Commercial Leases in the Time of COVID-19

Nova Scotia’s business community is grappling with how to meet commercial lease obligations in the face of the state of emergency.

COVID-19 Rent Deferral Support Program

Nova Scotia has implemented a Rent Deferral Support Program as a partial response to this situation.  The government’s description of the program as of March 30, 2020 is here: https://novascotia.ca/coronavirus/COVID-19-Rent-Deferral-Support-Program-Guidelines.pdf) The program gave landlords of some commercial tenants the option to apply for government funding if they have granted rent deferral for the months of April, May and June of 2020.  The rent of these tenants will increase, following the deferral period, to pay back the deferred rent over time. The program then allows landlords to apply to be reimbursed for a certain amount of their losses.

While the program provides immediate relief for some commercial tenants and landlords, it leaves them facing the reality of increased future rent when the deferment period ends. Commercial parties must still consider, therefore, the risk of future non-payment of commercial lease obligations.

Contractual Provisions

Some commercial leases will contain provisions that will govern the landlord and tenant’s rights in these circumstances. For example, a “force majeure” clause typically absolves the non-performing party when the party is unable to perform its contractual obligations because of unforeseeable circumstances beyond their control.

Whether and how a clause applies will depend entirely on the wording of the lease. Some key considerations are as follows:

• What events trigger the force majeure clause? Some clauses may include specific wording relating to pandemics, while others may refer more generally to “Acts of God” and yet others may be silent on the issue.  
• What is the impact of the force majeure clause? Some clauses may entirely excuse the party from their lease obligations, while other clauses may only give that party a certain amount of time to solve the problem.
• Does the force majeure clause include requirements about notice? Some clauses may have strict requirements about the length of notice the party seeking to rely on the clause must give the other party. If proper notice is not given, then the clause may not be able to be relied upon.

We recommend undertaking a thorough review of your commercial lease to determine whether there are any provisions that might apply to a breach caused by COVID-19, what rights you have and what notice and timeframe requirements apply.

Frustration and Impossibility

If there is no force majeure clause in the lease, parties to a commercial lease may still be able to terminate the lease based on the doctrine of frustration. If the doctrine of frustration applies, the lease is discharged.

This doctrine applies when a circumstance occurs for which the lease makes no provision and which causes the lease to be “a thing radically different from that which was undertaken”. For example, a tenant whose has been forced by government order to cease operations may be able to argue that the fact their premises is now unusable means their lease is radically different than what they originally bargained for. Generally speaking, for the doctrine of frustration to apply, 1) the circumstances must have arisen after the lease was entered into, 2) the circumstances must not have been foreseeable and 3) the circumstances must not be the fault of either party.

Whether the parties to a commercial contract can rely on frustration depends on the specific facts of each case. The viability of frustration arguments will depend on the length of the interruption at issue and the depth of disruption to the lease. Historically, courts have not applied the doctrine of frustration lightly, particularly with respect to leases.  It has not been enough for a party to prove that it was financially unviable to perform their contract or that their profits had been reduced.  Instead, the party must show that it is impossible to perform or that the very purpose of the lease was undermined. It may therefore be difficult for a tenant to rely on frustration where they voluntarily closed their business due to lack of customers or reduced profit.

Even where the closure is mandatory, however, courts have historically looked at the length of the closure when compared to the length of the lease.  For example, in a 1945 case, the House of Lords declined to apply the doctrine of frustration to a 90 year lease where WWII interfered with the use of the property noting that the time of interference was insignificant when compared to the length of the lease.  

We are Here to Help

Patterson Law is here to help if you would like advice on how best to navigate your commercial lease. In these fairly unprecedented times, we recognize that commercial tenants and landlords are facing more questions than answers. We are here to help you understand and protect your rights. For more information, please contact our Corporate/Commercial or Litigation Groups