A TENANT’S FRUSTRATION DOES NOT RENDER A CONTRACT FRUSTRATED

By Matt Mulholland

My steadfast advice for my clients is that it is far better to speak to a lawyer before entering into an agreement than to speak to a lawyer because you didn’t speak to one before. It is often far less expensive and, more importantly, it provides far more predictability if litigation does arise. 

One common theme that has come out of this pandemic is the continued tug-of-war between the interests of landlords and those of tenants. Many businesses have suffered greatly throughout the pandemic (even with subsidies). If businesses suffer then, unfortunately, so to do the landlords. Some landlords have multiple properties and minimal mortgages, while others aren’t so fortunate.  There are seldom any clear winners. 

Many landlords and tenants, to their credit, took matters into their own hands and worked out long term solutions when it was possible to do so. Others, unfortunately, were forced to turn to the wordings of their contracts in the hopes of finding something to assist them. 

The first clause the parties would often turn to was the force majeure clause, in the hopes it would provide some relief. This clause was often glossed over by the parties at the time of signing the contract, but the parties would now be forced to look more closely. In some cases, it would provide some protection for the tenant and in other cases it would provide protection for the landlord. In the case of it being silent, or perhaps ambiguous, then the tenant would often argue that the contract was “frustrated”, in the hopes of escaping its obligations. 

That was the position a tenant tried to maintain in a recent summary judgment motion before Justice G. Mew in the Ontario Superior Court of Justice.

In Braebury Development Corporation v. Gap (Canada) Inc., 2021 ONSC 6210, Gap (Canada) Inc. (“Gap”), a commercial tenant, argued that the commercial lease was frustrated by the restrictions mandated by the Ontario government despite the fact that there was a force majeure clause in favour of the landlord that excepted the payment of rent. In the end, the court disagreed with Gap and found that in this case the force majeure clause was applicable. The Court further found that even if it had concluded that the force majeure clause was not applicable, the contract still wasn’t frustrated and therefore the rent remained owing.  

On Mach 24, 2020, the Province of Ontario ordered the closure of all non-essential businesses to limit the spread of COVID-19. This meant Gap, like other businesses, was required to shut its doors until the restrictions began to lift on May 19, 2020. 

Gap did not pay rent for March and April 2020, and only partial rent from June to September. It then closed its doors permanently in September and ceased paying rent entirely at that time. This despite the lease term not being set to end until December 31, 2020. 

The landlord brought this claim seeking unpaid rent in the amount of $208,211.85. 

As stated, Gap argued that due to the health restrictions the purpose of the lease was frustrated and therefore it was relieved of its obligations to pay rent. 

This case came down to the determination of two issues, but, in the end, because of the findings of the first issue the court was not required to make a finding on the second issue (though it did anyways). The two issues were as follows: 

1)    Whether the force majeure clause contained in the lease was engaged in the circumstances and, if so, its effect on the defendant’s obligation to pay rent; and

2)    If the force majeure clause does not apply, whether the doctrine of frustration of contract applies to relieve the defendant of its obligation to pay the rent claimed. 

1)    Force Majeure Clause

Justice Mew found that force majeure clauses are designed to provide guidance, such as discharging obligations of a contracting party, if an unexpected event occurs. 

The relevant section of the force majeure clause in the lease agreement stated as follows: 

In the event that either party hereto shall be delayed or hindered in or prevented from the performance of any act required herein by reason of… restrictive governmental laws or regulations…or other reason… of a like nature beyond the reasonable control of the party delayed in performing work or doing acts required under the terms of this Lease (herein called “force majeure”)…The provisions of the preceding sentence however shall not excuse Tenant from the prompt and timely payment of the Rent as and when the same is due under this Lease… 

In determining the applicability of the force majeure clause, Mew J. was required to consider the following three questions: 

(a)  what was the triggering events under the clause? 

(b)  what is the required impact on the party invoking the clause? 

(c)  what are the consequences of that impact on the invoking party’s contractual obligations?

As such, the first step was for the court to determine whether the closure of the store was due to a triggering event. As was noted by Mew J. the pandemic was not the restrictive event itself, but, rather, it was the responding governmental laws and regulations.  

In the same way that the school boards could not use their respective leased premises because of government orders forbidding their use, as found by Justice Munroe, in Windsor-Essex Catholic District School Board v. 231846 Ontario Limited, 2021 ONSC 3040, Gap was unable to use their leased space because of the same government orders. Therefore, Mew J., like Munroe J., found that the “restrictive laws or regulations” would have triggered the force majeure clause. 

The second step was the for the court to find the required impact of the triggering event. In this case, it would be the delay, hinderance or prevention in performance of any act required under the lease. Justice Mew found that “any act” would include the payment of rent under the lease agreement, because of its ordinary meaning and because it would make the exclusion of rent portion of this clause meaningless if this were not the case. 

The final step was to determine the consequence of this clause being triggered. In this case, unlike in Windsor-Essex, the consequence was that the tenant was required to continue to pay rent notwithstanding the fact that of force majeure clause being triggered, as the payment of rent was specifically excluded from the parameters of the clause.

2)    Frustration

Notwithstanding that the court made a finding that the force majeure clause was triggered, and, therefore, as such the contract could not likely be frustrated, Mew. J. did engage in this analysis which is useful to consider in the case of a less clear contract. 

Justice Mew, quoted the Supreme Court decision of Naylor Group Inc. v. Ellis-Don Construction Ltd., [2001] 2 S.C.R. 943, which found the following: 

Frustration occurs when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes ‘a thing radically different from which was undertaken by the contract’. 

If the doctrine of frustration applies, then the parties are relieved of their obligations.

It was Gap’s argument that the purpose of entering into the lease was to operate the premises as a retail space and, given the restrictions, it was prevented from doing so. Justice Mew disagreed with this interpretation of the lease and said it was too restrictive. Instead, he found that the problem with this argument is, not only the fact that the force majeure clause directly dealt with the government restrictions, but the lease also stated that “The Premises may be used for any retail purpose or purposes (emphasis added)”. 

Accordingly, Gap’s purpose of entering into the lease may have been to operate a retail space, but the lease allowed for the premises to be used for alternative purposes. As such, Gap couldn’t argue that the contract was frustrated because of the government restrictions. 

In addition, Mew J. cites Manufacturers Life Insurance Co. v. Huang & Danczkay Properties, [2003] O.T.C. 717, in finding that the supervening event must be a permanent, as opposed to a temporary setback. In the case at hand, the restrictions were only for a limited period and therefor were not sufficient to trigger the doctrine of frustration. 

There is no doubt that the economic effects of the government restrictions have been a challenge for many people and will continue to be so for some time. In order to protect yourself, as best as you can, it is important that you have your lease agreements reviewed by a lawyer to ensure that the clause protects your interests. Though the doctrine of frustration might be a way to get out of your contractual obligations, courts are reluctant to use this as a tool and chances are that it will not be available in these situations.