Lease Issues in the Age of COVID-19

COVID-19 has dramatically altered the landscape of our community: streets are empty; businesses are boarded up; and those few businesses that remain open scramble to generate enough income to stay afloat.

Given the unprecedented nature of the situation, we may intuitively expect concessions in regard to our contractual obligations. But, what does the law actually say about the matter?

Generally speaking, a party is expected to fulfill its contractual obligations, regardless of the circumstances. There are, however, two avenues through which a party may be relieved from its commitments: force majeure and frustration.

Force Majeure

Contracts often include what is called a “force majeure” clause. Such clauses exist to protect a party if circumstances arise that prevent the party from fulfilling its contractual obligations or make it impractical to do so.

The clause may provide for a range of relief options, such as a temporary suspension of obligations, a variation of the contract, or an option to terminate the contract without penalty. In the context of commercial leases, that may mean a rent deferral, a change in the terms of the lease, the termination of the lease agreement, or any other remedy listed in the clause.

Can you seek relief through a force majeure clause?

Step 1: Does your lease contain a force majeure clause?

In British Columbia, one only has recourse to force majeure if it is written into a contract. Simply put, if your contract does not contain a force majeure clause, then you cannot avail yourself of it. However, you may still be able to rely upon the doctrine of “frustration” (see below).

Step 2: If your lease does contain a force majeure clause, does it apply to the COVID-19 pandemic?

Each contract is unique and whether a force majeure clause applies to the pandemic depends upon the specific wording of the clause. Some contracts may be vague and lack detail as to what constitutes a force majeure, while others may provide a specific list of circumstances, such as war, an act of terrorism, or act of God. In the former situation, it is left for the parties to agree or, barring agreement, for the courts to decide what constitutes a force majeure.

Courts tend to interpret force majeure clauses very strictly. This means that your lease should specifically, or as closely as possible, reference a pandemic. If your lease’s force majeure clause contains terms such as: “outbreak;” “disease,” or “quarantine,” you should be on solid footing to claim that the clause applies to the COVID-19 pandemic.

In the absence of a specific reference to a pandemic or something akin, check your lease for other less direct terms that might nevertheless be applicable – for example, a clause for a labour shortage or unavailability of supplies.

Force majeure clauses also often contain a general “act of God” provision. The Supreme Court of Canada defines an act of God as “[…] when a supervening, sometimes supernatural, event, beyond the control of either party, makes performance impossible.[1]” While there is no guarantee that the other party or the courts will determine COVID-19 to be an act of god, an argument can certainly be made that it is.

Step 3: My lease contains a force majeure clause that covers pandemics. Now what?

It is not enough that your lease contains a force majeure clause that applies to pandemics. You will also have to show that the effects of the pandemic were beyond the control of the party invoking the clause and that COVID-19 has made it impossible or impractical, not simply unprofitable, for a party to fulfill its contractual obligations.

A lease may also contain the requirement that you try to mitigate the effects of the event or give written notice of your inability to fulfill your obligations. It is vital that you carefully review the terms of your contract to ensure that you do not overlook any of these important details.

Lastly, many force majeure clauses in lease agreements specifically state that a force majeure event does not relieve a tenant from its obligations to pay rent. In such cases, the force majeure clause may simply allow a tenant to avoid certain tenant obligations such as remaining open during business hours.

Frustration

If your lease does not contain a force majeure clause, or if it does not apply to the COVID-19 pandemic, you may still find relief through the doctrine of frustration. Frustration occurs when events make the performance of the contract radically different than what the parties originally contemplated.

The classic example of frustration is the 1903 English case Krell v. Henry. In this case, Henry contracted out a flat in order to watch the coronation of King Edward VII. However, the king fell ill and the coronation was cancelled. The court ruled that Henry did not have to pay for the flat because his purpose for renting the flat had been frustrated – in other words, the purpose for which he entered into the contract no longer existed.

In British Columbia, the courts have set out six requirements for frustration:

1. The event in question must have occurred after the formation of the contract;
2. the event in question cannot be self-induced;
3. the contract must, as a result, be totally different from what the parties had intended – this difference must take into account the distinction between complete fruitlessness and mere inconvenience;
4. the disruption must be permanent, not temporary or transient;
5. the change must totally affect the nature, meaning, purpose, effect, and consequences of the contract so far as concerns either or both parties; and
6. the act or event that brought about such radical change must not have been foreseeable.

Businesses in the age of COVID-19 are in uncharted territory. Your best course of action is to act early: review your contract in detail as soon as possible to ensure you understand your rights and obligations. If possible, take steps to mitigate the effects of the pandemic on your business and be sure to abide by any notice requirements in your contract. Finally, be sure to document how COVID-19 has affected your business and your ability to fulfill your contractual obligations.

Please contact Jonathan Vroom at North Shore Law for further information.

[1] Atlantic Paper Stock Ltd v St Anne-Nackawic Pulp and Paper Co, [1976] 1 SCR 580