A Surprising Result – Applying Force Majeure Clauses to Commercial Leases in the Wake of COVID Shutdowns
The Ontario Court of Appeal (“ONCA”) recently released a decision that complicates the jurisprudence with respect to how courts will interpret force majeure clauses within commercial leases arising from COVID-19.
Thus far, the Ontario Superior Court (“ONSC”) has largely held that force majeure clauses cannot operate to relieve tenants of their obligation to pay rent during a shutdown unless the terms of the clause expressly allow for this relief.
In Niagara Falls Shopping Centre v. LAF Canada Company, the Court found that the tenant was obligated to pay rent during the closure periods, but the landlord was also obligated to extend the lease for a period equivalent to the closure periods and charge no rent during this extension.
This outcome should give pause to both commercial landlords and tenants. The court’s decision provides grounds for landlords and tenants to reconsider how force majeure provisions are drafted in their lease agreements. This decision is not only relevant in the context of COVID-19, but also in a wide array of other unanticipated events that may be included in a given lease’s definition of force majeure.
Background & Facts
LAF Canada Company (the “Tenant”) rented a space within a shopping plaza to use as an indoor health club and fitness facility (the “Club”).
Beginning in March 2020, the Club was subject to a series of closures and capacity-limited re-openings. After another government imposed lockdown at the end of 2020, the Tenant refused to continue paying rent.
Niagara Falls Shopping Centre Inc. (the “Landlord”), brought an action against the Tenant for all unpaid rent. The Tenant defended, arguing it was under no obligation to pay rent during periods in which the government required the Club to be closed, which totaled approximately nine months between 2020 and 2021.
The Lower Court Decision
The ONSC held that government mandated closures were “restrictive laws” such that they fell within the ambit of the force majeure provision. As such, the Landlord was exempted from providing the Tenant with quiet enjoyment of the leased premises.
The Tenant was required to pay rent since it was able to make the payments and failures to perform resulting from lack of funds were explicitly carved out of the definition of a “Force Majeure Event” in the force majeure clause.
The motions judge rejected the Tenant’s argument that the lease should be extended for nine months despite the language within the provision that states that “performance of such 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 motion judge found that such an extension would be “commercially absurd” and that this extension language was only meant to apply to time-limited events (e.g., a repair), not the Landlord’s covenant for quiet enjoyment.
Analysis on Appeal
On appeal, the Court agreed with the Tenant, holding that the motion judge failed to give effect to the force majeure provision’s ordinary and grammatical meaning. As the provision states that performance shall be “excused” rather than “exempted”, and following such an event “the period for the performance of such act shall be extended for an equivalent period”, the Court agreed that the Tenant should be entitled to a 9 month extension of the lease.
The Court also found no language in the force majeure clause which supported the idea that this clause should only apply to time-limited events. Rather, the Court found that the provision was drafted in an intentionally broad manner, covering “the performance of any act required” under the Lease.
The Court agreed with the motion judge that the Tenant could not rely on the force majeure provision to excuse it from paying rent during the closure periods. However, the Court found that the Tenant would not be obligated to pay rent during the nine-month extension of the lease, as the Tenant was already required to pay rent during the closure periods, even though the rent during the nine-month extension was higher.
This decision highlights the importance of precise drafting when preparing a commercial lease with force majeure provisions. The appellate court demonstrated an unwillingness to look beyond the literal meaning of the provision, even when such a literal reading lead to the Landlord having to provide a 9 month rent-free extension. This rent-free extension likely goes far beyond any relief the Landlord or the Tenant considered when it agreed to include this force majeure provision in the lease. Care should be taken to ensure that the wording of the lease reflects the parties’ intentions and only allows for the term to be extended in scenarios that both parties anticipated, for example, as is common when the commencement date is delayed due to a force majeure event.
In short, both commercial landlords and tenants should think carefully about and seek counsel when negotiating the exact wording used in their commercial leases’ force majeure clauses.