Where Do We Stand on Force Majeure in Commercial Leases?
Niagara Falls Shopping Centre Inc. v. LAF Canada Company
The COVID-19 pandemic presented many challenges in the commercial leasing world – the effects of which are still being felt today. One example of this is the interplay between government-mandated closures and force majeure clauses. Sometimes referred to as an “act of God” clause, force majeure clauses intend to protect parties from events outside of normal business risk and are used to manage the risk, providing relief when an unforeseeable event occurs that is beyond the party’s control and impacting its ability to fulfil contractual obligations.
During the pandemic, tenants were left with little recourse arising from these forced closures and were generally obligated to continue to pay rent to their landlords despite being unable to operate from their premises. However, the decision in Niagara Falls Shopping Centre Inc. v. LAF Canada Company, 2023 ONCA 159 (“Niagara Falls”) seems to have broken from previous decisions and adopted a novel approach to interpreting force majeure clauses in commercial leases.
In Niagara Falls, the tenant leased premises from the landlord to operate a fitness facility. As a result of the pandemic, the Ontario government mandated the closure of all non-essential workplaces, including the fitness facility operated by the tenant. The landlord and the tenant entered into a rent deferral agreement during the initial lockdown period that provided the tenant with certain rent relief from April 2020 to June 2020. The tenant continued to pay rent after the expiry of the deferral period but ceased paying rent commencing in December 2020 when the lockdown was reimposed. The landlord commenced an action for unpaid rent and the tenant defended the action claiming that it was not obligated to pay rent during the lockdown periods on the basis of: the doctrines of frustration and unjust enrichment, abatement at common law and under the terms of the lease, and the terms of the force majeure clause in the lease. In addition, the tenant sought a declaration that, during the lockdown periods, it was relieved of its obligation to pay rent and that its rent obligations should be reduced in proportion to the capacity limits imposed during the pandemic.
On a motion for summary judgment commenced by the landlord, the motion judge rejected the tenant’s defences, including the tenant’s arguments relating to the application of the force majeure clause in the lease.
The force majeure clause at issue in Niagara Falls provided, in part, that “[i]f either party is delayed or hindered in or prevented from the performance of any act required … [in the lease agreement] because of … restrictive laws … or other reason of a similar or dissimilar nature beyond the reasonable control of the party delayed, financial inability excepted (each, a “Force Majeure Event”), … performance of such act shall be excused for the period of delay caused by the Force Majeure Event and the period for performance of such act shall be extended for an equivalent period (including delays caused by damage and destruction caused by such Force Majeure Event). Delays or failures to perform resulting from lack of funds or which can be cured by the payment of money shall not be Force Majeure Events.”
The motion judge agreed with the landlord that the lockdowns were “restrictive laws” for the purposes of the lease and that the landlord was exempted from its obligation to provide quiet enjoyment of the premises to the tenant during the lockdown periods. In addition, the motion judge concluded that the curative provision in the force majeure clause (the language carving out delays that can be cured by the payment of money as events of force majeure) supported the landlord’s position that the tenant’s obligation to pay rent would not be impacted by an event of force majeure.
The motion judge did not accept the tenant’s position that the lease term should be extended for a period equivalent to the periods that it was forced to close by government order (approximately nine months), concluding that the language in the force majeure provision, stating that the time for performance would be extended due to events of force majeure, was intended to deal with time-limited events in the lease (such as repair and maintenance obligations).
The tenant appealed the motion judge’s decision based solely on her interpretation of the force majeure provision.
On March 8, 2023, the Ontario Court of Appeal (the “Court”) released its decision in Niagara Falls. The issues to be decided by the Court were whether the motion judge erred in her interpretation of the force majeure clause and, in particular, whether the force majeure clause either: (1) delayed the obligations of the parties to perform during the lockdown and extended the term for the duration of the closures; or (2) obliged the tenant to pay rent during the closures but extended the lease for the duration of the closures, during which period the tenant was not obliged to pay rent.
The Court concluded that the motion judge erred in her interpretation of the force majeure clause. In particular, it held that the motion judge failed to give proper effect to the excusing provision in the force majeure clause. The “excusing provision” referred to that portion of the force majeure clause stating that “…the period for the performance of such act shall be extended for an equivalent period.” In the Court’s view, the motion judge ignored the express language of the excusing provision that delineated the consequences of a force majeure event (i.e., that the period for performance would be extended). Furthermore, the Court disagreed that the language of the excusing provision was intended to apply to time-limited events only, stating that nothing in the force majeure clause supported that conclusion and that such an interpretation ignored the clear language and intent of the clause.
The Court ultimately concluded that the tenant was required to pay rent during the lockdown periods. However, it held that the term of the lease would be extended for the duration of the closure periods, during which extension period the tenant would not be required to pay rent.
Although it is very unfortunate that tenants were forced to bear the brunt of the financial impact arising from government-mandated shutdowns, the decision of the Court in Niagara Falls is problematic for a number of reasons. First, it ignores the commercial realities of commercial leasing practice (and the commercial real estate industry generally). Landlords are not in the habit of keeping their premises empty. As a result, it goes without saying that they endeavour to minimize downtime between tenants and are often negotiating new leases for premises long before the expiration date of existing leases. How can landlords negotiate new leases for premises when the term of any existing leases is not certain?
Further, how can lenders, who lend money based on the existence of certain rental streams, have confidence in the strength of their security when a rental stream can dry up for a sustained period at any time due to an event of force majeure? It seems inevitable that lenders may take notice of this potential gap if tenants begin to claim rent-free entitlements in any significant way.
In addition, the Court does not at all address the concessions granted by the landlord (i.e., rent deferral and forgiveness) or benefits received from government programs by the tenant in its analysis. Should those agreements be ignored and should the tenant be required to repay any benefits it received during any lockdown period? The Court appears to create some room for “double-dipping” by tenants whereby terms would be extended on a rent-free basis despite the fact that full rent was not being paid during a lockdown period.
There is no doubt that tenants bore the brunt of the financial impact caused by lockdowns and that the government subsidies offered were likely insufficient for many tenants. However, unilaterally extending the term of the lease in response to the lockdowns is likely not the most effective solution.
The implications of the decision in Niagara Falls may not be immediate, but it is clear that the decision will force landlords and tenants to pay close attention to their force majeure provisions. For tenants, this may be a time to look at your lease to determine if a rent-free period is available to you (provided it may be the case that many claims would likely be statute-barred by virtue of the Limitations Act). As a landlord, this may be a good time to revisit your force majeure clause to ensure that no force majeure event can give rise to an extension of the term beyond the agreed-upon expiry date, unless otherwise expressly agreed to in the lease.
If you require legal counsel on commercial leasing, please contact one of the authors or a member of our Commercial Leasing Group.