The Dirt: Long live Highway Properties

In the world of Canadian commercial leasing, justice Bora Laskin’s 1971 decision in Highway Properties Ltd. v. Kelly Douglas and Co. Ltd. stands out as the unrivalled seminal case on point. In Highway Properties, the Supreme Court of Canada affirmed that a commercial landlord had at its disposal three historic remedies with which to deal with a defaulting tenant.

Firstly, and considerably paraphrased, the landlord could do nothing to alter the landlord-tenant relationship but instead could simply sue the tenant from time to time in “instalment litigation.” Secondly, the landlord could terminate the tenancy (i.e. re-enter the premises and evict the tenant). Thirdly, the landlord could re-let the premises on behalf of the tenant (with an action on the covenant from time to time for any deficiencies in rent).

These three remedies arose as a natural consequence of a lease being a form of conveyance of real estate. Highway Properties did not establish these traditional conveyancing remedies — they are rather a long-standing reflection of the common law. All Highway Properties actually did was reaffirm the availability of the three conveyancing remedies and introduce the now infamous “fourth remedy” — the right on the part of the landlord to sue the tenant, on notice, for consequential damages arising from the premature loss of the lease.

Prior to Highway Properties, landlords could always get their leased premises back from a defaulting tenant through an eviction; however, that same landlord could not then also pursue a claim against the evicted tenant for the full measure of damages incurred by the landlord as a result of the tenant’s default.

For instance, if the unexpired lease term was significant and the rent payable was well over the market rent, then a landlord would want damages for loss of profit rather than just getting the premises back. Likewise, if the tenant had been an “anchor tenant” whose business function was inter alia to attract other businesses to the landlord’s site, the mere return of the premises to the landlord would be cold comfort in light of the economic damage that the landlord might face as a consequence of the tenant’s default.

Highway Properties revolutionized commercial leasing by giving landlords the supplemental right to also sue any abandoning tenant for all of the consequential damages as well as the return of the premises. The addition of this right, although almost trite by today’s understating of basic contract law, has led to the characterization of commercial leases as a hybrid of both contract and conveyancing law.

It is important to note that Highway Properties did not replace the traditional real estate conveyancing remedies with the right to sue for consequential damages, but rather, left the modern commercial landlord with the option of terminating the lease and suing for consequential damages or relying on the “old school” conveyancing remedy of doing nothing to the lease and just suing for arrears of rent from time to time.

Although this hybrid characterization of a commercial lease has been a central tenet of Canadian landlord and tenant law since Highway Properties, it is far from a universally accepted way of looking at commercial leases.

By rough count, while approximately half of American states still cling to a Highway Properties-type of hybrid characterization, the remaining states have adopted a more uni-dimensional characterization of a commercial lease, preferring to view it as simply another subspecies of commercial contract.

Under this “modern” or “contract” approach to commercial leasing, landlords retain the right to sue for consequential damages but lose the right to sit back and do nothing after a tenant has attempted to repudiate the lease — under pure contract theory, once the lease is repudiated, the contract is broken and the innocent counterparty immediately attracts a duty to mitigate its damages.

There has been a consistent torrent of academic commentary on this subject in Canada since Highway Properties, with most academics favouring a conversion from the “hybrid” model posed in Highway Properties to the “pure contract” approach now adopted in many U.S. states. That said, to this author’s knowledge, no court or legislature in Canada has actually overturned Highway Properties (nor is it apparent to this author how any court other than another panel of the Supreme Court of Canada could do so!).

No court, that is, until in 2006, the British Columbia Court of Appeal apparently did so, indirectly, sort of, in Evergreen Building Ltd. v. IBI Leaseholds Ltd. Space does not permit a detailed discussion of the Evergreen decision. Suffice it to say, it was widely touted as a Highway Properties killer, the case that would shed the Canadian law of commercial lease remedies of its cumbersome conveyancing roots and propel the law, once and for all, into the modern era of “pure contract” remedies.

And that is precisely what the British Columbia Court of Appeal appeared to do. Evergreen was, however, granted leave to appeal to the Supreme Court of Canada, and the stage seemed set for a showdown over Highway Properties. Alas, the parties in Evergreen settled before the SCC could revisit Justice John Laskin’s famous analysis of the nature of a commercial lease, leaving many practitioners wondering whether the B.C. Court of Appeal’s take in Evergreen is now the new normal.

Practitioners, at least in Ontario, need wonder no further. While Evergreen was never binding in Ontario, the recent Ontario Court of Appeal decision in Re TNG Acquisition Inc. seems to have laid to rest, at least for the time being, the nature of a commercial lease under Ontario law. Justice Eileen Gillese, writing for a unanimous panel that included Justice John Laskin, reaffirmed the characterization of the commercial lease as a “hybrid” or “dual” instrument that is both a conveyance and a contract, upholding the characterization that the senior Laskin espoused in Highway Properties some 40-plus years prior.

In TNG, the tenant had attempted to repudiate the lease, but the landlord had elected to do nothing in response (as was its right under the conveyancing remedies endorsed in Highway Properties), only to find its tenant retaliating with bankruptcy, and the trustee-in-bankruptcy subsequently disclaiming the lease, leaving the landlord with nothing more than a preferred claim under the Bankruptcy and Insolvency Act.

In almost counterintuitive strategy, it was the landlord (not the tenant), who argued in TNG that Highway Properties was a dead doctrine and the modern commercial lease had to be interpreted as a species of pure contract instead. Strategically, the landlord was likely better off financially in the tenant’s bankruptcy as a creditor with an unsecured claim for damages from a breached lease, rather than as a landlord with a valid lease and a preferred (but statute-limited) claim. Therefore, it was necessary for the landlord to argue that the lease, as a pure contract, would have been automatically terminated upon repudiation by the tenant, all without requiring an election on the part of the landlord.

By endorsing the effectiveness of the historic conveyancing remedies (most notably, the right to do nothing after a tenant purports to repudiate a commercial lease), even when faced with a landlord that is pleading that it does not want the benefit of such a remedy, the Court of Appeal in TNG has fended off, yet again, another attempt to erode one of the most fundamental tenets of Canadian commercial leasing law. Long live Highway Properties!

Jeffrey W. Lem is a partner in the real estate group at Miller Thomson LLP. His e-mail address is [email protected].

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