Consequences of Breaching a Commercial Lease Agreement

Despite the current pandemic, in the absence of an express right in the commercial lease agreement, tenants cannot unilaterally withhold rents without running the risk of putting themselves into a default.

In addition to non-payment of rent and other breaches of the lease, an abandonment of the leased premises by a tenant may constitute a fundamental breach of the lease, entitling the landlord to a number of common law remedies and possibly additional remedies available to the landlord under the lease.

Subject to the lease agreement, in the event of a tenant default, a landlord has several possible options available to it at law generally.

  1. It may do nothing to alter the relationship, simply continue to insist on performance by the tenant and sue for rent and any damages it has sustained on the basis that the lease remains in full force and effect.
  2. The landlord may elect to terminate the lease and retain the right to sue for the accrued rent due and any damages to the date of termination.
  3. The landlord may propose to re-let the premises on the tenant’s account and repossess the lease premises for that purpose.
  4. The landlord may elect to terminate the lease with or without reserving its rights to claim damages on the basis of a present recovery for the unexpired term of the lease by issuing a proper notice to the tenant of that reservation of rights. (Highway Properties Ltd. v. Kelly, Douglas & Co. [1971] SCR 562 (SCC))

Landlords should note that the above four remedies available to them as a result of the tenant’s fundamental breach of the lease are mutually exclusive; the law requires the landlord to give timely notice as to which remedy it will be pursuing (Makhija Holdings Ltd. v. Boulevard Prescriptions Ltd. (2005), 42 R.P.R. (4th) 142 (B.C. S.C.)).

To avoid defaulting on a commercial lease a tenant should consider other options possibly available to it including:

  1. thoroughly reviewing the relevant lease provisions for, among other things, possible events or circumstances constituting a basis for frustration or force majeure clauses;
  2. consulting their insurance provider for relief under the existing insurance policy;
  3. qualifying for any financial resources currently available; or
  4. attempting to negotiate a rent reduction or rent deferment with the landlord.

Any tenant considering breaching a lease should be aware of a number of consequences it may face upon default, including but not limited to the following:

Distress

In Alberta, commercial landlords may effect a distress seizure for unpaid rents without having to first sue and obtain a judgment against the tenant. A landlord may exercise its rights of distress through a civil enforcement agency pursuant to the Civil Enforcement Act.  In addition, many commercial leases contain provisions extending the landlord’s ability to seize for unpaid rents, including the waivers of exemptions otherwise available to the tenant and the ability to follow exigible assets removed from the lease premises off site to other locations.

In absence of an express lease provision allowing the landlord to follow goods removed to other locations, if a tenant vacates the leased premises owing rent and removes its property, the landlord may seize such property from the new location provided it is able to prove on a balance of probabilities that:

  1. when the tenant vacated the premises there were arrears of rent or rent reserved;
  2. the property removed was that of the tenant or a person liable to pay the rent;
  3. such property was removed to the new location fraudulently or clandestinely; and
  4. the property was removed with the intent to prevent the landlord from distraining it for arrears of rent. (CriticalControl Solutions Corp. v. 954470 Alberta Ltd.(2007), 73 Alta. L.R. (4th) 314 (Alta. Q.B.)).

It is recommended that landlords seek legal advice regarding the technical requirements for distraining properly and regarding the effect of terminating the lease on the right of distress.

Re-entry and Repossession

Under many commercial leases a landlord is provided an express right to re-enter and to repossess the lease premises if the tenant fails to pay rent when due. Tenants should note that unless the lease otherwise provides, a landlord may be entitled to exercise the right to re-enter and to repossess without having to first provide the tenant with any notice after a non-payment of rent.

The right to re-enter and to repossess the lease premises is often not restricted to defaults in payment of rent. Under many commercial leases the landlord is also expressly afforded these rights where a default is made in the performance of any covenant or obligation on the part of the tenant and the default occurs or continues for any specified period of time. Many leases also allow the landlord to act if the tenant has a seizure effected against it by others, is in bankruptcy or receivership or, removes its goods, equipment and/or inventory from the premises outside the ordinary course of its business – amongst other types of defaults.

Termination

In addition to the right to re-enter and to repossess the premises, defaults in performance by the tenant can give rise to a right to terminate the lease altogether. When a landlord terminates a lease it will then be entitled to deal with and to attempt to lease the premises again. In addition, the landlord may be entitled to pursue recovery of not only amounts due or accruing due to the point of termination but also damages for the present value of the loss of the benefit of the lease for the unexpired remainder of the term of the lease if it provides the proper kind of notice to the tenant. To preserve its ability to claim against the tenant for such damages, the landlord is required to give the tenant written notice of its reservation of those rights.  According to the court in some jurisdictions, this must be more than a simple warning (Langley Crossing Shopping Centre Inc. v. North-West Produce Ltd. (2000), 30 R.P.R. (3d) 180 (B.C. C.A.)).  It is strongly recommended that landlords consult legal counsel for assistance with the requirements of such notices.

Prior to terminating a lease, landlords need to be aware of and consider the possible effect of this decision. In the event a landlord elects to terminate the lease, it will be required to mitigate or minimize its loss and any possible damages it may suffer. Insofar as a claim for damages for the unexpired portion of the lease in concerned, a landlord will be required to make reasonable efforts to re-let the premises to minimize the amount of damage it will sustain over the remainder of the unexpired term of the previous lease or run the risk of having any damages it could have claimed reduced by what the court feels it should have been able to recover had it done so.  However, if the landlord elects to treat the lease as still in force, the landlord has no duty to mitigate (Pensionfund Realty Ltd. v. Keg Restaurants of Manitoba Ltd. (2004), 23 R.P.R. (4th) 297 (Man. Q.B.)).

Acceleration of Rents

Many commercial leases also afford the landlord an ability to accelerate some or all of the rents due over the remainder of the lease upon a default by a tenant, rendering these amount then currently due.

Legal Costs and Interest

In addition to the above rights and remedies, many commercial leases also allow the landlord to claim for and recover against the tenant for legal costs incurred to enforce the lease against it, as well as for interest on overdue amounts.

Conclusion

Regardless of which legal remedies a landlord pursues, the legal route will be stressful, lengthy and expensive. With this in mind, landlords may wish to consider a more flexible approach to accommodating alternate payment arrangements. Likewise, the courts will not look kindly on opportunistic tenants blatantly defying their contractual obligations.

Both landlord and tenants ought to keep the communication lines open to arrive at reasonable, and perhaps even unorthodox, solutions under these trying circumstances. As unexpected as the situation we currently find ourselves in, sometimes seeking a reasonable middle ground may result in a long-term and prosperous business relationship which is mutually beneficial for both the landlord and the tenant.  

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.