The Commercial Lease — Not Just Another Contract

2 janvier 2013

( Disponible en anglais seulement )

The undisputed seminal case on lease remedies, Highway Properties Ltd. v. Kelly, Douglas & Co. Ltd. (“Highway Properties”) was challenged a few years back by the British Columbia Court of Appeal in Evergreen Building Ltd. v. IBI Leaseholds Ltd. (“Evergreen”). The conflict between these two very different cases was never quite satisfactorily resolved, however, at least until the decision last year of the Ontario Court of Appeal in Re TNG Acquisition Inc., 2011 ONCA 535 (“TNG”) which re-established Highway Properties as the capo di tutti capi of lease remedy cases, at least in Ontario.

In Highway Properties, the Supreme Court of Canada affirmed that a commercial landlord had at its disposal four remedies with which to deal with an abandoning tenant, the most notorious of which was the right to do absolutely nothing with the lease by way of mitigation and, instead, simply sue the tenant from time to time in so-called “installment litigation”. While Highway Properties revolutionized the commercial leasing world by giving landlords an additional remedy to sue abandoning tenants for losses beyond unpaid rent, the decision, perhaps more importantly, re-affirmed that the landlord could indeed elect to do absolutely nothing to the lease, and simply sue the tenant from time to time in installment litigation.

For almost forty years, Highway Properties stood as the definitive expression of Canadian law on the landlord’s right not to mitigate upon a tenant default — then came Evergreen. In Evergreen, the landlord proposed demolishing the existing commercial building and replacing it with a residential project mid-way through the tenant’s term and without the tenant’s permission. The landlord demanded that its tenant vacate the premises and offered to compensate the tenant for the cost of relocation, but the tenant refused, protesting that it was not in breach of the lease and should be entitled to stay in possession throughout the balance of its term. The British Columbia Court of Appeal, however, allowed the landlord to evict the tenant on payment of appropriate compensation.

Evergreen was immediately touted as a “Highway Properties Killer” since the two cases could not logically co-exist in the same legal space — either a commercial lease was a form of property conveyance (à la Highway Properties), in which case a tenant then could not be arbitrarily evicted, no matter how much compensation the landlord was prepared to pay; or the lease was purely a form of contract (à la Evergreen), in which case a landlord then had to mitigate its damages whenever it became aware of a defaulting tenant.

Sadly, the great Evergreen vs. Highway Properties debate never made it to the Supreme Court of Canada, having been settled out-of-court after Evergreen was decided by the British Court of Appeal. The legal question persisted, however, as to whether Evergreen had successfully imposed upon landlords a duty to mitigate, ushering Canadian commercial leasing into the modern world of pure contract.

At least in Ontario, the suspense ended when the Ontario Court of Appeal in TNG confirmed, presumably once and for all, that Highway Properties, and not Evergreen, was the law of the land in Ontario. An Ontario commercial lease remained a “hybrid” or “dual” instrument that is both a real property conveyance and a commercial contract, just as described in Highway Properties some forty plus years prior.

In TNG, the tenant attempted to repudiate its lease, but the landlord elected to do nothing to the lease in response (à la Highway Properties). The tenant was then declared bankrupt a scant few weeks later. The landlord suffered more than $3.3 million in losses as a result of the end of that lease, but was only allowed to submit a proof of claim for the “preferred claim” awarded to landlords in bankruptcy (a measly sum limited to a maximum of six months’ of rent).  

The landlord in TNG argued that Evergreen, not Highway Properties, was the better expression of the law, and therefore, the landlord in TNG never really had the right to refuse to mitigate when the tenant first tried to repudiate the lease. The landlord must therefore have been deemed to have accepted the repudiation of the tenant at that time. Paradoxically, having terminated the lease before the bankruptcy, the landlord would no longer have been a “landlord” at the time of the bankruptcy, and would therefore have been permitted to submit a proof of claim for the full $3.3 million as just an unsecured creditor.

Alas, the Court of Appeal found that Highway Properties did prevail in Ontario. The landlord, by remaining silent in the face of the repudiation, had, in effect, done nothing to alter the landlord-tenant relationship (as was its right under Highway Properties) and had thus preserved the lease – to its detriment since this left the landlord in TNG with nothing more than the paltry preferred claim in bankruptcy once the trustee subsequently disclaimed the lease!

Curiously, TNG has been met with mixed applause by Ontario’s landlords. While the right not to mitigate upon a tenant’s default is generally seen as a benefit to landlords, TNG is also a eye-opener of sorts, and a warning to landlords not to routinely reject all lease repudiations as a matter of course.

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