How can COVID-19 impact my obligations under my commercial lease?


FIVE Q&A to Consider

Amid the outbreak of the new Coronavirus COVID-19, we are faced with numerous concerns with respect to current and potential repercussions on commercial real estate transactions and relationships. Below is a short Q&A designed to provide our clients and partners with our preliminary thoughts and to raise awareness on some common concerns we have seen and anticipate for commercial leasing situations.

  1. Can I be excused from paying rent if my business is shut down as part of the government’s requirement that public and gathering places be closed?
    Generally, no. A tenant’s obligation under most leases is to pay rent on time without any abatement, set-off, compensation or deduction whatsoever, except as may be otherwise expressly provided for therein. Except for very particular circumstances, a force majeure event does not relieve an obligation to pay rent.
     
  2. Can I stop operating without being in default pursuant to the continuous operation clause in my lease?
    Yes, if done in accordance with the terms of the lease or the law. Check your lease. Under some leases, a tenant is required to continuously operate (conduct its business) from its premises. In other instances, so long as the tenant pays rents and satisfies all of its obligations under its lease, the tenant is not considered at default for failure to continuously conduct its business from the whole or part of the premises. Regardless, most leases acknowledge and provide a tenant’s obligation to comply with the law.

    Consequently, where it is mandated by local, municipal, provincial, and or federal authorities that a business cease or modify its operational hours, in the geographical area of the premises, that advisory would supersede the continuous requirement. Alternatively, a tenant desirous of pausing its operations in the premises in the context of COVID-19 could be excused from its obligation to operate continuously under its lease force majeure provision. Caution is advised in relying on force majeure provision as its application depends on several factors including but not limited to, the language of the clause, the nature of the contract, the type of services affected, and alternatives considered.

    Where tenants are unclear whether or not they can curtail their hours of operation, we advise that you contact your landlord or its property management group.

    More on force majeure below.
     
  3. What if a shortage of materials or labour impact the delivery of my new space, can I rely on force majeure?
    Yes, if the factual and contractual circumstances give rise to force majeure. Depending on local circumstances and the nature of the contractual obligations, it is plausible as a result of COVID-19, a shortage of labour and or material may arise affecting construction timelines. Some leases provided for specific remedies when a delay arises by postponing the start of the term, abating rent, or imposing a monetary penalty. In cases where the lease is silent on a corresponding remedy, the force majeure provision may be relied upon. However, force majeure clauses are not ubiquitous. If a force majeure clause is present in your lease, the scope and effect must be determined by considering the wording and the relevant facts of the issue at hand.

    Generally, a party seeking to rely upon a force majeure event is tasked with the burden of proof. If the burden can be overcome at a cost, a party may be precluded from relying on force majeure. Similarly, the courts have held that a party cannot rely on a force majeure event retroactively to alter its contractual obligations.
     
  4. Can the Landlord restrict access to my premises?
    Yes, if a restriction is possible in accordance with the terms of the lease or the law. A number of provisions typically provide for the landlord’s control over the building, including hours and points of access and security protocols. Under most leases, tenants are granted access to their premises at all times (i.e., 24h/7days). However, a landlord acting in accordance with the terms of the lease or the law could restrict such access and or limit services. Whether a tenant is entitled to specific relief, including but not limited to compensation, would depend on the particular circumstances and what the parties’ bargained for under the lease contract.
     
  5. Can I rely on my insurance coverage for relief?
    It depends on your coverage. What does your policy say? Whether or not a loss arising from COVID-19 is covered will depend on the terms and conditions of your insurance policy. Whether your policy is categorized as “all risks” and or “business interruption” does not automatically translate to coverage for “virus” and “disease”. Generally, these policies are tied to physical loss in relation to insured property. It is unusual that they cover viruses and diseases as interruptions caused by a communicable disease are covered by way of specific endorsements.

    Bottom line, whether loss arising from COVID-19 is covered will depend on the specific wording of a tenant’s insurance policy and the facts surrounding each individual loss.

Takeaway

Whether in an ongoing leasing relationship or for a new leasing transaction, careful consideration should be given to the timing of delivery of new space and exit of current space, availability and option to extend the use of swing (temporary) space, insurance coverage, notably for business interruption, clauses of force majeure, landlord’s control over the operation and security of the building and various remedies for shortage or unavailability of labour or materials related to construction of new premises, the prohibition to continuously operate in the premises and other conceivable scenarios.

A note about Force Majeure

Most leases contain a force majeure clause. Its application must be carefully considered, including with respect to its scope and notice requirements, by a party seeking to avail itself of a force majeure clause. Below are relevant distinctions between common law and civil jurisdictions.

In Common Law

Force majeure derived from Roman law is not recognized as a standalone legal concept under the common law. When force majeure is incorporated within a contract it is the product of negotiation of contractual terms by the parties. Many contracts (including commercial leases) contain a force majeure provision however, such a provision is not ubiquitous. In a nutshell force majeure may be relied upon when a contract cannot be adhered to (executed or otherwise) due to extraordinary circumstances. What constitutes “extraordinary circumstances” will depend on the contract but typically it includes so-called “acts of God” – inclement weather, insurrection, war, strike, lock-out, acts of terrorism, etc. Some force majeure provisions include ‘disease’ or ‘pandemic’ in the list of enumerated grounds. In other cases, where a communicable/contagious disease is not specifically provided for, it will likely fall under a catch-all basket such as “or other similar reason” and may be implied. In the absence of a force majeure provision, the doctrine of frustration may have to be relied upon.

In Civil Law

The exact definition of a force majeure will vary in each lease. Unless provided otherwise in the lease, article 1470 of the Civil Code of Quebec requires the event to be unforeseeable by the parties and irresistible – that it renders performance of a specific contractual obligation absolutely impossible. Once satisfied, a party is relieved from the consequences of the non-performance of its obligation.


To learn more about how COVID-19 may impact your rights and obligations, please contact a member of our team.

Montreal
Alexandre McCormack, Lawyer
Manager, Legal Services
Real Estate Broker
Tel.: 514-392-9465
amccormack@devencore.com                             

Toronto
Gaya Saysenarine*, Legal Counsel
Manager of Legal Services
Tel.: 416-366-1352
gsaysenarine@devencore.com
*Legal Services provided through Devencore Legal Services Professional Corporation.

 

Mayya Mihaylova, Lawyer
Legal Services
Tel:  514-392-9380
mayyam@devencore.com

Anna Bartoli, Paralegal
Legal Services
Tel:  514-392-6893
abartoli@devencore.com

Marie-France Desrochers, Lawyer
Vice-President, Corporate Services
Chartered Real Estate Broker
Tel.: 514-392-9478 
mfdesrochers@devencore.com

 

This communication is intended for general information only and not to be relied upon in any way. Its content does not constitute legal or professional advice. To obtain such advice, please communicate with our offices directly. Devencore’s Legal Services are rendered by corporations affiliated to Devencore. For legal and regulatory reasons, Devencore’s Legal Services may vary amongst those corporations.

 

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