Commercial Leases In The Age Of COVID-19: Tenant Once Again Ordered To Pay Rent Even If The Landlord Was Not Pulling Its Weight

It goes without saying that COVID-19 has made life difficult for commercial tenants. When we went into lockdown, businesses naturally ran into difficulty meeting all their obligations, including the payment of rent. As a result, tenants have often sought recourse from the courts and have consistently been told that they have to honour their leases and can't get out of paying rent. As a recent decision has demonstrated, this will hold true even if landlords don't pull their weight when it comes to keeping up with their obligations related to the pandemic.

In Cherry Lane Shopping Centre Holdings Ltd v. Hudson's Bay Company ULC, 2021 BCSC 1178, the Tenant, the Hudson's Bay Company ("HBC") failed to pay rent to its landlord, Cherry Lane Shopping Centre Holdings Ltd. ("Cherry Lane") as a result of the disruption caused by COVID-19. HBC alleged that the Cherry Lane failed to maintain its shopping centre in a manner that was up to standard during the pandemic and that COVID-19 caused an "unavoidable delay" under its lease, which should allow it to delay rent payments. The court held that, even if HBC's position was true, this did not excuse it from its obligation to pay rent.

HBC leased extensive retail space in a shopping centre in British Columbia for 25 years. Like many other retail tenants, HBC's business was adversely affected when the COVID-19 pandemic took hold last year. In April, 2020, it failed to pay its monthly rent and the following month, it advised Cherry Lane that it would not be paying rent due to the ongoing pandemic. In the following months, HBC continued to fail to pay rent and Cherry Lane delivered a notice of default each month, demanding payment of the outstanding rent within 30 days.

In September 2020, HBC wrote to Cherry Lane and alleged that it was in default of the lease for failing to maintain the shopping centre in accordance with "first class regional shopping centre" standards and by failing to take extraordinary marketing initiatives during the pandemic. HBC requested an abatement of rent due to the alleged default. Cherry Lane refused and, on November 9, 2020, after eight months of unpaid rent, it issued a notice to terminate HBC's lease.

Both HBC and Cherry Lane commenced legal proceedings against each other. Cherry Lane sought an order that the lease was validly terminated and that HBC was therefore wrongfully holding possession of the premises. HBC, conversely, sought an order declaring that Cherry Lane was in breach of the lease for a number of reasons, including failure to maintain high quality of a first-class shopping centre; failure to take appropriate measures to address the impact of the pandemic; failure to provide a safe environment during the pandemic; failure to properly market the shopping centre during the pandemic; and, failure to take internal steps to deliver suitable premises.

HBC argued that it was necessary for the court to intervene to remedy the disproportionate economic burden it had to suffer as a consequence of COVID-19. It therefore requested relief from forfeiture and an abatement of rent. HBC also sought an order restraining Cherry Lane from interfering with its use of the premises and a declaration that it was not required to pay rent until Cherry Lane's breaches were cured. HBC also relied on an "unavoidable delay" clause in the lease, which allowed it to delay rent payments in certain circumstances and it was argued that COVID-19 was an unavoidable delay.

The court considered the parties' positions and analyzed evidence regarding what constituted a "high quality" shopping centre and whether Cherry Lane discharged its duties in this regard. HBC's "unavoidable delay" argument was also considered by the court. In examining HBC's position, it was held that even if Cherry Lane did not discharge its duties under the lease, as alleged, that did not excuse HBC from its obligation to pay rent. Cherry Lane was therefore permitted to terminate the lease and the court granted it an order for possession of the premises.

However, HBC was granted relief from forfeiture of its lease. It coming to this determination, the court considered the fact that HBC had been a tenant for a prolonged period of time and had invested significantly in leasehold improvements for the premises. As such, losing the leased premises would have caused HBC to suffer a disproportionate loss. The court therefore ordered that HBC was allowed to remain a tenant in the premises, on the condition that it pay outstanding rent and make regular rent payments on an ongoing basis.

This decision represents yet another setback that commercial tenants have had to face in the age of COVID-19. The pandemic and the accompanying lockdowns have decimated brick and mortar business and commercial tenants have naturally suffered as a result. Unfortunately, courts have not afforded them any relief, even if their landlords do not meet their obligations in this time of need.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mr Daniel Waldman
Pallett Valo LLP
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