Pandemic does not permit courts to rewrite commercial leases: Ontario Court of Appeal

As Justice Doherty put it in the opening line of the Court’s decision in Hudson’s Bay Company ULC Compagnie de la Baie D’Hudson SRI v. Oxford Properties Retail Holdings II Inc., “[t]he arrival of COVID-19 in March 2020 changed everything”¹. But do unforeseen events, such as the business disruption from the COVID-19 pandemic, allow courts to reduce rent previously agreed upon in a commercial lease? Hudson’s Bay confirms that they do not.

What you need to know

• The Court of Appeal for Ontario held that the equitable remedy of relief from forfeiture—codified in section 20 of the Commercial Tenancies Act—does not include rent abatement or reduction. Relief from forfeiture may in some circumstances include rent deferral, but only to the extent necessary to give meaningful effect to the relief and the tenant’s ability to bring itself into compliance with the lease.
• If, even with a deferral of rent, a tenant cannot bring itself into compliance with the lease within a reasonable and specified period of time, relief from forfeiture will not be an appropriate remedy.
• The Court confirmed that orders granting relief from forfeiture cannot be used to rewrite commercial leases according to what the court views as “fair”, even in the face of unforeseen, extraordinary events like COVID-19.
• Hudson’s Bay reinforces the reluctance of courts to rewrite commercial leases, especially those between highly sophisticated parties.

The details

Background

This case directly addresses the impact of the pandemic on the retail sales sector.

Hudson’s Bay Company ULC (HBC) leases multiple properties from the landlord, Oxford. The HBC store here is in Hillcrest Mall in Richmond Hill, Ontario. The mall is owned by affiliates of Oxford. From the beginning of its lease in 1978, HBC was a model tenant and always paid its rent on time.

When COVID-19 struck in March 2020, HBC was forced by the government to shut its doors. Like many retail establishments across the country, HBC suffered significant economic losses: between March 2020 and April 2021 HBC sales were down 60.5%². Following the first COVID-19 government-imposed lockdown, HBC, unilaterally and without notice to Oxford, withheld payment of rent to Oxford, beginning with rent payable for April 2020. There was no evidence to suggest that HBC was financially unable to pay rent.

After HBC commenced proceedings against Oxford—alleging that Oxford had breached its obligation under the lease to operate the mall in accordance with first-class shopping centre standards—Oxford served HBC with a Notice of Intention to forfeit or terminate HBC’s Hillcrest Mall lease³. Oxford cited HBC’s failure to pay rent for seven months, resulting in arrears of rent totaling over $1.3 million⁴.

HBC brought a motion for the remedy of relief from forfeiture under section 20 of the Commercial Tenancies Act (CTA), which allows commercial tenants to apply to the courts for relief from enforcement of re-entry or forfeiture by their landlords in the form of an order on various terms, including rent payments⁵.

The motion judge held at first instance that HBC was in default for non-payment of rent. While the motion judge granted HBC relief from forfeiture, she held that the remedial power of section 20 of the CTA does not extend to orders abating or reducing the rent agreed to in the lease. However, she held that section 20 does extend to orders deferring rent payments and granted HBC deferrals on its outstanding rent payments, in an effort to mitigate the economic harm suffered by HBC from the pandemic. The motion judge also reduced the interest rate on arrears of rent specified in the lease from prime plus 4% to prime plus 2%⁶.

HBC appealed on the scope of section 20 of the CTA. Oxford cross-appealed the deferral of HBC’s rent payments.

Key issue

The key issue on appeal was the scope of the relief available under relief from forfeiture and section 20 of the CTA: specifically, whether relief from forfeiture permits courts to order rent reductions, abatements or deferrals.

The Court of Appeal’s decision

Oxford, the landlord, was successful on both the appeal and cross-appeal.

The Court explained that relief from forfeiture is a discretionary equitable remedy dating back over 300 years, which responds to the circumstances of the individual case. A tenant seeking relief must establish that it would be inequitable in the circumstances to permit the landlord to exercise its right to terminate the lease and take possession of the property⁷. Given that the remedy enables courts to interfere with the rights afforded to landlords by their leases, it is granted sparingly⁸.

The Court held that, while discretion under section 20 of the CTA is broad, it must be exercised in the context of the narrow and specific remedy contemplated by the provision, i.e., relief for the tenant from forfeiture of the lease. Section 20 “aims to preserve the relationship between the parties as reflected in the lease”, and does not empower courts to create what they regard as a “fair lease” for the parties in light of unforeseen events, like COVID-19⁹. To the extent relief is granted, any terms in connection with an order under section 20 are to be “granted to make the relief from forfeiture an effective remedy”¹⁰. Whereas rent deferral may be an appropriate tool to allow a tenant to come back into compliance under the lease, other terms, such as an abatement or reduction in rent, would result in relief from compliance with the negotiated terms of the lease, which goes beyond the intended purpose of section 20. Here, it was not inequitable to hold HBC, a highly sophisticated commercial entity, to the bargain it had struck with its landlord¹¹. Accordingly, the Court could not grant HBC abatement or reduction of its rent under section 20¹².

On the cross-appeal, the Court agreed that relief from forfeiture could include rent deferral to provide a tenant reasonable time to comply with the order. However, here the rent deferral schedule was not designed to give HBC time to pay the rent arrears, and “had nothing to do with” HBC’s ability to pay; rather it was an effort to lessen the economic harm suffered by HBC as a result of COVID-19. This was not an acceptable use of relief from forfeiture, which should not be used “to do economic justice”¹³. Similarly, the Court of Appeal overturned the motion judge reducing the interest rate on outstanding arrears; reducing the interest rate is not any different from changing the monthly amount of rent owing¹⁴.

Implications

Hudson’s Bay confirms that courts in Ontario cannot use the remedy of relief from forfeiture under section 20 of the CTA to rewrite commercial bargains between landlords and tenants according to what they view as “fair”.Commercial tenants cannot expect to be able to rely on section 20 of the CTA to access rent abatements, reductions or variations of other terms of their leases following unforeseen or extraordinary events, such as a global pandemic.

The Court stressed the importance of commercial certainty and autonomy in the landlord-tenant relationship, rejecting a broad interpretation of section 20 that would “inevitably encourage litigation as a means of redefining a tenant’s obligations under a lease in response to unforeseen changed economic circumstances”¹⁵. Hudson’s Bay reinforces the reluctance of courts to rewrite commercial leases, especially those between highly sophisticated parties.