Matilda Lici

The emergence of COVID-19, and the ensuing government mandates and public health measures, threw a wrench in commercial relationships. The retail sales sector was dramatically affected, with retail stores being forced to close on and off for about 15 months and sales plummeting to a fraction of pre-pandemic levels. As earnings declined, the costs associated with operating retail businesses remained, and rent payments comprised a significant portion of those costs. Earlier this year, the Court of Appeal for Ontario had the opportunity to consider the extent to which the remedy of relief from forfeiture under s. 20 of the Commercial Tenancies Act (“CTA”) can be used to “spread the economic pain” arising out of the pandemic between retail store tenants and their landlords.

In Hudson's Bay Company ULC Compagnie de la Baie D'Hudson SRI v. Oxford Properties Retail Holdings II Inc., the appellant, Hudson’s Bay Company ULC (“HBC”), appealed from an order of the court granting it relief from forfeiture but declining to grant an abatement or reduction of rent for an indefinite period of time while the economic effects of COVID-19 persisted. HBC had been a “model tenant” at Hillcrest Mall since 1978, always paying its rent on time and in full to its landlord, Oxford Properties Retail Holdings II Inc. (the “Landlord”). Following a government-mandated close in late March, HBC began withholding payment of rent, starting with the rent payable for April 2020. In or about October 2020, after the Landlord delivered a Notice of Intention to forfeit the HBC lease at Hillcrest Mall, HBC moved for an order granting relief from forfeiture pursuant to s. 20 of the CTA.

Relief from forfeiture allows a tenant who has breached a lease to avoid termination of the lease, even though, under the terms of the lease, a landlord would otherwise be entitled to terminate the lease and take possession of the leased premises.

The motion judge held that HBC defaulted under the lease agreement for non-payment of rent but, in the circumstances, was entitled to relief from forfeiture pursuant to s. 20 of the CTA. As part of the package of relief granted, the motion judge deferred payment of rent pursuant to a timetable that spanned nine months from the date of the order. However, the motion judge declined to grant an abatement or reduction of rent as part of the relief from forfeiture.

On appeal, both HBC and the Landlord agreed that resort to relief from forfeiture was appropriate in the circumstances of this case. They disagreed about the appropriate scope of such relief. HBC argued that s. 20 of the CTA gave the court broad powers to override the terms of a lease if justice required it. Specifically, HBC contended that, during the unprecedented economic challenges brought on by the pandemic, an abatement or reduction of rent for a long-time, “model tenant” was a just remedy under s. 20. The Landlord, on the other hand, argued that the language of s. 20 was not broad as to permit the court to rewrite a commercial bargain, merely preserve it.

The Court of Appeal’s decision provides valuable guidance on the limits of relief available and the considerations that will inform a court’s determination.

1. Relief from forfeiture does not include rent reductions or abatements

Under the terms of the lease, HBC was obligated to pay the full amount of rent as it became due, without deductions or setoff for any alleged breaches on the part of the Landlord. The obligation to pay rent in full was independent of any obligation owed by the Landlord to HBC. Even relief under s. 20 of the CTA could not afford HBC the ability to pay reduced rent.

The Court of Appeal confirmed that relief from forfeiture “does not contemplate a recalibration of existing rights and obligations under the lease on a go forward basis”. Courts are not in the business of rewriting contracts with a view to redistributing risk in the aftermath of unforeseen crisis. To grant an abatement or reduction of the amount of rent agreed upon in the lease is to alter a basic and fundamental term of the lease.

2. Rent payments may be deferred to assist a tenant who is “underwater”, not as a means of “sharing the burden”

Under the auspices of s. 20 of the CTA, the motion judge granted a deferral of part of HBC’s rental obligation, fixing a schedule for payment that was meant to reflect the anticipated gradual and eventually-unrestricted reopening of retail stores. Her Honour established benchmarks by which time HBC was required to pay 50%, then 70% and eventually 100% of the rent owing.

On appeal, the Court of Appeal acknowledged that relief from forfeiture would be an illusory remedy if a tenant were not given reasonable time to comply with a court order compelling it to do something. The circumstances must be such that while a tenant does not have the present ability to comply with the terms of the lease, it nevertheless displays the potential to become compliant within a specified period of time. Otherwise, if a court concludes that the tenant will not be able to bring itself into compliance within a reasonable, specified period of time, relief from forfeiture will not be a suitable remedy in the circumstances.

In this case, however, there was no evidence that HBC was ever unable to pay the rent that it owed. The motion judge granted HBC a brief and partial respite from the full weight of its rent obligations, not because HBC was unable to shoulder that weight, but because—in the court’s view—the pandemic made it unfair to require HBC to shoulder that weight alone, without the help of the landlord. The Court of Appeal held that the motion judge erred in deferring HBC’s rental obligations for reasons unrelated to its ability to pay the rent owing under the lease.

The length of any deferral of rent payments must reflect the time needed by a tenant to bring itself into compliance with the lease. Relief from forfeiture is not a mechanism by which courts may do “economic justice” between tenants and landlords.

3. Judicial interference with contracted-for interest rates is not justified

Under the terms of the lease, HBC was required to pay interest on arrears of rent at the rate of TD prime rate plus 4%. In granting relief from forfeiture, the motion judge adjusted the interest rate to TD prime rate plus 2%. In her decision, the motion judge alluded to the interest rate not being “a fundamental term of the lease”.

The Court of Appeal held that the motion judge erred in adjusting the interest rate accruing on arrears of rent. Both HBC and the Landlord were sophisticated commercial parties who were, or ought to have been, well aware of the interest they had agreed upon in the lease. Changing the interest rate as a term of granting relief from forfeiture was not qualitatively different from granting an abatement or reduction of rent as a term of granting relief from forfeiture.

Conclusion

The Court of Appeal favoured a narrow interpretation of s. 20 of the CTA, noting that the broader interpretation championed by HBC would promote considerable uncertainty in the ongoing relationship between a landlord and tenant in the face of unforeseen changed economic circumstances. Commercial parties must be able to bargain freely and have confidence in the certainty of their contractual arrangement, even in the face of emerging contingencies. Expanding the limits of relief under s. 20 of the CTA would only encourage resort to litigation as a means of redefining a tenant’s obligations under the lease.

In light of this appellate ruling, tenants should be mindful of the limited scope of relief available under s. 20 of the CTA, even for so-called “model tenants”. The conduct of the parties will be a considerable factor in any s. 20 analysis. A tenant’s deliberate refusal to pay rent or abide by any other term under the lease—even on the heels of a long-standing history of otherwise exemplary behaviour—may well preclude the tenant from obtaining relief from forfeiture.