Mall tenant can't invoke pandemic to add new lease terms: Ontario Court of Appeal

The pandemic’s economic effects cannot be the basis for fundamentally altering a remedy for breaching a commercial lease and imposing additional terms in the lease, the Ontario Court of Appeal has ruled.

Following the COVID-19 outbreak in March 2020, the provincial government imposed lockdowns and closed all non-essential businesses, including Hillcrest Mall in Richmond Hill, ON. The dispute in Hudson's Bay Company ULC Compagnie de la Baie D'Hudson SRI v. Oxford Properties Retail Holdings II Inc., 2022 ONCA 585 arose when Hudson’s Bay Company (HBC), formerly a model tenant at the mall, stopped paying rent in April.

In September, HBC gave notice to its landlord that it would continue withholding rent since the landlord was allegedly violating the terms of the lease. The landlord then sued HBC for non-payment of rent.

In October 2020, HBC filed an action asking for damages for breaches of the lease. It sought declarations that the landlord failed to meet “first-class shopping centre standards” and that payment of rent was not required until the landlord remedied its breaches.

The landlord notified HBC that it was planning to forfeit the lease in Hillcrest Mall based on nonpayment of rent, with arrears totalling more than $1.3 million.

The motion judge rejected HBC’s argument that the landlord’s compliance with government-imposed COVID-19 restrictions could be the basis for a violation of the lease. The judge made the following findings:

• the landlord did not breach the terms of the lease
• while HBC was in default for failure to pay rent, it was entitled to relief from forfeiture under s. 20 of Ontario’s Commercial Tenancies Act
• the remedial power in s. 20 covered orders deferring rental payments owed but did not extend to orders abating or reducing the rental amount upon which the parties agreed in the lease.

Court cannot dictate fair lease or recalibrate existing obligations

Regarding HBC’s appeal, the Court of Appeal found no need to vary the payment schedule that the motion judge fixed. As of the hearing of the appeal, HBC had made all the payments that the judge required, the appellate court noted.

HBC argued that the judge should have abated or reduced the rent owed by 50 percent for an indefinite period while the pandemic’s economic effects continued. The appellate court disagreed with HBC’s broad interpretation of s. 20’s remedial powers, which would lead to uncertainty in landlord-tenant relations and encourage litigation as a way to redefine a tenant’s lease obligations in the context of unforeseen economic changes.

According to the appellate court, s. 20 did not contemplate a recalibration of existing rights and obligations under the lease and did not empower a court to dictate what it considered a fair lease for the parties. Preservation of the lease did not entail abating or reducing the agreed rent or absolving a tenant from the requirement to pay it.

Regarding the landlord’s cross-appeal, the appellate court found that the judge inappropriately deferred HBC’s rent obligations for reasons unrelated to its ability to comply with the lease’s terms relating to rent payment.

Lastly, the appellate court varied the interest on rent arrears from TD prime rate plus two percent to TD prime rate plus four percent, in line with the terms of the lease. The motion judge did not sufficiently explain how reducing the agreed interest rate would help preserve the relationship between the parties as described in the lease, the appellate court said.