November 4, 2020
Businesses faced a novel challenge in Ontario when due to the COVID-19 pandemic, non-essential businesses were forced to close for an extended period of time to protect Ontario’s public health. All businesses faced the challenge of how to respond to these unexpected closures which in some cases put a complete stop on operations and revenues for up to months.
Faced with a lack of revenue, businesses became unable to pay bills necessary to keep them in business. A common example of this are rent payments. Organizations turned to the provisions of their contracts and many decided to rely on force majeure clauses for relief from making payments they likely could not afford.
The Ontario Superior Court of Justice recently released a decision that interpreted one such clause to determine whether a business was released from their obligation to pay rent because the COVID-19 pandemic triggered a force majeure clause.
Force Majeure Clauses
Parties put force majeure clauses into contracts to protect themselves from events that are beyond their control. The contractual provision will set out that if events beyond the control of the parties take place that they are no longer required to perform certain parts of the contract. For example, a clause may set out that:
In the event that the Purchaser is unable to make payments due to Acts of God or other causes reasonably outside the control of either Party, the Purchaser will not be required to make payments until such point as the event preventing the Purchaser’s ability to make payment reasonably ends.
Throughout the COVID-19 pandemic, businesses have taken the position that the pandemic constitutes an act outside the control of the parties and so triggers a force majeure clause. The Ontario Superior Court of Justice considered this position recently in the context of a commercial tenant seeking to be excused from paying rent.
The Court’s Interpretation
The Court interpreted a force majeure clause in Durham Sports Barn Inc. Bankruptcy Proposal. The case involved a company in Oshawa which carried on business as an athletic performance and training centre. The company rented space which allowed them to be equipped with a hockey arena, indoor turf field, an obstacle course, a fitness facility, and meeting rooms. They entered into a 10-year lease with the Landlord starting in 2015.
There were consistent issues with the Tenant’s ability to pay their rent and they were frequently in arrears of their rent. These problems formed part of the issues which were before the Court but were not a part of the Court’s interpretation of the force majeure clause.
Public health mandated closures caused the Tenant to cease operations and completely close their business from March 18, 2020 until May 25, 2020. They were able to offer limited services from May 25 until July 25 and began fully operating again in August 2020. The Tenant took the position that they should not have to pay rent during the time they were completely shut down and pay only a portion of the rent during they time they were operating in a limited capacity.
The contract between the Landlord and Tenant contained a force majeure clause which stated that the Landlord was not required to provide the Tenant with quiet enjoyment of the property because of events out of their control. The specific wording of the provision was unfortunately not reproduced however the Court appears to have accepted that the pandemic closures counted as an event which triggered the Landlord’s ability to no longer provide quiet enjoyment.
The Tenant argued that since the Landlord no longer needed to provide quiet enjoyment then by extension, they were no longer required to pay rent as those obligations go hand in hand. The Court rejected this argument and found that the Tenants were not excused from paying rent because of the force majeure clause in the contract.
The Court found that the Landlord being excused from providing quiet enjoyment does not also on its own excuse the Tenant from paying rent. The clause did not mention paying rent. Further, a Landlord’s obligation to provide quiet enjoyment is always subject to the Tenant paying rent anyways. As the Tenant did not pay rent, the Landlord was never required to provide quiet enjoyment in the first place.
The Court also held that the government legislation which prevented eviction did not suspend rent payments and the Tenant never informed the Landlord of their position during the time it was not operating at full capacity and so the Landlord never had a chance to try and assist the Tenant.
In response to decisions from Québec courts where commercial tenants were excused from paying rent during the pandemic, the Court in this case found that there is no “superior force” principle in Ontario which protects parties from events out of their control regardless of what is in the contract. There has also not been a precedent established in Ontario that businesses are entitled to long-term relief during shutdown and limited operating periods caused by COVID-19.
The Tenant was found to be required to pay all of their rent owed from the time that they were shutdown and operating at limited capacity. The force majeure provision of the contract did not clearly and explicitly provide the protections sought by the Tenant and there were no principles outside of the contract which would excuse the Tenant from paying rent.
The Court’s decision in Durham Sports Barn Inc. Bankruptcy Proposal makes it clear that the specific wording of a force majeure clause will determine whether a business is protected from its obligations due to the COVID-19 pandemic. Force majeure clauses are typically interpreted narrowly, and it appears that this continues to be the case during the pandemic. Where the clause does not clearly provide for the protections being sought after and also provides that the pandemic is enough to trigger those protections, courts likely will not grant them. It is consequently very important to review these clauses to assess whether they contain clear wording before taking the position that they protect you from certain obligations. This decision and its consequences should also be noted when drafting contracts so that parties can be very explicitly clear on what will trigger a force majeure clause and what contractual obligations will be affected by that.
The Court’s decision also reinforces the importance of cooperation between parties. While it may not have ultimately made a difference, the Court emphasizes that the Tenant never informed the Landlord that they believed they did not need to pay nor did they seek assistance from the Landlord. The Court looked poorly on this given that the Tenant ultimately took the position that it did not need to pay. This emphasizes the important of being open and honest to seek good faith solutions to problems in contractual relationships.
Should you have any questions regarding the interpretation of an agreement containing a force majeure clause or about the drafting of an agreement please call RBHF Professional Corporation at 613-546-2147 or contact us for assistance with your specific issue.
This article provides general information and does not constitute legal or other professional advice. It should not be relied on as legal advice or opinion. Please contact RBHF Professional Corporation for detailed legal advice should you have questions of any kind.