OCA finds force majeure clause allows for rent-free lease extension over COVID-19 lockdown period

Landlord seeking leave to appeal to Supreme Court of Canada

OCA finds force majeure clause allows for rent-free lease extension over COVID-19 lockdown period
Harvin Pitch, Teplitsky LLP

A Niagara LA Fitness’s commercial lease will be extended a year-and-a-half, rent-free, to account for rent due during the COVID-19 lockdown, the Ontario Court of Appeal has found.

In Niagara Falls Shopping Centre Inc. v. LAF Canada Company, 2023 ONCA 159, the appeal court overturned the lower court’s ruling, which denied the lease extension because it amounted to rewriting the contract. Court of Appeal Justices Eileen Gillese, Michael Tulloch and Lois Roberts found that while the rental contract’s force majeure clause did not eliminate the obligation to pay rent during the pandemic, the clause did allow for an extension of time to fulfill that obligation.

"The most important point emerging from this ruling is the importance of the specific wording of a force majeure clause and the lease in which it is found, says Jeffrey Haylock, partner at Polley Faith and counsel for LAF Canada. "The question of whether a particular situation will trigger a force majeure clase and the question of what the effects of the application of a force majeure clause will depend on a careful reading of the contractual provisions in issue."

Harvin Pitch, a partner at Teplitsky LLP, who acted for the landlord, says his side will appeal the ruling to the Supreme Court of Canada.

“[The decision] sets a precedent that when you're litigating over the terms of a lease, and there are provisions for some kind of extension, or otherwise. The Court of Appeal has said there is latitude to extend the term and rewrite the lease by extending the term without that being expressly stated in the lease.”

The appeal court’s decision will impact 25-30 other leases held by LA Fitness across Ontario and Alberta and other commercial leases with similar clauses, he says.

LAF Canada owns and operates 31 LA Fitness centres in Ontario and Alberta, and the company signed a retail lease with the previous owner of the Niagara Falls, Ont. shopping plaza. The lease required LAF to pay monthly rent, a share of common area expenses, and an administration fee. LAF’s parent company indemnified the rent obligation, and the original landlord assigned its interest in the lease to the appellant, Niagara Falls Shopping Centre Inc.

Ontario ordered closed all non-essential businesses, including gyms, on March 24, 2020. In May 2020, LAF and the shopping centre entered into a rent deferral agreement, which forgave half the rent and deferred another quarter. When the contract expired, LAF paid rent for the remainder of 2020, though it could only operate at a limited capacity.

From the pandemic's beginning until the end of 2021, LAF was forced to remain closed or allowed open subject to capacity limits.

In Dec. 2020, LAF refused to continue paying rent, and the shopping centre brought an action for unpaid rent and other charges. LAF’s defence relied on frustration, unjust enrichment, abatement, and the force majeure clause.

LAF submitted that the lease should be extended for a period equivalent to the closure, which the judge called “commercially absurd.” The judge also ruled that LAF was not relieved of rent obligations because of the curative provision in the force majeure clause, which states that “failures to perform… which can be cured by the payment of money shall not be force majeure events.” Therefore, the judge found that the tenant was required to pay rent during the lockdown.

At the Court of Appeal, the parties disagreed on the applicable standard of review. Justice Eileen Gillese, who wrote the reasons for the panel, said the interpretation of a non-standard-form contract was a question of mixed fact and law and required an extricable legal error for appellate intervention.

The judge had made two such errors, said Gillese. The first was a failure to give effect to the excusing provision, which expressly provides for what occurs when a party is prevented from holding up their side of the lease due to a force majeure event, she said.

According to the provision, the performance of the prevented act “shall be excused for the period of delay caused by the force majeure event and the period for the performance of such act shall be extended for an equivalent period.”

The second extricable error was limiting the operation of the excusing provision to “time-limited events,” which is not in the force majeure clause, said Gillese.

“In my view, the motion judge’s interpretation of the Force Majeure Clause does violence to the clear language and intent of that clause and effectively rewrites the parties’ agreement on what is to happen in the case of a Force Majeure Event,” she said.

The Court of Appeal agreed with the lower-court judge that the curative provision meant that LAF could not rely on the force majeure clause to get out of paying rent during the lockdown because financial inability does not qualify as a force majeure event. But the appeal court extended the lease term and ruled that LAF was not required to pay rent during the extension period.

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