to obtain a retroactive rent reduction.

Given the specific circumstances of this case, the court concluded that HBC had to pay 100% of future rents for a maximum period of six months to restore a certain balance between the parties during the legal proceedings and prevent arrears from accumulating by the mere passage of time.

Final judgment

In its decision on the merits of the case³, the Court focused first on the basic principle that the landlord's obligation to provide peaceable enjoyment of the leased premises is an obligation of result, subject to force majeure (superior force). In addition, if this obligation of result is not fulfilled, the tenant is entitled to request a rent reduction.

Therefore, if the landlord is released from his obligation due to force majeure, the tenant will also be released from his obligation to pay the rent, like when a fire ravages the leased premises. Similarly, the landlord could not provide the tenant with peaceable enjoyment of the premises in the context of the COVID-19 pandemic because the health measures prohibited the tenant from operating his shop.

As for the reduction in the fair rent resulting from this loss of peaceable enjoyment, the Court dismissed the arbitrary percentages proposed by HBC, stating that the percentages for loss of enjoyment must be established by taking into account the way in which the rent is apportioned:

• When the shopping centre and stores were closed, HBC was entitled to a refund 100% of the common facilities maintenance costs (CFMC), since HBC and its customers could not access the store and shopping centres. No reduction was granted for the basic rent and property taxes related to the store since HBC had peaceable enjoyment of the premises in accordance with the terms of the leases.
• When the shopping centre was closed and the store remained open, HBC was entitled to a refund of 75% of the CFMCs, since HBC and its customers had no access to the shopping centre and services, but only to the car parks.
• When the shopping centre and the store opened, HBC was not entitled to any reduction in base rent, property taxes or CFMCs.

Regarding the obligation to operate the shopping mall as a first-class shopping centre, the Court ruled that this was indeed an obligation of result, as the clause was worded in imperative terms. HBC was not released from its burden of proving that the landlord failed to meet this obligation of result in the absence of evidence that any first-class shopping centre operated differently.

You may consult the full decision and the final decision.