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Should Courts exercise their discretion to order pandemic-related exceptions to the tenant’s obligation to pay rent under a commercial lease?  As the effects of the Covid-19 pandemic and the government-mandated lockdowns on the brick-and-mortar retail sector continue to be felt, some insolvent retailers have attempted to escape certain of their obligations by challenging well-established legal principles.

A recent example of an insolvent tenant challenging the status quo arose in the Companies’ Creditors Arrangement Act ^[1] (“CCAA”) proceedings of Groupe Dynamite ^[2] in Quebec.  The debtor sought Court-ordered relief for rent payable after it commenced CCAA proceedings, for certain retail stores it was unable to “use” because of government-mandated lockdowns.

Typically, in the insolvency context, such relief would be denied: the insolvent debtor is obligated to pay rent for any leased premises it continues to use after it commences CCAA proceedings. To rule otherwise would be manifestly unfair to the debtor’s landlords and contravene the sanctity of the debtor’s contractual lease provisions. Accordingly, the debtor’s request in Groupe Dynamite was that the supervising court depart from long-standing principles and employ its discretion to carve out a pandemic-related exception.

The Court refused to grant such an exception, referring to and relying on long-standing principles governing landlord-tenant relationships, to uphold the terms of the lease. The Court’s refusal to depart from well-established legal norms will be welcome news to landlords and insolvency practitioners, as it confirms the treatment of such rights in insolvency proceedings that most parties have come to rely on.

Background

Groupe Dynamite operates several hundred brick-and-mortar retail locations, operating principally out of shopping malls situated across Canada and the U.S. Pursuant to its CCAA proceedings, the debtor disclaimed leases for many such leased locations, but continued to hold onto other, presumably more profitable, leased locations.

The resurgence of the Covid-19 pandemic towards the end of 2020 meant that some of the leased store locations that the debtor held onto were forced to close by government decree. The debtor argued before the Court that it should not be obligated to pay rent in respect of the locations closed by government decree because it was not “using” the premises. The debtor requested that the Court grant it relief from those rent obligations during the period of the government-ordered lockdown. The affected landlords vigorously contested the requested relief.

The Ruling against the Tenant

The Court described the Covid-19 pandemic as constituting extraordinary circumstances. Nevertheless, the Court ruled that such extraordinary circumstances were not sufficient to grant the Court jurisdiction to make an order contrary to section 11.01(a) of the CCAA, which requires debtors to pay rent in respect of their continued use of leased premises. The Court further held that even if it had the discretion to grant such an order, it would refuse to exercise that discretion.

The Court determined that the debtor was in fact “using” the leased premises that were subject to the lockdown under section 11.01(a) of the CCAA. In so deciding, the Court identified two key facts:

1. the debtor had chosen not to exercise its option to disclaim the subject leased locations; and
2. as long as the debtor maintained the leased locations, it retained sole possession of those locations to the detriment of its landlords. In the Court’s view, this alone was sufficient to trigger the application of section 11.01(a) of the CCAA, such that the debtor was required to continue to pay rent.

Finally, the Court revisited several long-standing principles of landlord-tenant law, particularly emphasizing the principle of the sanctity of contractual lease terms.  In reliance on those principles, the Court concluded:

1. the debtor had chosen not to disclaim the subject leases, which meant that the landlords could not rent the premises to anyone else if they chose to;
2. the Covid-19 restrictions could be in place for an extended period of time, again principally to the detriment of the landlords;
3. during the lockdown period, the landlords would presumably continue to pay operating costs associated with the leased premises, including maintenance, utilities, security and insurance, all while not receiving rent payments;
4. nothing prevents the debtor from disclaiming the leases at any time pursuant to the CCAA;
5. if the requested order was made, the landlords would be relegated to unsecured creditors in the insolvency proceedings; and
6. granting the requested order would result in redrafting of the lease agreements by allowing the debtor to invoke government regulations as justification for not paying rent. This would contravene the sanctity of the contractual lease terms.

Conclusion

The Court did not comment on the issue of frustration of the lease agreement between the landlord and the debtor, despite it being raised by the debtor. It remains to be seen if, in other circumstances and with differently drafted leases, the doctrine of frustration may apply to relieve a tenant of its obligations. This issue is considered in my colleague’s article, Covid-19 is Frustrating - But Has it Frustrated Your Contract? written by Fraser Hughes, accessible here.