Death, Taxes and the Obligation to Pay Rent Without Deduction, Abatement or Set-Off

December 1, 2011

There is a proverb, largely ascribed to Benjamin Franklin, suggesting that nothing in life is certain, except death and taxes. In the commercial leasing world, the same is often said about the obligation to pay rent “without set-off, deduction, abatement or reduction whatsoever” (or some permutation of this wording). Alternatively put, the obligation to pay rent has always been considered at law to be an “independent covenant”: no matter what else a tenant may have to complain about in relation to the tenancy, the rent must always be paid first. If the tenant really cared, it could bring a separate lawsuit to obtain a refund of the rent paid.

Alas, perhaps unlike with death and taxes, recent court cases have suggested that the requirement to always pay rent without set-off, deduction, abatement or reduction might not be that certain after all. In Manufacturers Life Insurance Company v. Firstbrook, Cassie, and Anderson Limited (1999) 5 R.P.R. (4th) 241, the tenant had overwhelming proof of gross overpayments in the operating costs in previous years and sought to net-out these past overpayments against the next installments of rent coming due. Not surprisingly, the landlord insisted that all of the rent be paid in full and that the tenant pursue a separate lawsuit to recover any alleged past overpayments in operating costs. The court determined that, where a tenant has a claim against the landlord that arises out of the lease (as opposed to some unrelated claims that just happened to be with the landlord), and it would otherwise be “manifestly unjust” to require the tenant to pay the full rent, and then require the tenant to commence a lawsuit to recover a refund of that same rent, then that tenant could set-off its claim against the rent due, notwithstanding that the lease expressly required the tenant to pay rent “without reduction, abatement or set-off whatsoever”.

A couple of more recent cases have also applied this so-called doctrine of “equitable set-off” in the context of commercial leases. The case of 473807 Ontario Ltd. v. TDL Group Ltd. (2006) 47 R.P.R. (4th) 1, involved a Tim Horton’s lease and what the judge described as the “landlord from hell”.  The tenant had a litany of complaints against its landlord and was allowed by the Court of Appeal to set-off its claim against all of the rent coming due for the entire balance of the term of the lease! In the case of Toronto Kosher Inc. v. Windward Drive Holdings Inc., [2011] O.J. No. 3461, the court examined a complex case involving an option to purchase lands adjacent to the leased premises. In this situation, the court actually did not allow equitable set-off under the  circumstances because of a technical issue on the specific nature of these damages suffered, but the court did affirm the legal principle that “equitable set-off has been available for tenants where the landlord’s defaults are flagrant and offensive and go directly or indirectly to the covenant of quiet enjoyment…the underlying norm is whether a set-off in all circumstances is just”.

Granted, equitable set-off against rent is still a relatively difficult remedy to invoke given the “flagrant”, “offensive” and “manifestly unjust” thresholds that have to first be met. In most cases, rent will still have to first be paid “without set-off, deduction, abatement or reduction whatsoever”, with recourse for the countervailing complaints obtained only through a subsequent lawsuit. One commentator, speaking recently on the law of equitable set-off against rent, concluded, somewhat paraphrased, that “the door to equitable set-off is now open, but is not wide open”. Still, for landlords and tenants accustomed to death, taxes and all rent payments made without reduction, abatement or set-off whatsoever, the doctrine of equitable set-off against rent represents a potentially brave new world.

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