Business is shut down. What happens with your lease now?

Almost all store-front businesses have been required to close their doors in an effort to reduce the spread of Covid-19 in British Columbia. But, what does that mean for the landlords and tenants of these premises? What do you do if there is a default that happens because of having closed doors? The answer is tricky. There may a suspension of certain obligations under a lease either contractually or by way of the common law.

The first place to start in determining what impact this required closures will have on any given lease is to review the lease itself. Many leases have what is called a force majeure clause or otherwise a clause that suspends operation or suspends the obligations that one or more parties to the lease has/have in certain circumstances. For example, a clause may suspend certain action if “restrictive government laws or regulations” were to be put in place. This could potentially include the current restrictions put in place for the pandemic and could suspend certain obligations such as repairs, construction or other actions that are required under the lease. Importantly, however, many of these clauses specifically do not relieve the tenant from paying rent in accordance with the lease.

Force majeure clauses are a contractual remedy that have been added to many contracts to increase certainty after the doctrine of frustration emerged in the common law. The doctrine of frustration was an evolution to accommodate supervening and unforeseeable world events such as war that interfered with business’ abilities to meet their contractual obligations. Prior to the development of this doctrine, strict liability was applied to the law of contracts and this led to some perverse and unfair outcomes. The doctrine of frustration was solidified in a series of cases from the United Kingdom and has since then been incorporated into Canadian contract law.

The doctrine of frustration relieves one or more parties in a contract from performance in certain circumstances. Specifically, the doctrine of frustration has a two part test. First, the parties must be unable to perform part of the contract which renders the contract substantially different from what the parties agreed. Second, the parties must not, in either express or implied terms, have made provisions for the event.

In application, the doctrine of frustration has primarily been applied in situations where performance has become impossible. For example, in a service contract where the service provider dies or where the government has made the action illegal or where a performance halls burns down making a performance impossible. The doctrine has also been applied in situations where the purpose of the contract is defeated. In these latter cases, the contract can technically be performed; however, the underlying reason for its performance has been lost. That being said, the application of the doctrine of frustration in these loss of purpose cases has been varied and fact dependent.

What does this mean for people who would be rendering insolvent or are in capable of paying rent due to our current pandemic measures? Well, it’s not clear. The interpretation and application for the test in the doctrine of frustration to leases has been varied. Though most scholars agree that the doctrine of frustration would apply to leases, its application may be thwarted by the inclusion of a force majeure clause which potentially does make provision for the supervening event. In the current situation, it is best to have the lease reviewed by a lawyer to determine if this doctrine may apply to your situation.

However, if the doctrine of frustration is found to apply, then the British Columbia Frustrated Contract Act outlines a party’s entitlement to restitution: i.e. if money has been paid and then the contract frustrated, the party can apply for restitution; or, if money was payable and then the contract was frustrated, the money would no longer be payable.

During the world wars, governments passed legislation that prevented people from enforcing contractual obligations if the reason the contract was breached was because the company has been co-opted into the war effort. While, there is currently no legislation being proposed by the government to legislatively deal with breaches that may arise during this current Covid-19 crisis, the stimulus packages and other governmental responses may be a starting point to address some of these situations.

Nonetheless, the law moves slowly to address new and unprecedented situations. From a practical perceptive, many business will more than likely have to negotiate a solution with their landlords (which was often the approach taken during previous world events, such as the world wars). However, knowing what possible remedies are available under the law could bolster a party’s negotiating position. We do recommend, should you have questions about your own circumstances, to speak with your lawyer about what remedies are available to you under your lease, and within law, as every situation will be fact dependent.