THE IMPACT OF COVID-19 ON COMMERCIAL LEASES
Author:
Sarah Miles, J.D., LL.L.,
Articling Student
On March 24th, the Government of Quebec issued a decree on measures to protect the health of the population during the COVID-19 pandemic, Decree No. 223-2020 (the “Decree”). On that date, Quebec declared a state of health emergency by its authority under article 123 of the Public Health Act.
The Decree orders all non-essential workplaces to suspend their activities. The Government of Quebec has announced that this suspension will remain in place until at least May 4th 2020. Non-essential businesses that can operate remotely may do so to ensure future resumption of activities. In other words, e-commerce and teleworking can continue. However, the stores, shopping malls, offices and workshops of non-essential businesses are effectively closed.
What happens to non-essential businesses that cannot pay their rent?
The reality is that non-essential businesses are currently in survival mode due to the order to suspend their activities. As they see a substantial decrease in business revenues, one of the many financial issues they face is the inability to pay their rent for their commercial premise.
Can the notion of force majeure provide relief of the obligation to pay rent?
According to article 1855 of the Civil Code of Quebec (“C.C.Q.”), lessees are bound to pay the agreed upon rent with prudence and diligence, failing to do so will expose them to civil liability. A person can be exonerated from civil liability if the harm results from “force majeure”, also know as superior force. The notion of superior force can provide relief of a contractual obligation, namely the obligation to pay rent. Superior force is defined as an unforeseeable and irresistible event (article 1470 C.C.Q.). The question becomes whether or not the Decree and the consequences of the global pandemic on the supply chain will be declared an event of superior force by the Quebec courts.
Quebec jurisprudence has developed a superior force test. The test is composed of three cumulative conditions: unforeseeability, irresistibility and exteriority. First, the event is unforeseeable if a prudent and diligent person could not have reasonably foreseen the situation at the moment the contract was formed. Second, the event is irresistible if it prevents the performance of the debtor’s obligation in an absolute and permanent manner, therefore rendering it impossible for the debtor to execute his obligation. Third, the event is external if it is an event that is outside the sphere of the debtor’s control.
Does COVID-19 meet the requirements of the superior force test?
The following section will discuss the application of the superior force test to COVID-19 situation. To meet the first criterion, COVID-19 and the Decree will only be considered unforeseeable if, at the time the parties entered the contract, the outbreak and the Decree was unforeseeable. Arguably, nobody could have foreseen COVID-19 as being a problem for Quebec before March 2020. As the situation only developed in mid-March, it was impossible to foresee the impact of COVID-19 at the beginning of March. However, one could argue that it was reasonably foreseeable to a prudent and diligent person towards the end of March. Second, this virus meets the criterion of irresistibility if the virus made the performance of the specific obligation impossible. The Decree constitutes an irresistible restriction against commercial operations issued by the government. Third, the COVID-19 and the Decree have an external character in that they are beyond anyone’s control. Therefore, COVID-19 and the Decree meet the threshold of the superior force test but it remains a case-by-case analysis.
Ultimately, it will be up to the Quebec courts to decide if this pandemic and the Decree are a superior force. Quebec jurisprudence reveals that courts have characterized H1N1[1] as a superior force, therefore it is likely that the courts will have the same conclusion for the Covid-19 virus and the Decree.
Does the lease provide for civil emergencies?
To determine whether or not superior force will relieve you from a duty to pay rent, there is another element to consider: the lease agreement. The outcome will differ based on what was agreed upon in the contract. There are three possible situations: the contract contains a superior force clause; the contract expressly excludes the notion of superior force and the contract is silent on the topic.
Commercial contracts usually anticipate unforeseeable circumstances in the form of a superior force clause. In the event that the contract explicitly provides for superior force situations, you will have to consult the contract to see if this pandemic falls within the clause. Depending on how narrow or broad the clause is, the debtor could be released from performing his contractual obligations. It is therefore important to consult the lease to see if a period of pandemic was provided for. This clause should be interpreted in light of the entire contract.
The contracting parties can decide to completely exclude the notion of superior force so that it does not apply to their contract because the rule of article 1470 C.C.Q. is not of public order. A rule that is of public order is a rule of general interest and governs life in society; it is compulsory and cannot otherwise be circumvented. The clause that expressly excludes superior force will have no legal effect against the superior force of the Decree. The Decree is a ministerial order and the parties do not have the right to contract out of it. The Decree will therefore still apply to all parties and can still be considered a superior force because it prevents businesses from honouring their contractual obligations.
In the event that the contract is silent on the topic, the default rule of article 1470 C.C.Q. will apply. It will be left to the courts to determine whether or not the debtor is relieved of their duties due to this global pandemic based on the superior force test.
Conclusion
Over the next few months, we foresee the opening up of a legal dialogue on whether these unprecedented times will qualify as a superior force. There is likely to be extensive litigation on this issue. Consideration should be given to negotiating an agreement between the lessor and lessee if the rent payment is a problem.
In response to the economic shutdown, the Government of Canada introduced a new Canada Emergency Commercial Rent Assistance (CECRA) program on April 16th 2020 to help small businesses pay their rents for the months of April, May and June. This assistance will be in the form of loans, including forgivable loans, to commercial property owners who in turn will lower or forgo the rent of small businesses.
There is a discussion to be had on whether or not a lessor/lessee settlement or the acceptance of a loan from the CECRA program would forfeit the lessees right to claim superior force in the future. It is likely that these financial aids will not affect the recourse of superior force because the Decree is an irresistible restriction against commercial operations. The commercial lessor remains unable to deliver a property that is accessible to the public, which, in most commercial lease agreements, is a material element to the contract. The lessee cannot benefit from the same agreed upon peaceful enjoyment since the lessor cannot offer a property that is functional and open to the general public.
In all events, the lessee should obtain the opinion and advice of a lawyer before refusing to pay rent and the lessor should obtain the opinion and advice of a lawyer for issues of collecting the rent.
[1] Béland c. Voyage Charterama Trois-Rivières Itée, [2010] QCCQ 2842, 2010 QCCQ 2842 (CanLII), par. 37 to 42.
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